<PAGE>
As filed with the Securities and Exchange Commission on July 22, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CERENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
----------------
3661
Delaware (Primary Standard 77-0447327
(State or Other Industrial (I.R.S. Employer
Jurisdiction of Classification Code Identification Number)
Incorporation or Number)
Organization)
1450 North McDowell Blvd.
Petaluma, CA 94954
(707) 793-9055
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
----------------
Carl Russo
President and Chief Executive Officer
Cerent Corporation
1450 North McDowell Blvd.
Petaluma, CA 94954
(707) 793-9055
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------
COPIES TO:
Joshua L. Green Jeffrey D. Saper
Keith A. Miller Selim B. Day
Kevin G. Montler Robert G. Day
VENTURE LAW GROUP Ava M. Hahn
A Professional Corporation WILSON SONSINI GOODRICH & ROSATI
2800 Sand Hill Road Professional Corporation
Menlo Park, CA 94025 650 Page Mill Road
(650) 854-4488 Palo Alto, CA 94304
(650) 493-9300
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Aggregate Amount Of
Title Of Each Class Of Offering Registration
Securities To Be Registered Price(1) Fee
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<S> <C> <C>
Common stock, par value $0.001....................... $100,000,000 $27,800
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</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of computing the
amount of the registration fee.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 22, 1999
Shares
[LOGO]
Cerent Corporation
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $ and $ per
share. We have made application to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "CERE."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds
Price to and to
Public Commissions Cerent
-------- ------------ --------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
BancBoston Robertson Stephens
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Warburg Dillon Read LLC
The date of this prospectus is , 1999.
<PAGE>
Illustrations of the Cerent 454 in several network configurations
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 7
Note Regarding Forward-Looking
Statements......................... 17
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial Da-
ta................................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................ 29
Management.......................... 43
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Related Party Transactions......... 52
Principal Stockholders............. 54
Description of Capital Stock....... 57
Shares Eligible for Future Sale.... 59
Underwriting....................... 61
Notice to Canadian Residents....... 63
Legal Matters...................... 63
Experts............................ 64
Change in Independent Accountants.. 64
Where You Can Find More
Information....................... 64
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Cerent(TM) and Cerent 454(TM) are trademarks of Cerent. This prospectus also
contains additional trade names, trademarks and service marks of Cerent and of
other companies.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully. Except as otherwise indicated,
all information in this prospectus is based on the following assumptions: (a) a
three-for-one stock split of the common stock effected on July 16, 1999, (b)
the conversion of each outstanding share of convertible preferred stock into
one share of common stock immediately prior to the completion of this offering,
(c) the automatic conversion of our convertible promissory notes into
shares of common stock upon the completion of this offering, assuming an
initial public offering price of $ per share, (d) no exercise of the
underwriters' over-allotment option and (e) the filing of our amended and
restated certificate of incorporation.
Cerent Corporation
------------
We are a leading provider of next-generation optical transport solutions
that enable network service providers to meet the demands resulting from the
rapid growth of data and voice communications traffic. We deliver an
evolutionary, multi-service optical transport platform designed to dramatically
lower network operating costs and increase the efficiency of bandwidth delivery
within today's congested transport networks. Our high-speed solution, the
Cerent 454, is designed to support any traffic interface at any transmission
rate up to an aggregate of 240 gigabits per second, or Gbps, in a single,
compact system. The Cerent 454 provides a cost-effective solution for our
service provider customers and enables them to rapidly deploy a wide range of
applications and revenue generating services. We are currently able to deliver
our 454 on the customer request date, which is typically within ten days of
receiving an order. As of June 30, 1999, we had shipped our 454 to 86
customers, including ALLTEL, Buckeye Telesystem, Frontier Communications, GST
Telecom, Hutchinson Telephone, Nextlink, PSINet, QWest Communications, RCN
Corp., Sho-Me Power Electric, TCI and Williams Communications.
We use a direct sales force to sell our products to service providers that
we believe will move quickly to adopt new technologies. Accordingly, we believe
it is important to take a targeted approach in our sales efforts and have
focused initially on emerging inter-exchange carriers, or IXCs, competitive
local exchange carriers, or CLECs, independent carriers and cable companies. We
also intend to pursue incumbent IXCs, regional Bell operating companies, or
RBOCs, and international carriers.
We believe that communications traffic will continue to grow at significant
rates and network service providers will deploy new communications
infrastructure equipment to carry the increasing volume of data traffic while
optimizing the utilization of existing networks. While new equipment and
technologies have been introduced to address the increases in data traffic over
the access and backbone networks, the optical transport network has not yet
been similarly addressed with new broadband optimized technologies and
equipment. The optical transport network, which aggregates multiple traffic
types from the access network and interconnects them to the backbone network,
currently consists primarily of legacy, voice-based technologies. This
situation has created the need for a transport solution that can accommodate
multiple services and addresses the demand for both high-bandwidth data and
voice communications.
Our objective is to be the leading supplier of evolutionary optical
transport solutions. The key elements of our strategy include the following:
. continue developing products that provide scalable, flexible and cost-
effective optical transport solutions;
. penetrate a large base of customers with targeted direct sales and
support;
. continue developing products that are designed to support multiple forms
of broadband access and all leading network technologies;
. enable fast and cost-effective deployment of our products; and
. continue developing optical transport products that will expand the
traditional reach of the optical transport network and create demand for
our products in new markets.
4
<PAGE>
Recent Developments
On July 21, 1999, we issued $30,000,000 of convertible notes to certain
entities affiliated with MSD Capital, L.P., the private investment firm for
Michael S. Dell. The convertible promissory notes will be automatically
convertible into shares of our common stock upon completion of this
offering, assuming an initial public offering price of $ per share.
------------
We were originally incorporated in Delaware under the name "Fiberlane
Communications, Inc." in January 1997 and changed our name to "Cerent
Corporation" in June 1998. Our principal executive offices are located at 1450
North McDowell Blvd., Petaluma, CA 94954, and our telephone number is (707)
793-9055. The address of our Web site is "www.cerent.com." Information
contained on our Web site is not a part of this prospectus.
The Offering
<TABLE>
<S> <C>
Common stock offered............... shares
Common stock to be outstanding af-
ter this offering................. shares
Use of proceeds.................... For general corporate purposes, including
working capital, capital expenditures, and
potential acquisitions.
Proposed Nasdaq National Market
symbol............................ CERE
</TABLE>
----------------
The above table is based on shares outstanding as of June 30, 1999. This
table includes shares of common stock issuable upon automatic conversion of
convertible promissory notes upon the completion of this offering, assuming an
initial public offering price of $ per share. This table excludes:
. 459,875 shares subject to outstanding options at a weighted average
exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
stock available for future issuance under our 1997 Stock Plan and
5,000,000 shares of common stock available for future issuance under our
1999 Stock Plan;
. 4,982,118 shares of common stock reserved for issuance on the exercise of
warrants, of which 4,588,416 shares at a weighted average exercise price
of $1.13 per share were outstanding as of June 30, 1999;
. 500,000 shares of common stock available for issuance under our 1999
Directors' Stock Option Plan; and
. 500,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan.
----------------
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
January 27, 1997 Six Months Ended
(inception) to Year Ended June 30,
December 31, December 31, -----------------
1997 1998 1998 1999
---------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated Statement of Op-
erations Data:
Revenue...................... $ -- $ 220 $ -- $ 9,917
Gross profit (loss).......... -- (841) -- 1,974
Operating loss............... (7,629) (21,943) (8,396) (27,869)
Net loss..................... $(7,858) $(22,550) $(8,664) $(29,304)
======= ======== ======= ========
Pro forma basic and diluted
net loss per share(1)....... $ (0.67) $ (0.54)
======== ========
Shares used in computing pro
forma basic and diluted net
loss per share(1)........... 33,850 54,026
======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------
Pro Pro Forma
Actual Forma(2) As Adjusted(3)
------ -------- --------------
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................... $5,794 $35,794
Working capital.............................. 1,453 31,453
Total assets................................. 33,628 63,628
Long-term debt, net of discount.............. 5,001 22,144
Total stockholders' equity................... 13,484 26,341
</TABLE>
- --------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute per share
data.
(2) The pro forma amounts in the table above are adjusted to give effect to the
proceeds of $30.0 million received from the issuance of convertible
promissory notes on July 21, 1999, and recorded the obligation net of a
$12.9 million discount.
(3) The pro forma as adjusted amounts in the table above are adjusted to give
effect to the automatic conversion of the convertible promissory notes into
shares of common stock upon completion of this offering, assuming an
initial public offering price of $ per share and to the receipt of the
net
proceeds from the sale of shares of common stock offered by us at an
assumed initial public offering price of $ per share, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us. Additional risks and uncertainties, such as those that
generally apply to our industry or to companies undertaking initial public
offerings, also may impair our business operations. You should also refer to
the other information set forth in this prospectus, including the discussions
set forth in "Note Regarding Forward-Looking Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as our consolidated financial statements and the related
notes.
Our failure to increase our revenues would prevent us from achieving and
maintaining profitability.
We cannot assure you that our revenue will continue to grow, or that we will
generate sufficient revenue to achieve profitability. We have incurred
significant net losses since inception and expect to continue to incur
significant losses in the future. As of June 30, 1999, we had an accumulated
deficit of $59.7 million. Further, we expect to incur negative operating cash
flow in the future. We have large fixed expenses and we expect to continue to
incur significant and increasing sales and marketing, product development and
administrative expenses. As a result, we will need to generate significantly
higher revenues to achieve and maintain profitability. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements for more
information on our results of operations.
Our limited operating history makes it difficult to evaluate our business and
prospects.
We were incorporated in January 1997, commenced operations in April 1997 and
began shipping the Cerent 454 in December 1998. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. Further, due to our limited operating history, we have difficulty
accurately forecasting our revenues, and we have limited meaningful historical
financial data upon which to base planned operating expenses. You should
consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company in an early stage of
development in a relatively new and rapidly-evolving industry. If we do not
achieve our expected level of revenues or if our operating results are below
the expectations of securities analysts and investors, the price of our common
stock could decline.
Our revenue and operating results in one or more future periods may fluctuate
significantly and these fluctuations may adversely affect the trading price of
our common stock.
Our revenue and operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number of factors, many
of which are outside of our control. The primary factors that may affect us
include the following:
. variations in the timing and size of sales and shipments of our products;
. delays or cancellations of product orders by our customers;
. new product introductions by us or our competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. mix in product configurations that we sell;
. our ability to develop, introduce and ship in a timely manner new
products and product enhancements that meet customer requirements;
. our ability to obtain sufficient supplies of sole or limited source
components, including ASICs;
. our ability to attain and maintain production volumes and quality levels
for our current and future products;
. our ability to control expenses and manufacturing costs;
7
<PAGE>
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
communications and related industries.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, any unanticipated decline
in revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of securities analysts and investors, which could cause the
price of our common stock to decline.
The Cerent 454 currently is our only product and we are entirely dependent on
its commercial success.
The Cerent 454 currently is the only product that we offer and, as a result,
our revenue is entirely dependent on its commercial success. Due to the
complexity of the Cerent 454, as well as our current and prospective customers'
network architectures, we cannot assure you that our present or future
customers will not encounter significant problems with the 454, which could
negatively affect sales of the 454. If our target customers do not widely
adopt, purchase and successfully deploy the 454, or if our current or future
customers become dissatisfied with the 454, our business, financial condition
and results of operations will be seriously harmed.
If our products do not interoperate with all widely adopted modes of network
access or with our customers' internal networks, sales of our products will be
adversely impacted.
Our products are designed to accommodate all widely-adopted modes of network
access such as digital subscriber line, or DSL, frame relay, cable modem,
integrated services digital network, or ISDN, and wireless. In addition, our
products are designed to interface with our customers' existing networks, each
of which has different specifications and utilizes multiple protocol standards.
Many of our customers' networks contain multiple generations of products that
have been added over time as these networks have grown and evolved in order to
meet our customers' requirements. Our products must support all widely-used
forms of network access and must interoperate with all present and future
products within our customers' networks. If we find interoperability problems
or bugs in the existing software used in our customers' networks, we must
modify our software to fix or overcome these errors so that our products will
interoperate and scale with the existing software and hardware. If our products
cannot support all widely-used modes of network access or if our products do
not interoperate with our customers' networks, product installations could be
delayed, orders for our products could be cancelled or our products could be
returned, any of which could seriously harm our business, financial condition
and results of operations.
Because our products are complex and are deployed in complex environments, they
may have errors or defects that we find only after full deployment, which could
seriously harm our business.
The Cerent 454 is a highly complex product and is designed to be deployed in
very large and complex networks. Although we have thoroughly tested the Cerent
454, because of the nature of the product, it can only be fully tested when
deployed in very large networks with high amounts of traffic. Consequently, our
customers may discover errors or defects in the hardware or the software after
it has been fully deployed. If we are unable to fix errors or other problems
that may be identified in full deployment, we could experience:
. loss of or delay in revenues and loss of market share;
8
<PAGE>
. significant harm to our reputation and loss of customers;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
Our products are new and face rapid technological changes and evolving
standards and if we do not respond in a timely manner, our business could be
harmed.
The network infrastructure market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. In developing our products, we have made, and
will continue to make, assumptions with respect to which standards will be
adopted by our customers and competitors. If the standards adopted are
different from those on which we have chosen to focus our efforts, market
acceptance of our products may be significantly reduced or delayed and our
business will be seriously harmed. In addition, the introduction of products
embodying new technologies and the emergence of new industry standards could
render our existing products obsolete, which would seriously harm our business,
financial condition and results of operations.
Our future success depends on our ability to develop innovative new products
and product enhancements that gain market acceptance.
The market for telecommunications networking equipment, including transport
systems, is marked by rapid innovation and evolution. We cannot assure you that
we will be able to develop new products or product enhancements in a cost-
effective and timely manner, or at all. Even if we are able to develop and
introduce new products and enhancements in a cost-effective and timely manner,
they may be inferior to similar products or enhancements developed by our
current or future competitors and may fail to achieve broad market acceptance.
If we fail to successfully develop and introduce new products or enhanced
features and functionality for the 454, or if our future products or
enhancements fail to achieve widespread market acceptance, our business,
financial condition and results of operations would be seriously harmed.
Our future success depends on our ability to increase sales of our products to
CLECs and other relatively small telecommunications carriers and to effectively
market and sell our products to large, established carriers.
In order to achieve significant revenue growth, we must increase sales of
our products to CLECs and other relatively small telecommunications carriers
while effectively marketing and selling our products to large, established
carriers, specifically regional Bell operating companies, or RBOCs, such as SBC
and Bell Atlantic, and incumbent IXCs, such as AT&T, Sprint and MCI WorldCom.
Our sales efforts to date have been limited primarily to emerging IXCs, CLECs,
independent carriers and cable companies. Large carriers such as RBOCs and
incumbent IXCs are typically more demanding and deliberate in their product
selection than CLECs and other relatively small carriers and, as a result, the
process of selling equipment to RBOCs and large, incumbent IXCs is likely to
require more time and sales and marketing effort than sales to smaller
carriers. The successful expansion of our sales efforts to include RBOCs and
incumbent IXCs will necessitate the hiring of a significant number of
additional sales personnel. Competition for qualified sales personnel in the
telecommunications industry is intense, and we cannot assure you that we will
be able to hire a sufficient number of qualified sales personnel to expand our
sales efforts successfully. Further, even if we are successful in expanding the
size of our sales force, we cannot assure you that we will be successful in
increasing our sales to CLECs and other relatively small carriers or that we
will be able to market and sell our products effectively to RBOCs and incumbent
IXCs. If we cannot increase our sales to smaller carriers and effectively sell
our products to large carriers, we will not achieve significant revenue growth,
which would materially and adversely affect our business, financial condition
and results of operations.
9
<PAGE>
Even if we are successful in expanding our sales to RBOCs and incumbent
IXCs, we cannot assure you that our products will perform in a satisfactory
manner for these potential customers. The deployment of our products by RBOCs
and incumbent IXCs will likely place greater performance and interoperability
demands on our products than deployment by our existing customer base. If our
products fail to perform to the standards established by, or expectations of,
any RBOC or IXC for any reason, such customers may refuse to purchase
additional products from us, which will likely represent a significant loss of
potential market share. Further, any such failure could significantly harm our
reputation in the industry, leading to further loss of sales.
RBOCs and incumbent IXCs typically have longer sales cycles than the smaller
carriers and, as a result, if we expand our product sales to RBOCs and
incumbent IXCs, our revenues and operating results will be more susceptible to
quarterly fluctuations. Additionally, the long sales cycles associated with
these large carriers will require us to expend significant sales efforts for
each prospective RBOC or incumbent IXC customer regardless of whether we sell
our products to such customer. If a protracted sales cycle for one or more
large customers causes our operating results for any quarter to fall short of
the expectations of securities analysts or investors, the market price of our
common stock could decline.
If the market for broadband and other data communications services does not
continue to expand, demand for our products may decline significantly.
Our future success depends on the continued growth in the demand for
broadband and other data communications services and the ability of our
customers and prospective customers to sell such services. If this demand does
not continue to grow as anticipated, the demand for our products could decline
significantly, which would materially and adversely affect our business,
financial condition and results of operations.
If the number of competing access services declines or if an access service
standard is adopted, demand for our products may decline significantly.
One of the key features of our current product is the ability to aggregate
multiple access services such as digital subscriber lines, or DSL, frame relay,
cable modems, or wireless services. However, we cannot assure you that multiple
access services will be utilized in the future. If the telecommunications
industry adopts a standard access service or if one or relatively few access
services are adopted by a substantial portion of our customers or potential
customers, the market for a transport product that aggregates multiple access
services would diminish significantly, which would seriously harm our business,
financial condition and results of operations.
Our markets are highly competitive and dominated by large corporations and we
cannot assure you that we will be able to compete effectively.
Competition in the transport equipment market is intense and we expect such
competition to increase. Historically, the market for transport equipment has
been dominated by Alcatel, Fujitsu, Lucent, NEC, Nortel and Tellabs. Some of
these companies, including Nortel, have announced products that may be
competitive to the 454. In addition, a number of private companies have
developed or are developing products that perform transport functions. Many of
our competitors and potential competitors have substantially greater name
recognition and technical, financial and marketing resources than we have and
may have a substantial advantage over us in developing or acquiring new
products and technologies and in creating market awareness for those products
and technologies. Further, many of our competitors have built long-standing
relationships with some of our customers and potential customers and have the
ability to provide financing to customers and may, therefore, have an inherent
advantage in selling transport system products to those customers. We expect
our competitors to continue to improve the performance of their current
products and to introduce new products and technologies. To be competitive, we
must continue to invest significant resources in research and development,
sales, marketing and customer support. We cannot assure you that we will have
sufficient resources to make these investments, that we will be able to make
the technological advances necessary to be competitive, or that we will be able
to effectively sell our products to targeted customers who have prior
relationships with our competitors.
10
<PAGE>
In order to compete effectively in the network transport market we believe
we must deliver products that:
. provide a cost-effective optical transport solution to our customers both
initially and throughout the entire system life-cycle;
. support multiple access technologies and network protocols;
. scale easily and efficiently without disruption of carrier service to
evolve with the needs of our customers;
. perform reliably in a wide variety of physical locations and
environments; and
. are flexible and interoperate with existing network designs and
equipment.
If we are unable to compete successfully against our current and future
competitors, it could adversely affect us in the following ways:
. reduce demand for our products;
. cause delays or cancellations of customer orders;
. cause us to reduce prices on our products; or
. increase our expenses.
Any of the foregoing would materially and adversely affect our business,
financial condition and results of operations. See "Business--Competition."
We currently depend on one contract manufacturer and have no internal
manufacturing capabilities.
Our future success will depend on our ability to have sufficient volumes of
our products manufactured in a cost-effective and quality-controlled manner.
PCB Assembly, a third-party manufacturer of telecommunications and data
networking equipment, manufactures the Cerent 454 and is our sole manufacturer.
We currently have no internal manufacturing capabilities and we have no present
intention of developing such capabilities. There are a number of additional
risks associated with our dependence on a sole third-party manufacturer
including the following:
. reduced control over delivery schedules;
. quality assurance;
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on components supplied to us;
. increases in contract prices;
. the potential misappropriation of our intellectual property; and
. manufacturing disruptions.
Any of these risks could impair our ability to fulfill orders. Our customers
typically request delivery of our products within ten days following submission
of an order. As we increase our level of sales, we cannot assure you that our
third-party manufacturer will be able to meet the delivery requirements of our
customers, which could decrease customer satisfaction and have a material
adverse effect on our product sales. We do not have a long-term contract or
arrangement with our contract manufacturer that guarantees product
availability, the continuation of particular payment terms or the extension of
credit limits. If our manufacturer is unable or unwilling to continue
manufacturing our products in required volumes, for example, we would have to
identify and qualify an alternative manufacturer. Qualifying a new contract
manufacturer and commencing volume production is expensive and time-consuming
and if we are required to change or qualify an additional contract
manufacturer, we would likely lose revenue and damage our customer
relationships, either of which would harm our business, financial condition and
results of operations.
11
<PAGE>
We are dependent on sole source and limited source suppliers for several key
components, including ASICs, and if we are unable to obtain these components on
a timely basis, we will be unable to meet our customers' product delivery
requirements.
We currently purchase several key components from single or limited sources.
In particular, we rely on LSI Logic as a sole-source foundry for certain of our
application specific integrated circuits, or ASICs, and KLSI as a sole-source
foundry for certain other of our ASICs. If any of our sole or limited source
suppliers suffers from capacity constraints, work stoppages or any other
reduction or disruption in output, they may be unable to meet our delivery
schedule. If we do not receive critical components from our suppliers in a
timely manner, we will be unable to deliver those components to our
manufacturer in a timely manner and would, therefore, be unable to meet our
customers' product delivery requirements. Any failure to meet a customer's
delivery requirements could harm our reputation and decrease our sales, which
would negatively affect our business, financial condition and results of
operations. We currently have no long-term supply contracts to ensure sources
of supply for several of our key components, including ASICs. Our suppliers may
enter into exclusive arrangements with our competitors, stop selling their
products or components to us at commercially reasonable prices or refuse to
sell their products or components to us at any price and we may be unable to
develop alternative sources for the components.
If we fail to accurately predict our manufacturing requirements, we could incur
additional costs or experience delays.
We provide forecasts of our demand to our manufacturer several months prior
to scheduled delivery of products to our customers. If we overestimate our
requirements, our manufacturer may have excess inventory, which indirectly
would increase our costs. If we underestimate our requirements, our
manufacturer may have an inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenues.
In addition, lead times for materials and components that our manufacturer
orders, including ASICs, vary significantly and depend on factors such as the
specific supplier, contract terms and demand for each component at a given
time. If we fail to order sufficient quantities of product components in a
timely manner or if we experience any delay in receiving product components
from third parties, the manufacturing of our products, and the delivery of such
products to our customers, could be delayed, which would harm our business,
financial condition and results of operations.
If we fail to manage our rapid growth effectively, our business, financial
condition and results of operations could be seriously harmed.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process, as well as the implementation of appropriate control systems. We
currently intend to expand our operations to additional sites. There can be no
assurance that we will be successful in accomplishing this expansion. We
continue to increase the scope of our operations and have grown our headcount
substantially. At December 31, 1998, we had a total of 88 employees and at June
30, 1999, we had a total of 210 employees. Additionally, we plan to continue to
hire a significant number of employees. This growth has placed, and our
anticipated growth will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and
procedures, and will need to continue to expand, train and manage our workforce
worldwide. We may not be able to install adequate control systems in an
efficient and timely manner. Delays in the implementation of new systems or
operational disruptions when we transition to new systems would impair our
ability to accurately forecast sales demand, manage our product inventory and
record and report financial and management information in a timely and accurate
basis, which would seriously harm our business, financial condition and results
of operations.
If we do not expand substantially our customer service and support
organization, we will be unable to significantly increase our product sales.
Because our products are complex, we must hire highly trained customer
service and support personnel. We currently have a small customer service and
support organization and will need to increase our staff
12
<PAGE>
substantially to support the expanding needs of existing customers and to meet
the demands of new customers, some of which could require significantly greater
amounts of attention than our existing customers. In particular, it is
essential to RBOC and incumbent IXC customers that our products do not result
in network disruption. Hiring customer service and support personnel is
extremely competitive in our industry due to the limited number of people
available with the necessary technical skills and understanding of data
networking. If we are unable to expand our customer service and support
organization, we will be unable to significantly increase the sales of our
products, which would impair our ability to grow and seriously harm our
business, financial condition and results of operations.
If we lose key personnel or are unable to hire additional qualified personnel
as necessary, our business may be adversely affected.
Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing, and finance personnel,
many of whom would be difficult to replace. In particular, we believe that our
future success depends on Carl Russo, our President and Chief Executive
Officer. We do not have employment contracts or key person life insurance
covering any of our key personnel.
We believe our future success will also depend in large part upon our
ability to identify, attract and retain highly skilled managerial, engineering,
sales and marketing and finance personnel. Competition for these individuals is
intense in our industry, especially in the San Francisco Bay Area, and we have
had difficulty hiring employees in the timeframe we desire, particularly
qualified engineers and sales personnel. We may not succeed in identifying,
attracting and retaining personnel. Further, competitors and other entities
have in the past attempted, and may in the future attempt, to recruit our
employees. The loss of the services of any of our key personnel, the inability
to identify, attract or retain qualified personnel in the future or delays in
hiring qualified personnel, particularly engineers and sales personnel, could
make it difficult for us to manage our business and meet key objectives, such
as timely product introductions, which would harm our business, financial
condition and results of operations.
If we become subject to unfair hiring claims we could incur substantial costs
in defending ourselves.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring
practices. We have received claims of this kind in the past and we cannot
assure you that we will not receive claims of this kind in the future as we
seek to hire qualified personnel or that those claims will not result in
material litigation. These claims, regardless of their merits, could cause us
to incur substantial costs in defending ourselves and could divert the
attention of our management away from our operations, which could materially
and adversely affect our business.
Any acquisitions we make could disrupt our business and harm our financial
condition and operations.
While we have no current agreements or negotiations underway, we may buy
businesses, products or technologies in the future. In the event of any future
acquisitions, we could:
. issue stock that would dilute our current stockholders' percentage
ownership;
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
These acquisitions also involve numerous risks, including:
. problems integrating the purchased operations, technologies or products
with our own;
. unanticipated costs and other liabilities;
. diversion of management's attention from our core business;
13
<PAGE>
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees, particularly those of the acquired
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future. Our failure to do so could have an adverse effect on our business,
financial condition and results of operations.
We may be subject to product returns and product liability claims resulting
from defects in our products, which could result in costly and time-consuming
litigation, financial liability to our customers or the failure of our products
to attain market acceptance.
Our products are complex and may contain undetected bugs or defects, which
could result in product returns or product liability claims. Our contracts with
our customers generally contain provisions designed to limit our exposure to
potential product liability claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. A
product liability claim, however, whether successful or not, could seriously
impact our capital reserves, harm our reputation and direct the attention of
key personnel away from our operations, any of which could harm our business,
financial condition or results of operations.
Problems arising from use of our products in conjunction with other vendors'
products could disrupt our business and harm our financial condition.
Our customers use our products in conjunction with products from other
vendors. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. The occurrence of hardware or software
errors, whether caused by our products or another vendor's products, may result
in the delay or loss of market acceptance of our products, and any necessary
corrections or modifications may cause us to incur significant expenditures.
The occurrence of these types of problems may seriously harm our business,
financial condition and results of operations.
We could become subject to litigation regarding intellectual property rights
which could seriously harm our business.
Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, many leading companies in the
networking industry, including our competitors, have extensive patent
portfolios with respect to networking technology. From time to time, third
parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to our business. Third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to our existing or future
products. Any of these claims and any resulting lawsuit, if successful, could
subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us
to do one or more of the following:
. stop selling, incorporating or using our products that use the challenged
intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. For additional information concerning
our intellectual property rights, see "Business--Intellectual Property."
14
<PAGE>
Our business could be adversely affected if we are unable to protect our
intellectual property rights from third-party challenges.
We rely on a combination of patent, copyright, trademark and trade secret
laws to protect our intellectual property rights. We also enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and control access to and distribution of our software,
documentation and other proprietary information. While we have a number of
patent applications pending before the United States Patent and Trademark
Office, we currently hold no issued patents. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. Our future success will depend in part on our ability to
protect our proprietary rights and the technologies used in our principal
products. If we are unable to enforce and protect our intellectual property,
our business, financial condition and results of operations would be materially
adversely affected.
Necessary licenses of third-party technology may not be available to us or may
be very expensive.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, any of which could seriously harm our business, financial condition and
results of operations.
The communications industry is subject to government regulations which could
harm our business.
The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry and, as a result, our products, and those of our
customers, are subject to FCC rules and regulations. Current and future FCC
regulations affecting communications services, our products or our customers'
businesses or products could negatively affect our business. In addition,
international regulatory standards could impair our ability to develop products
for international carriers in the future. Delays caused by our compliance with
regulatory requirements could result in postponements or cancellations of
product orders, which would harm our business, financial condition and results
of operations. Further, we cannot be certain that we will be successful in
obtaining or maintaining any regulatory approvals that may, in the future, be
required to operate our business.
We face a number of risks associated with year 2000 problems.
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to perform data
communications or engage in similar normal business activities.
We have designed the Cerent 454 for use in the year 2000 and beyond and
believe it is year 2000 compliant. However, our product is generally integrated
into larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of our customers' networks involves different
combinations of third party products. We cannot evaluate whether all of their
products are year 2000 compliant. We may face claims based on year 2000
problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no claims
of this kind have been made, we may in the future be required to defend our
products in legal proceedings which could be expensive regardless of the merits
of these claims.
15
<PAGE>
If our suppliers, vendors, manufacturer, customers and service providers
fail to correct any year 2000 problems, which they may have, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt our operations and damage our relationships with our customers. Due
to the general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party suppliers and vendors, we are unable to determine at
this time whether year 2000 failures could harm our business and our financial
results.
Additionally, our customers' purchasing plans could be affected by year 2000
issues if they need to expend significant resources to fix their existing
systems to become year 2000 compliant. This situation may reduce funds
available to purchase our products. Further, some customers may wait to
purchase our products until after the year 2000, which may reduce our revenue.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
We may need additional capital to fund our future operations.
The development and marketing of new products and the expansion of our
direct sales operation and associated support personnel is expected to require
a significant commitment of resources. If the market for our products develops
more slowly than anticipated, if we fail to establish significant market share
and achieve increased revenues, if our capital expenditure forecasts change or
prove inaccurate, or if we need to respond to unforeseen challenges or take
advantage of unanticipated opportunities, we may incur significant operating
losses and/or utilize significant amounts of capital. As a result, we may need
to raise substantial additional capital. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the issuance
of such securities could result in dilution to our existing stockholders. If
additional funds are raised through the issuance of debt securities, these
securities would have rights, preferences and privileges senior to holders of
common stock and the terms of such debt could impose restrictions on our
operations. Additional capital, if required, may not be available on acceptable
terms, or at all. If we are unable to obtain additional capital, we may be
required to reduce the scope of our planned product development and marketing
and sales efforts, which would harm our business, financial condition and
operating results.
There has been no prior market for our common stock and a public market for our
securities may not develop or be sustained.
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. If an active public market for our common stock does not
develop, the liquidity of your investment may be limited. Further, the market
price of our common stock might fall below the initial public offering price.
The initial public offering price may bear no relationship to the price at
which the common stock will trade upon completion of this offering. The initial
public offering price will be determined based on negotiations between us and
the representatives of the underwriters, based on factors that may not be
indicative of future market performance. See "Underwriting."
Substantial shares of our common stock will be available for future sale and
such sales may depress our stock price.
After this offering, assuming the number of outstanding shares as of June
30, 1999, we will have shares of common stock outstanding. All the shares
sold in this offering will be freely tradable. The remaining shares of
common stock outstanding after this offering are subject to lock-up agreements
that prohibit the sale of the shares for 180 days after the date of this
prospectus. Immediately after the 180 day lock-up period shares which will
be outstanding after the offering will become available for sale. The remaining
shares of our common stock will become available at various times thereafter
upon the expiration of one-year holding periods and/or lapse of our repurchase
option. Sales of a substantial number of shares of common stock in the public
market after this offering or after the expiration of the lock-up and holding
periods could cause the market price of our common stock to decline. See
"Shares Eligible for Future Sale."
16
<PAGE>
Our officers and directors will continue to have substantial control over
Cerent after this offering and could delay or prevent a change in corporate
control.
We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately % of our
outstanding common stock following the completion of this offering. These
stockholders, if acting together, would be able to influence significantly all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other changes in corporate control.
We expect to experience volatility in our share price which could negatively
affect your investment.
The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:
. quarterly variations in operating results;
. any loss of a major customer;
. changes in market valuations of communications related companies;
. changes in financial estimates by securities analysts;
. announcements by us or our competitors of new products or of significant
acquisitions, strategic partnerships or joint ventures;
. additions or departures of key personnel;
. any deviations in net revenues or in losses from levels expected by
securities analysts;
. future sales of common stock; and
. volume fluctuations, which are particularly common among highly volatile
securities of technology companies.
You will suffer immediate and substantial dilution.
The initial public offering price is substantially higher than the net
tangible book value per share of our outstanding common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of their investment of approximately $ assuming an
initial public offering price of $ . To the extent that currently outstanding
options or warrants are exercised, there will be further dilution to your
investment.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
Internet use and deployment of communications equipment. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. We undertake no obligation to update these statements
or publicly release the result of any revisions to the forward-looking
statements that we may make to reflect events or circumstances after the date
of this prospectus or to reflect the occurrence of unanticipated events. Our
actual results could differ materially from those anticipated in these forward-
looking statements for many reasons, including the risks faced by us and
described in the preceding pages and elsewhere in this prospectus.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock
offered by us are estimated to be $ at an assumed public offering price of
$ per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses (assuming no exercise of the
underwriters' over-allotment option to purchase shares from us).
We intend to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures. We may also use a
portion of the net proceeds to acquire additional businesses, products and
technologies or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so and are not currently engaged in any negotiations for any
such acquisition or joint venture. The amounts that we actually expend for
working capital purposes will vary significantly depending on a number of
factors, including future revenue growth, if any, and the amount of cash we
generate from operations. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending the uses described
above, we will most likely invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of our current credit
facility prohibit us from paying dividends without lender consent.
18
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. the actual capitalization of Cerent as of June 30, 1999;
. the pro forma capitalization of Cerent after giving effect to proceeds of
$30.0 million received from the issuance of convertible promissory notes
on July 21, 1999, and recorded the obligation net of a $12.9 million
discount; and
. the pro forma as adjusted capitalization of Cerent after giving effect to
the conversion of all outstanding shares of convertible preferred stock
into 32,990,691 shares of common stock, the automatic conversion of the
convertible promissory notes into shares of common stock upon
completion of this offering, at an assumed initial public offering price
of $ per share and the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
This table should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ -------------
(in thousands, except share data)
(unaudited)
<S> <C> <C> <C>
Long-term debt, net of discount...... $ 5,001 $ 22,144
------------ ------------ --------
Stockholders' equity:
Convertible preferred stock, $0.001
par value per share, issuable in
series: 37,709,088 shares
authorized, 32,990,691 shares
issued and outstanding, actual and
pro forma: 10,000,000 shares
authorized, none issued or
outstanding, pro forma as
adjusted........................... 64,989 64,989
Common stock, $0.001 par value per
share, 150,000,000 shares
authorized, 33,612,476 shares
issued and outstanding, actual and
shares issued and outstanding
pro forma, and 300,000,000 shares
authorized and shares issued and
outstanding, pro forma as
adjusted........................... 55,868 68,725
Notes receivable from stockholders... (11,891) (11,891)
Deferred stock compensation.......... (35,770) (35,770)
Accumulated deficit.................. (59,712) (59,712)
------------ ------------ --------
Total stockholders' equity......... 13,484 26,341
------------ ------------ --------
Total capitalization............... $ 18,485 $ 48,485
============ ============ ========
</TABLE>
- ---------------------
The above table is based on shares outstanding as of June 30, 1999. This
table excludes:
. 459,875 shares subject to outstanding options at a weighted average
exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
stock available for future issuance under our 1997 Stock Plan and
5,000,000 shares of common stock available for future issuance under our
1999 Stock Plan;
. 4,982,118 shares of common stock reserved for issuance on the exercise of
warrants, of which 4,588,416 shares at a weighted average exercise price
of $1.13 per share were outstanding as of June 30, 1999;
. 500,000 shares of common stock available for issuance under our 1999
Directors' Stock Option Plan; and
. 500,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan.
19
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock on June 30, 1999
was $ , or approximately $ per share. Pro forma net tangible book value
represents the amount of our total tangible assets less total liabilities
(after giving effect to the proceeds received from the issuance of the
convertible promissory notes on July 21, 1999), divided by the number of shares
of common stock outstanding after giving pro forma effect to the conversion of
all outstanding shares of convertible preferred stock into 32,990,691 shares of
common stock as of June 30, 1999 and the automatic conversion of the
convertible promissory notes into shares of common stock upon completion of
this offering at an assumed initial public offering price of $ share.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately following this offering. After giving
effect to our sale of shares of common stock at an assumed initial public
offering price of $ and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our
pro forma net tangible book value would have been $ , or approximately
$ per share. This represents an immediate increase in 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.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $
Pro forma net tangible book value per share as of June 30, 1999...... _ $
Increase in pro forma net tangible book value per share attributable
to new investors....................................................
Pro forma net tangible book value per share after this offering........
---
Dilution in pro forma net tangible book value per share to new
investors............................................................. $
===
</TABLE>
The following table summarizes on a pro forma basis at June 30, 1999 after
giving effect to the conversion of all outstanding shares of our convertible
preferred stock into an aggregate of 32,990,691 shares of common stock
immediately prior to completion of this offering and the automatic conversion
of the convertible promissory notes into shares of common stock upon
completion of this offering at an assumed initial public offering price of $
share, the difference between the number of shares of common stock purchased
from us, the total consideration paid to us and the average price paid per
share by existing stockholders and by new investors purchasing common stock in
this offering before deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, assuming an initial
public offering price of $ per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- --------------------- Average Price
Number Percent Amount Percent Per Share
------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New investors...........
------- --------- -------- ----------
Total................. 100.0% 100.0%
========= ==========
</TABLE>
The above tables are based on shares outstanding as of June 30, 1999. These
tables exclude:
. 459,875 shares subject to outstanding options at a weighted average
exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
stock available for future issuance under our 1997 Stock Plan and
5,000,000 shares of common stock available for future issuance under our
1999 Stock Plan;
. 4,982,118 shares of common stock reserved for issuance on the exercise of
warrants, of which 4,588,416 shares at a weighted average exercise price
of $1.13 per share were outstanding as of June 30, 1999;
. 500,000 shares of common stock available for issuance under our 1999
Directors' Stock Option Plan; and
. 500,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. The consolidated statement
of operations data set forth below for the period from January 27, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
and the consolidated balance sheet data as of December 31, 1997 and 1998 have
been derived from the audited consolidated financial statements of Cerent
Corporation included elsewhere in this prospectus, which have been audited by
Ernst & Young LLP, Independent Auditors. The consolidated statement of
operations data for the six-month periods ended June 30, 1998 and 1999, and the
consolidated balance sheet data as of June 30, 1999, are unaudited. In the
opinion of management, all necessary adjustments (consisting only of normal
recurring adjustments) have been included to present fairly the unaudited
results of operations for these periods. The consolidated financial data for
the six-month period ended June 30, 1999 are not necessarily indicative of
results to be expected for any future period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Period from
January 27,
1997
(inception) Six Months Ended
to Year Ended June 30,
December 31, December 31, -----------------
1997 1998 1998 1999
------------ ------------ ------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue.................................. $ -- $ 220 $ -- $ 9,917
Cost of revenue.......................... -- 1,061 -- 7,943
-------- --------- ------- --------
Gross profit (loss)...................... -- (841) -- 1,974
Operating expenses:
Research and development................. 5,159 15,553 6,723 8,792
Selling, general and administrative...... 2,470 5,039 1,673 10,251
Stock compensation....................... -- 510 -- 10,800
-------- --------- ------- --------
Total operating expenses................ 7,629 21,102 8,396 29,843
-------- --------- ------- --------
Operating loss........................... (7,629) (21,943) (8,396) (27,869)
Interest expense and other, net.......... (229) (607) (268) (1,435)
-------- --------- ------- --------
Net loss................................. $ (7,858) $ (22,550) $(8,664) $(29,304)
======== ========= ======= ========
Basic and diluted net loss per share
(1)..................................... $ (0.82) $ (1.33) $ (0.57) $ (1.36)
======== ========= ======= ========
Shares used in computing basic and
diluted net loss per share (1).......... 9,535 16,901 15,091 21,470
======== ========= ======= ========
Pro forma basic and diluted net loss per
share (1) (unaudited)................... $ (0.67) $ (0.54)
========= ========
Shares used in computing pro forma
basic and diluted net loss per share (1)
(unaudited)............................. 33,850 54,026
========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998 June 30, 1999
------- -------- -------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $ 6,758 $ 22,245 $ 5,794
Working capital............................. 4,868 18,511 1,453
Total assets................................ 10,143 31,877 33,628
Long-term debt, net of discount............. 3,718 4,229 5,001
Total stockholders' equity.................. 4,197 20,885 13,484
</TABLE>
- ---------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used to compute per share
data.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We design, develop and market an evolutionary, multi-service optical
transport platform designed to dramatically lower network operating costs and
increase the efficiency of bandwidth delivery within today's congested
transport networks. Our Cerent 454 efficiently integrates multiple voice and
data services in a single, compact platform and is designed to support any
transmission rate up to an aggregate of 240 Gbps. Our 454 supports multiple
service offerings from a single platform and provides flexibility and
scalability to accommodate the requirements of existing installed equipment and
growing bandwidth demands. The Cerent 454 provides a cost-effective solution
for our service provider customers and enables them to rapidly deploy a wide
range of applications and revenue generating services.
We were incorporated in Delaware in January 1997 as Fiberlane
Communications, Inc. and commenced operations in April 1997. From our inception
through September 1998, our operating activities were primarily devoted to
increasing our research and development capabilities, designing our ASICs,
developing our software and developing and testing the Cerent 454. We also
staffed and trained our administrative, marketing and sales organizations. In
December 1998, we began shipping the Cerent 454 with volume shipments beginning
in the first quarter of 1999. As of June 30, 1999, we had shipped our 454 to 86
customers.
Since our inception, we have incurred significant losses, and as of June 30,
1999, we had an accumulated deficit of $59.7 million. We have not achieved
profitability on a quarterly or an annual basis, and anticipate that we will
incur net losses for the foreseeable future. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, we will need to generate significantly higher
revenues to achieve and maintain profitability.
Our revenue currently is derived from sales of one product, the Cerent 454.
We expect that a significant portion of our future revenue will continue to
come from sales of the Cerent 454. While we are developing and plan to
introduce future products and enhancements to our 454, we cannot assure you
that we will be successful in these efforts.
We recognize revenue at the time of shipment, assuming that collectibility
is probable, unless we have future obligations or have to obtain customer
acceptance, in which case revenue is deferred until these obligations are met.
We provide for potential product returns and estimated warranty costs in the
period of the related sale.
We currently sell the 454 through our direct sales force and have targeted
our initial sales efforts primarily to emerging IXCs, CLECs, independent
carriers and cable companies. We intend to pursue incumbent IXCs, RBOCs and
international carriers. In order to achieve significant revenue growth, we must
increase sales of our products to CLECs and the other small carriers and
effectively market and sell our products to large, established carriers, such
as RBOCs and incumbent IXCs. The expansion of our sales efforts to include
RBOCs and incumbent IXCs will necessitate the hiring of a significant number of
additional sales personnel. See "Risk Factors--Our future success depends on
our ability to increase sales of our products to CLECs and other relatively
small telecommunications carriers and to effectively market and sell our
products to large, established carriers."
Our cost of revenue consists of amounts paid to third-party manufacturers,
manufacturing start-up and personnel and related costs. We outsource our
manufacturing and assembly requirements. Accordingly, a significant portion of
our cost of revenue consists of payments to a third-party contract
manufacturer. Manufacturing engineering and documentation control are conducted
at our facility in Petaluma, California. Our gross margins will be affected
primarily by the following factors:
. demand for our products;
. new product introductions both by us and by our competitors;
22
<PAGE>
. changes in our pricing policies and those of our competitors;
. the mix of product configurations sold; and
. the volume of manufacturing and the effect on manufacturing costs.
Research and development expenses consist primarily of salaries and related
personnel costs, non-recurring engineering charges and prototype costs related
to the design, development, testing and enhancement of our products, including
our ASICs, software and system development. We expense our research and
development costs as they are incurred. Several components of our research and
development effort require significant expenditures, the timing of which can
cause significant quarterly variability in our expenses. Our ASIC development
requires an upfront payment of non-recurring engineering charges, regardless of
whether the integrated circuit works, and a per unit cost payable as ASICs are
purchased. Additionally, we incur significant expenses in connection with the
purchase of testing equipment for our products. With several complex ASICs in
our architecture, we will incur large non-recurring engineering and prototype
expenses with every enhancement of the Cerent 454 and any new product
development. We are devoting substantial resources to the continued development
and enhancement of the Cerent 454 and the introduction of new products. We
believe that research and development is critical to our strategic product
development objectives and intend to leverage our leading technology to meet
the changing requirements of our customers. As a result, we expect our research
and development expenses to increase in absolute dollars in the future.
Selling, general and administrative expenses consist primarily of salaries
and related personnel costs of sales and marketing personnel, salaries and
related expenses for executive, finance, accounting, facilities, human
resources and information technology personnel, recruiting expenses and
professional fees, commissions and promotional and other marketing expenses. We
expect that sales and marketing expenses will increase substantially in
absolute dollars in the future as we increase our direct sales efforts, hire
additional sales and marketing personnel, initiate additional marketing
programs and establish sales offices in new locations. We expect that general
and administrative expenses will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company. We do not allocate general corporate
overhead expenses which include but are not limited to rent and utilities.
In connection with the granting of certain stock options and warrants during
the year ended December 31, 1998 and the six-month period ended June 30, 1999,
we recorded deferred stock compensation of $2.8 million and $41.3 million,
respectively. Stock compensation primarily includes the amortization of stock
compensation charges resulting from the granting of stock options and warrants
with exercise prices below the deemed fair value of our common stock on the
date of grant. These amounts are being amortized using a graded vesting method
over the vesting periods of the applicable options or term of the related
warrants. We amortized $332,000 of deferred stock compensation during the year
ended December 31, 1998, and $5.7 million of deferred stock compensation during
the six-month period ended June 30, 1999. During the year ended December 31,
1998 and the six-month period ended June 30, 1999, we also recorded stock
compensation charges of $178,000 and $5.1 million, respectively, relating to
the issuance of convertible preferred stock to certain of our officers at an
exercise price which was below the deemed fair value of our common stock.
Including amounts recorded through June 30, 1999, we expect to amortize
approximately $23.3 million of this deferred compensation expense in 1999,
$15.7 million in 2000, $7.0 million in 2001 and $2.7 million in 2002. See Note
3 of Notes to Consolidated Financial Statements.
In connection with our financing obligations, we recorded $338,000, $163,000
and $8.8 million as discounts on long-term debt for the period ended December
31, 1997, year ended December 31, 1998 and the six-month period ended June 30,
1999, relating to the deemed fair value of warrants which were issued in
connection with our debt financings. The discounts are being amortized over the
term of the long-term debt as interest expense. We recorded $76,000, $139,000
and $1.0 million of amortization expense for the period ended December 31,
1997, year ended December 31, 1998 and the six-month period ended June 30,
1999, respectively. Including amounts amortized through June 30, 1999, we
expect to amortize approximately
23
<PAGE>
$2.8 million of this discount in 1999, $3.7 million in 2000 and $2.6 million in
2001. See Note 3 of Notes to Consolidated Financial Statements.
As of December 31, 1998, we had approximately $20.4 million of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Such net operating loss carryforwards expire at various
dates beginning in 2012 to the extent that they are not utilized. We have not
recognized any benefit from the future use of loss carryforwards for these
periods, or for any other periods, since inception. Management's evaluation of
all the available evidence in assessing realizability of the tax benefits of
such loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize the tax benefits currently.
Results of Operations
Revenue
The quarter ended December 31, 1998 was the first quarter we recognized
revenue. Revenue was $220,000 for the year ended December 31, 1998 and $9.9
million for the six-month period ended June 30, 1999. The increase in revenue
was directly related to the increase in sales of the Cerent 454.
Cost of Revenue
Cost of revenue was $1.1 million for the year ended December 31, 1998 and
$7.9 million for the six-month period ended June 30, 1999. We began shipping
our product in the quarter ended December 31, 1998. Cost of revenue as a
percentage of revenue was very high during these periods due to the large cost
of initial start-up of production and the low volume of sales.
Research and Development Expenses
Research and development expenses were $15.6 million for the year ended
December 31, 1998, an increase of $10.4 million from $5.2 million for the
period ended December 31, 1997, and were $8.8 million for the six-month period
ended June 30, 1999, an increase of $2.1 million from $6.7 million for the
comparable period of 1998. The period-to-period increases were primarily due to
increased costs associated with a significant increase in personnel and
personnel-related expenses. An increase in non-recurring engineering costs and
an increase in prototype expenses also contributed to the period-to-period
increases. Development is essential to our future success and we expect that
research and development expenses will increase in absolute dollars in future
periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5.0 million for the year
ended December 31, 1998, an increase of $2.5 million from $2.5 million for the
period ended December 31, 1997, and were $10.3 million in the six-month period
ended June 30, 1999, an increase of $8.6 million from $1.7 million for the
comparable period of 1998. The period-to-period increases were due primarily to
a significant increase in the number of sales and marketing and general and
administrative personnel, increased recruiting expenses and other related
personnel costs. An increase in professional fees and an increase in rent and
utilities also contributed to the period-to-period increases.
Stock Compensation
Stock compensation expenses were $510,000 and $10.8 million for the year
ended December 31, 1998 and the six-month period ended June 30, 1999,
respectively. The increase was due primarily to an increase in the number of
options granted to our employees at exercise prices which were below the deemed
fair value of our common stock and $5.1 million of stock compensation expense
relating to the issuance of preferred stock to certain of our officers at an
exercise price which was below the deemed fair value of our common stock.
24
<PAGE>
Interest Expense and Other, Net
Interest expense and other, net, relates primarily to expenses associated
with our financing obligations. Interest expense and other, net, totaled
$229,000 and $607,000 for the period ended December 31, 1997 and year ended
December 31, 1998, respectively, and $268,000 and $1.4 million for the six-
month periods ended June 30, 1998 and 1999, respectively. These increases were
due primarily to increased borrowings under financing obligations and related
amortization of discounts relating to warrants issued in connection with these
obligations.
Quarterly Results of Operations
The following table presents our operating results for the quarters ended
September 30 and December 31, 1998 and March 31 and June 30, 1999. The 454 was
placed into production in the quarter ended September 30, 1998. The information
for each of these quarters is unaudited and has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read in conjunction with our audited
consolidated financial statements and the related notes appearing elsewhere in
this prospectus. These operating results are not necessarily indicative of the
results of any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
------------- ------------ --------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue....................... $ -- $ 220 $ 2,442 $ 7,475
Cost of revenue............... 346 715 2,338 5,605
------- ------- ------- --------
Gross profit (loss)........... (346) (495) 104 1,870
Operating expenses:
Research and development..... 4,312 4,518 4,191 4,601
Selling, general and
administrative.............. 1,332 2,034 4,406 5,845
Stock compensation........... 49 461 783 10,017
------- ------- ------- --------
Total operating expenses.... 5,693 7,013 9,380 20,463
------- ------- ------- --------
Operating loss................ (6,039) (7,508) (9,276) (18,593)
Interest expense and other,
net.......................... (214) (125) (149) (1,286)
------- ------- ------- --------
Net loss...................... $(6,253) $(7,633) $(9,425) $(19,879)
======= ======= ======= ========
</TABLE>
Our revenues and operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number of factors, many
of which are outside of our control. The primary factors that may affect us
include the following:
. variations in the timing and size of sales and shipments of our products;
. delays or cancellations of product orders by our customers;
. new product introductions by us or our competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. mix in product configurations that we sell;
. our ability to develop, introduce and ship in a timely manner new
products and product enhancements that meet customer requirements;
. our ability to obtain sufficient supplies of the sole or limited source
components, including ASICs;
. our ability to attain and maintain production volumes and quality levels
for our current and future products;
. our ability to control expenses and manufacturing costs;
25
<PAGE>
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
communications and related industries.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, any unanticipated decline
in revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of securities analysts and investors, which could cause the
price of our common stock to decline.
Liquidity and Capital Resources
From inception through June 30, 1999, we have financed our operations
primarily through private sales of our capital stock totaling approximately
$50.5 million in net proceeds. We have also financed our operations through net
borrowings on long-term debt agreements totaling approximately $21.0 million.
On July 21, 1999, we received $30.0 million in proceeds through the issuance of
convertible promissory notes. At June 30, 1999, cash and cash equivalents
totaled $5.8 million. As of June 30, 1999, we had $10.0 million available under
long-term debt agreements.
Cash used in operating activities for the year ended December 31, 1998 was
$19.8 million, an increase of $13.0 million from the $6.8 million used for the
period ended December 31, 1997. The increase was primarily due to an increase
in our net loss from $7.9 million in fiscal 1997 to $22.6 million in fiscal
1998, partially offset by increased non-cash operating charges in 1998. Cash
used in operating activities for the six-month period ended June 30, 1999 was
$17.3 million, an increase of $10.1 million from the $7.2 million used for the
six-month period ended June 30, 1998, as a result of an increase in our net
loss from $8.7 million for the six-month period ended June 30, 1998 to $29.3
million for the six-month period ended June 30, 1999, partially offset by
increased non-cash operating charges.
Cash used in investing activities for the year ended December 31, 1998 was
$4.2 million, an increase of $0.6 million from the $3.6 million used for the
period ended December 31, 1997. Cash used in investing activities for the six-
month period ended June 30, 1999 was $9.3 million, an increase of $6.8 million
from the $2.5 million used for the six-month period ended June 30, 1998. Cash
used in investing activities for these periods primarily reflected the purchase
of computers and other equipment and software used in our development
activities and other equipment and furniture used in our operations.
Cash provided by financing activities was $17.1 million for the period ended
December 31, 1997, $39.5 million for the year ended December 31, 1998 and $10.1
million for the six-month period ended June 30, 1999. Cash provided by
financing activities for these periods was derived primarily from private sales
of convertible preferred stock and long-term debt borrowings. See "Related
Party Transactions" and Notes 3, 6 and 9 of Notes to Consolidated Financial
Statements.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may
26
<PAGE>
seek to sell additional equity or debt securities. If additional funds are
raised through the issuance of debt securities, these securities could have
rights, preferences and privileges senior to holders of common stock, and the
term of this debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders, and we cannot be certain that additional
financing will be available in amounts or on terms acceptable to us, if at all.
If we are unable to obtain this additional financing, we may be required to
reduce the scope of our planned product development and sales and marketing
efforts, which could harm our business, financial condition and operating
results.
Year 2000 Compliance
Impact Of The Year 2000 Computer Problem
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
State Of Readiness Of Our Products
We have designed the Cerent 454 for use in the year 2000 and beyond and
believe it is year 2000 compliant. However, our products are generally
integrated into larger networks involving sophisticated hardware and software
products supplied by other vendors. Each of our customers' networks involves
different combinations of third party products. We cannot evaluate whether all
of their products are year 2000 compliant. We may face claims based on year
2000 problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no such
claims have been made, we may in the future be required to defend our products
in legal proceedings which could be expensive regardless of the merits of such
claims.
State Of Readiness Of Our Internal Systems
Our business may be affected by year 2000 issues related to non-compliant
internal systems developed by us or by third-party vendors. We have received
assurances that all material systems from third-party vendors in use by us are
year 2000 compliant. We are not currently aware of any year 2000 problem
relating to any of our material internal systems. We are in the process of
testing all such systems for year 2000 compliance and plan to complete such
testing before September 30, 1999. We do not believe that we have any
significant systems that contain embedded chips that are not year 2000
compliant. Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as our manufacturers,
suppliers, customers and other service providers. We believe that absent a
systemic failure outside our control, such as a prolonged loss of electrical or
telephone service, year 2000 problems at third parties such as manufacturers,
suppliers, customers and service providers will not have a material impact on
our operations. If our manufacturers, suppliers, vendors, partners, customers
and service providers fail to correct their year 2000 problems, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt our operations and damage our relationships with our customers. Due
to the general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party manufacturers, suppliers and vendors, we are unable to
determine at this time whether year 2000 failures could harm our business and
our financial results. Our customers' purchasing plans could be affected by
year 2000 issues if they need to expend significant resources to fix their
existing systems to become year 2000 compliant. This situation may reduce funds
available to purchase our products. In addition, some customers may wait to
purchase our products until after the year 2000, which may reduce our revenue.
27
<PAGE>
Risks
Failures of our internal systems to be year 2000 compliant could temporarily
prevent us from processing orders, issuing invoices and developing products and
could require us to devote significant resources to correcting such problems.
Due to the general uncertainty inherent in the year 2000 computer problem,
resulting from the uncertainty of the year 2000 readiness of third-party
suppliers and vendors, we are unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on our business,
results of operations or financial condition.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will be effective for the fiscal year ended
December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133, however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position, results
of operations, or cash flows as the Company has not entered into any derivative
contracts.
Quantitative and Qualitative Disclosures About Market Interest Rate Sensitivity
Our exposure to market risk is principally confined to our cash and money
market accounts which have short maturities and, therefore, minimal and
immaterial risk.
28
<PAGE>
BUSINESS
Overview
We are a leading provider of next-generation optical transport solutions
that enable network service providers to meet the demands resulting from the
rapid growth in the volume of communications traffic. We deliver an
evolutionary, multi-service optical transport platform designed to dramatically
lower network operating costs and increase the efficiency of bandwidth delivery
within today's congested transport networks. Our Cerent 454 efficiently
integrates multiple voice and data services in a single, compact platform and
is designed to support any transmission rate up to an aggregate of 240 Gbps.
The 454 provides a cost-effective solution for our service provider customers
and enables them to rapidly deploy a wide range of applications and revenue
generating services. As of June 30, 1999, we had shipped the Cerent 454 to 86
customers, including ALLTEL, Buckeye TeleSystem, Frontier Communications, GST
Telecom, Hutchinson Telephone, Nextlink, PSINet, Qwest Communications, RCN
Corp., Sho-Me Power Electric, TCI and Williams Communications.
Industry Background
Dramatic Increase in the Volume of Data Traffic
The volume of data traffic over communications networks has surpassed
traditional voice traffic and continues to grow dramatically. Industry sources
have predicted that voice will account for less than 1% of worldwide
communications traffic by 2004. The primary reason for the increase in data
traffic is the emergence of the Internet as an essential communications and
transaction medium. According to International Data Corporation, the number of
Internet users worldwide reached approximately 142 million in 1998 and is
forecasted to grow to approximately 502 million by the end of 2003. The
increasing use of the Internet among consumers and business users is primarily
attributable to easier and cheaper access to the Internet, greater diversity of
devices that are able to access the Internet and the demand for bandwidth-
intensive applications and enhanced services. E-commerce in particular is
generating enormous data traffic over communications networks as it is becoming
a critical element of many businesses' strategies. According to International
Data Corporation, e-commerce revenues are expected to grow from approximately
$32 billion at the end of 1998 to approximately $426 billion by the end of
2002.
This increase in data traffic has placed significant constraints on the
existing communications infrastructure which was originally designed to carry
only voice traffic over the public switched telephone network, or PSTN. Such
constraints have manifested themselves in the form of network congestion,
decreases in reliability and an inability to scale effectively with an ever-
increasing volume of traffic.
To accommodate the increase in data traffic as well as meet the demand for
bandwidth-intensive applications and enhanced services, service providers
recognize the need to upgrade their communications networks. With the advent of
telecommunications deregulation and the subsequent increased competition,
existing as well as emerging service providers are deploying new communications
infrastructure equipment to carry the increasing volume of data traffic while
optimizing the utilization of existing networks.
The Communications Network
Service provider communications networks consist of a complex set of several
interlinking networks: the Internet, the public switched telephone network and
private corporate networks. These networks consist of a vast conglomeration of
equipment, which is typically owned by communications service providers and
cannot be changed easily or comprehensively without an interruption of service.
The communications networks can be conceptually classified into the
following three categories:
. access network
. optical transport network
29
<PAGE>
. optical backbone or core
[Graphic depicting the access, optical transport and optical backbone networks.
The access network is depicted as six access services, including IP/ATM, POTS,
DSL, cable modem, frame relay and analog/ISDN. The optical transport network is
depicted as a interconnected web of fiber optic transmission lines within a
cloud shape. The optical backbone is depicted as an interconnected web of fiber
optic transmission lines within a smaller cloud shape.
The access network, often referred to as the last mile, carries electrical
signals via telephone copper twisted-pair wiring, coaxial cable and wireless
transmissions between end users' and service providers' networks. The optical
transport network consists of fiber optic transmission lines that aggregate the
multiple electronic signals from the access portion and interconnects these
aggregation points to the fiber optic backbone or core. The fiber optic
backbone consists of long-haul fiber optic lines designed to carry enormous
amounts of communications traffic over great distances.
Access Network Upgrades Are Enabling High-Speed Broadband Delivery
The access network connects individual end users and corporate local area
networks, or LANs, to service provider networks and was originally designed to
support low-bandwidth analog voice traffic. Due to the increased demands for
high-bandwidth data traffic and enhanced voice services that now must pass over
this traditional analog network, service providers have begun to install new
high-speed access equipment. These new higher speed broadband digital
transmission technologies include:
. digital subscriber line, or DSL, over traditional copper twisted-pair
wiring;
. cable modem technology over coaxial cable; and
. broadband wireless.
Each of these technologies has substantially higher data transmission speeds
or bandwidth than traditional telephone lines and is being deployed at rapid
rates to meet the growing demands of end users. The Gartner Group estimates
that worldwide revenue for DSL equipment will increase from approximately $700
million in 1999 to approximately $3.2 billion by 2003 and that worldwide cable
modem shipments will increase from approximately 1.8 million in 1999 to
approximately 5.3 million by 2003. In addition to supporting multiple types of
emerging broadband traffic, access networks must also support standards such as
internet protocol, or IP, asynchronous transfer mode, or ATM, and frame relay.
Many vendors focus exclusively on developing new technologies that serve the
access portion of the network. These vendors supply several separate devices to
handle disparate traffic types as existing equipment is unable to aggregate
multiple data types at multiple speeds. This traditional approach of accessing
service-provider networks via separate devices results in a complex access
solution that is expensive, consumes valuable space at a carrier's central
offices and a cable operator's headend locations and is difficult to manage and
maintain. These new broadband services operate in conjunction with traditional
voice technology and are incremental to the existing network resources. As a
result, legacy systems will continue to exist in the network. Accordingly, the
equipment linking the access network to the optical transport network must
provide the
30
<PAGE>
flexibility to support the coexistence of multiple broadband services as well
as voice traffic. We expect that this problem will be exacerbated as broadband
services become more pervasive.
Backbone Network Upgrades Are Enabling Higher Capacity
The backbone network is designed to carry the heaviest aggregated traffic
and has traditionally been dominated by a small number of incumbent inter-
exchange carriers, or IXCs, such as AT&T, MCI WorldCom and Sprint. More
recently, new backbone providers such as Level 3, Qwest Communications and
Williams Communications have emerged to support increased capacity and
performance demands. In recent years, carriers have invested significantly to
upgrade transmission capacity and equipment in the backbone. In order to meet
increased bandwidth demands, carriers have adopted and deployed new equipment
and enhanced technologies that include:
. high performance frame relay and ATM switches and terabit IP routers that
enable the networks to switch and route the increasing volumes of data
traffic;
. dense wave division multiplexing, or DWDM, systems that, depending on the
commercial system deployed, enhances the capacity of existing fiber optic
lines by a factor of 8, 32, 64 or 128;
. optical transmission equipment that enables transition from slower
speeds, such as the industry standard referred to as OC-3 operating at
155 Mbps to the higher standards OC-48 operating at 2.5 Gbps and
eventually OC-192 operating at 10 Gbps; and
. high-capacity fiber optic cabling which maintains the integrity of a
signal for longer distances.
The advent of these new technologies continues to increase the capacity of
the fiber optic backbone. This increased capacity is placing increasing demands
on the optical transport network.
Limitations of the Traditional Optical Transport Network
The optical transport network consists of optical equipment that aggregates
multiple traffic types from the access network and interconnects these
aggregation points to the long-haul backbone portion of the network. Service
providers which own and deploy equipment in the transport portion of the
network include competitive local exchange carriers, or CLECs, independent
telephone companies, utility companies, cable companies, Internet service
providers, or ISPs, emerging IXCs such as Level 3, Qwest and Williams, as well
as traditional regional Bell operating companies, or RBOCs, and incumbent IXCs,
such as AT&T, MCI WorldCom and Sprint. In addition, international carriers are
also expanding their transport networks.
The optical transport network consist within and interconnects metropolitan
area, regional, national and interoffice networks and currently consists
primarily of legacy voice-based technologies, such as add/drop multiplexers, or
ADMs, and digital cross-connects, or DCS, that aggregate access traffic and
place it onto the optical backbone. Current systems in the optical transport
network utilize legacy equipment that conforms to standard fiber-optic
transmission signals called synchronous optical network, or SONET. The
international variation of SONET is called synchronous digital hierarchy, or
SDH. Dataquest estimates that approximately $9 billion of SONET/SDH and DCS
equipment was deployed in the optical transport network in 1998.
These legacy systems were designed for predictable analog voice traffic and
cannot efficiently handle the multiple data and voice service offerings enabled
by the proliferation of broadband access technologies. Currently, separate
equipment must be dedicated to each service type because existing equipment is
unable to aggregate multiple data types at multiple speeds. Changes or upgrades
to existing equipment are expensive, take up critical space in a service
providers' central office or headend location, require significant time and
effort to implement and increase the risk of network downtime. For example, the
mere upgrading from an OC-12 at 622 Mbps to an OC-48 at 2.5 Gbps SONET system
is very expensive and requires a replacement of existing SONET equipment,
potentially from multiple vendors. This upgrade can take several days to
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implement. Because service providers have no tolerance for network downtime,
they are consequently forced to build a second, fully redundant network to
ensure uninterrupted service.
Traditional transport systems cannot evolve to accommodate the multiple
services and rapid growth that characterize networks in the Internet era. While
new devices and technologies have been introduced to address the increases in
data traffic over the access and backbone portions of the network, the
transport portion has not yet been similarly addressed with new broadband
optimized technologies and equipment.
The Cerent Opportunity
As new higher bandwidth access and backbone technologies proliferate on
either side of the transport network, service providers are increasingly
looking for transport equipment that:
. supports multiple service offerings from a single platform;
. offers scalability and flexibility to accommodate both the requirements
of existing installed equipment and the rapidly increasing bandwidth
demands of service providers' customers;
. enables rapid deployment of new services and non-service affecting
upgrades;
. provides cost-effective installation and maintenance;
. operates within the service providers' existing network management system
for operations, administration, maintenance and provisioning; and
. satisfies carrier-class reliability and system certifications.
The Cerent Solution
[Graphic depicting two of our Cerent 454 products connected by a line across a
cloud shape. Each of the Cerents 454's are in turn connected by lines to
various dots, which are labelled "Voice/TDM," "Video," "POS", "IP," "ATM" and
"Frame Relay."]
We design, develop and market an evolutionary, multi-service optical
transport platform designed to dramatically lower network operating costs and
increase the efficiency of bandwidth delivery within today's congested
transport networks. Our high-speed solution, the Cerent 454, efficiently
integrates multiple voice and data services in a single, compact platform and
is designed to support any transmission rate to an aggregate of 240 Gbps. The
Cerent 454 provides a cost-effective solution for our service provider
customers and enables them to rapidly deploy a wide range of applications and
revenue generating services. We believe that our solution provides service
providers with the following key competitive advantages and benefits:
Supports Multiple Service Offerings from a Single Platform. Our system
enables service providers to meet their optical transport equipment needs from
a single supplier instead of having to purchase a multitude of different
equipment from multiple vendors. While traditional SONET transport system
architectures have been optimized for voice-only based services, our system
efficiently supports voice services, as well as IP, ATM and frame relay in a
single, compact platform. It is also optimized for all emerging broadband
access traffic
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including DSL, cable modem and wireless. Our Cerent 454 platform efficiently
aggregates all widely used traffic types, operating at different speeds, and
efficiently delivers the data for transmission over the optical network. The
Cerent 454 integrates the functionality of traditional SONET add-drop
multiplexers, digital cross-connect systems and packet/cell switches on a
single platform.
Scalable, Flexible, Evolutionary System. Our system is capable of easily and
quickly responding to unpredictable network growth and usage, enabling our
service provider customers to quickly take advantage of future revenue
opportunities. The Cerent 454 supports over-subscription of bandwidth by
utilizing statistical multiplexing and packet/cell switching to aggregate
bandwidth, thus avoiding wasted bandwidth that is otherwise dedicated to
accommodating peak volumes of data traffic. Flexible slot utilization is
achieved via a plug-and-play architecture as the system's slots support all
Cerent 454 plug-ins and hence facilitate scalability to higher transmission
speeds. Our software-based provisioning system delivered within the 454 is
designed with maximum flexibility to support a comprehensive set of transport
layer protocols including SONET/SDH and DWDM. In addition, our Cerent 454
system supports the ring architectures of the current SONET/SDH networks as
well as the mesh network architectures that will be deployed as service
providers migrate to fully transparent optical network architectures. The
modular structure provides a migration path for service providers which allows
them to leverage their existing infrastructure as end-user requirements and
technologies evolve.
Rapid Deployment of New Services and Non-Service Affecting Upgrades. Our
Cerent 454 system was designed to be shipped, installed and configured more
quickly than legacy transport equipment. We currently deliver the Cerent 454
within ten days of receipt of order and our customers have installed and turned
up the 454 in less than an hour. Rapid service initiation is achieved through
eliminating the need to make modifications to the hardware elements of the
network and through an innovative route assignment architecture that simplifies
the installation process and enhances the efficiency of sending information
across legacy transport networks. Our six proprietary application specific
integrated circuits, or ASICs, enable service providers to scale transmission
capacity from relatively low-speed OC-3 optical transport at 155 Mbps to higher
speed OC-12 optical transport at 622 Mbps to OC-192 optical transport at 10
Gbps without any changes in network hardware other than a modular line card
swap. This eliminates the need for a complete replacement of existing equipment
and thereby preserves existing investments and minimizes the risk of downtime
and the cost of equipment redundancy. Changes or upgrades to the system can be
performed without any interruption of service.
Cost-Effective Deployment and Dramatically Lower Lifecycle Costs. Our system
provides customers with a solution that can be rapidly put to use with a modest
initial capital investment. Our Cerent 454 provides for cost-effective
deployment and significantly lower lifecycle costs, as compared to legacy
transport systems. The Cerent 454 supports any transmission speed from DS-1 at
1.5 Mbps to OC-48 at 2.5 Gbps at reduced cost and space requirements relative
to current generation optical transport equipment. The system's small size,
which is 18 1/2 inches tall by 19 inches wide by 12 inches deep, ensures
optimal rack space and power usage. This compares to legacy transport equipment
which can occupy multiple seven-foot racks. The lifecycle cost of the equipment
is further reduced with fewer card types, simplified installation and
maintenance procedures and easy upgrades. Our Cerent 454 has a graphical user
interface that works on any standard personal computer, thus managing our
Cerent 454 network does not require the purchase of an outboard workstation or
separate element management software.
Interoperability with Existing Networks. The Cerent 454 offers
interoperability with other equipment in the optical transport network. We
actively participate in developing industry-wide standards to continue to
facilitate end-to-end interoperability. Our 454 operates within the service
provider's existing network management system for operations, administration,
maintenance and provisioning. In addition, to further reduce time to service
for service providers the Cerent 454 is compatible with existing service
provider operational systems and support, or OSS.
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High Reliability and Robustness. The Cerent 454 offers the level of
reliability demanded by the operators of the world's largest networks. Our
system combines the robustness required for customer premise equipment and
outside plant compliance with the stringent Bellcore specifications for central
office environments. The 454 is conditioned for a wide variety of environments
and is network equipment buildings standard, or NEBS, level 3 certified which
requires the 454 to be able to operate in severe environments, including
temperatures ranging from -40(degrees)C to +60(degrees)C. Additionally, the
Cerent 454 is rural utility services, or RUS, listed allowing rural independent
carriers to acquire our product using government loans. The Cerent 454 performs
reliably in a wide variety of physical locations within the optical transport
network, including Internet service providers' points of presence, carriers'
central offices and cable operators' headend locations, customer premises,
outside plant cabinets and multi-dwelling units.
The Cerent Strategy
Our objective is to be the leading supplier of evolutionary optical
transport solutions. The key elements of our strategy include the following:
Continue to Develop and Introduce Products that Address Service Providers'
Optical Transport Needs. We intend to continue developing products that provide
scalable, flexible and cost-effective optical transport solutions that will
operate reliably under a wide range of operating environments. The number of
services used to access the optical network is large and growing. We have
designed our initial product, the Cerent 454, to support all modes of access to
the optical network including IP, ATM, frame relay, DSL, cable modem and
wireless and to facilitate such access at multiple speeds without affecting
service. We will continue to focus our product development efforts on providing
transport solutions that accommodate all emerging types of access to the
optical network. At the same time, we intend to preserve the ability of such
products to accommodate traditional types of access so that our customers will
not be forced to make unnecessary upgrades to their existing network
infrastructure or change their preferred forms of access.
Penetrate a Large Base of Customers with Targeted Direct Sales and
Support. We intend to continue selling our products direct to customers through
our internal sales force. We believe that it is important to take a targeted
approach to the implementation of our sales strategy and have focused initially
on emerging IXCs, CLECs, independent carriers and cable companies. We intend to
pursue incumbent IXCs, RBOCs and international carriers. By focusing our
initial sales efforts on the service providers that can move quickly to adopt
new technologies, we can more rapidly obtain a large installed user base. We
believe that the adoption and implementation of our products, such as the 454,
by a large number of CLECs and independent carriers will help promote the sale
of our products to the incumbent IXCs and RBOCs. Additionally, we believe that
providing ongoing support is critical to successful long-term relationships
with, and follow-on sales to, our customers. In this regard, we are committed
to providing our customers with the highest levels of support and service.
Maintain and Extend Product and Technology Leadership. We believe that we
are currently a technology leader in developing optical transport solutions and
will continue to develop products that are designed to support multiple forms
of broadband access and all leading network technologies. Network service
providers require optical transport solutions that support existing
architectures and types of access and also permit migration to new or upgraded
versions of existing technologies. The Cerent 454 currently supports widely-
deployed, existing SONET architecture, and also can support a wide variety of
network technologies such as an all-optical mesh architecture. We intend to
continue to invest in the development of innovative network software, hardware
and ASIC designs to rapidly develop new products and product enhancements that
further increase the functionality of transport systems. We intend to continue
to build our research and development efforts, cross-leveraging our
intellectual property and technical expertise as we transition to a multi-site,
multi-project organization.
Enable Fast and Cost-Effective Deployment of Products. Our objective is to
ensure rapid deployment of optical transport systems to our customers. In this
effort, we currently outsource manufacturing, are developing
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a Web-based ordering system and will continue to design rapidly-installable
products. We are currently able to deliver our product on the customer request
date, which is typically within ten days of receiving an order. Additionally,
by outsourcing manufacturing to a turnkey manufacturer, we can focus on our
core competencies of designing flexible, scalable transport solutions.
Extend the Optical Transport Network. As the optical transport network
extends into areas traditionally referred to as the last mile, access providers
will require systems that link electrical access networks with the optical
backbone closer to the end user. We intend to continue to develop optical
transport products that will expand the traditional reach of the optical
transport network and create demand for our products in new markets.
Products and Technology
Cerent 454
The Cerent 454 is a powerful 240 Gbps next-generation optical transport
system designed to dramatically lower the cost and increase the efficiency of
bandwidth delivery within optical access and transport networks.
[A photograph of the Cerent 454 with access and transmission rates.]
The Cerent 454 base price ranges generally between $20,000 and $50,000 based
on configuration.
Features of the Cerent 454
Multiple Uses in Transport Networks. The Cerent 454 is designed for a broad
range of uses and locations in optical transport networks. The Cerent 454
aggregates a variety of voice, data and video services from access networks
over a SONET infrastructure. In backbone networks, the Cerent 454 interconnects
carrier exchanges, cable headends and Internet service provider POPs by
providing next-generation transport and integrated bandwidth management. The
system facilitates the transition of legacy SONET networks to the data
intensive networks of the future. The environmentally hardened platform is
certified at temperatures of -40(degrees)C to +60(degrees)C and can be deployed
in central office, equipment room, outside plant cabinet and customer premises
locations. The Cerent 454 is a fully NEBS level 3 and RUS certified, carrier-
class product.
Low Cost Bandwidth. The Cerent 454 high-speed optical transport system
dramatically lowers the cost of bandwidth by supporting up to 240 Gbps from a
single shelf. Integration of access, transport and bandwidth management
capabilities in one platform results in significant first-cost and lifecycle-
cost advantages. Optical transport scales from OC-3 at 155 Mbps to OC-192 at 10
Gbps in a single assembly with no impact to service thereby eliminating costly
and cumbersome capacity upgrades. Cerent 454 plug-ins offer bandwidth in
modular increments to improve efficiency and reduce start-up costs. Capacity
can be added as needed, making it cost effective to deploy the system in low
and high-density applications. The system's compact size, minimal
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common control card slots, plug-and-play architecture and flexible card slots
ease system configuration, turn-up and use. The Cerent 454's powerful bandwidth
management and packet/cell switching features enable efficient use of
transportation facilities to further lower bandwidth costs.
Efficient Bandwidth Management. The Cerent 454 significantly improves
bandwidth efficiency to ensure cost-effective transport. The Cerent 454 can
groom and aggregate traditional voice traffic, referred to as time division
multiplexing, or TDM, as well as bandwidth-intensive data traffic. A core
cross-connect matrix provides non-blocking TDM bandwidth management. These
extensive bandwidth management features allow each Cerent 454 to be deployed as
a distributed broadband digital cross-connect. Additionally, the Cerent 454
utilizes statistical multiplexing and packet and cell switching to aggregate
bandwidth. This prevents wasting bandwidth that is otherwise dedicated to
accommodating peak volumes of data traffic. The system may be oversubscribed
with IP, ATM and frame relay access interfaces when only a fraction of the
bandwidth needs to be transported. Packet and cell switching engines are
distributed to the interface cards to enable locally switched traffic. Packets
and cells from access interfaces are concentrated in standard SONET/SDH
payloads if needed for transport onto the fiber network.
Multiple Configurations. Because every Cerent 454 card from a DS1 or E1 to
an OC192 or STM64 can be installed in a single shelf, each terminal can provide
transport and access interfaces and can be configured to support one-to-one or
one-to-several protection for electrical access.
Cerent 454 systems can be deployed in any combination of the following
network configurations:
. terminal mode for access agreggation;
. add-drop mode, or ADM, for traffic grooming and agreggation;
. ring architecture for SONET/SDH transport.
Cerent 454 systems can also host systems in any of these configurations.
The Cerent 454 high speed SONET/SDH transport system supports 240 Gbps of
TDM, IP, ATM and frame relay in any combination of configurations from a single
platform.
Network Management. Typical network management systems require external
platforms. However, our management system for the Cerent 454 is Java-based and
allows the 454 to interface with an off-the-shelf Internet browser, eliminating
the need for an external workstation. Our management system supports standard
network management protocols such as simple network management protocol, or
SNMP, and transaction language 1, or TL-1.
Technology
Our unique, single-platform optical transport solution is enabled by key
technology capabilities, including the following:
Plug-And-Play Architecture. The Cerent 454 incorporates extensive
integration and modular architecture designed to offer significant economic
savings. The Cerent 454 combines in a single platform: high-speed SONET/SDH
transport; VT and STS bandwidth management; TDM, IP, ATM and frame relay
access; and packet/cell switching. The Cerent 454 chassis is a compact assembly
with minimal common control card slots. Flexible slot utilization is achieved
via a plug-and-play architecture allowing any Cerent 454 to seamlessly manage
TDM, IP, ATM and frame relay traffic.
ASIC Integration. We have currently developed six proprietary ASICs, all of
which are included in our product architecture. These ASICs have significant
component integration with gate counts per ASIC ranging from 500,000 to 2.5
million. Our ASIC technology enables support for add-drop-multiplexer
functionality, digital cross-connect functionality and packet/cell switching.
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High Speed Optics. Optical connection components with support for speeds
higher than OC-12, operating at 622 Mbps, cannot be sourced with off-the-shelf
components. Therefore, we have developed discrete OC-48, operating at 2.5 Gbps
ASICs, and are developing OC-192, operating at 10 Gbps, ASICs, to optimize
size, thermal performance and manufacturing capability. By customizing our
discrete optics designs we are able to enhance our in-house packaging expertise
which will allow us to scale to even higher optical speeds in a cost-effective
manner. In addition, this capability can serve as the basis for future DWDM
enhancement efforts.
Gigabit Data Switching. The Cerent 454 allocates bandwidth via an innovative
multi-layer point-to-point backplane architecture that switches traffic across
two high-speed planes: a SONET/SDH plane and a data plane. The data plane
features 160 Gbps aggregate bandwidth to allow intercard communication and
traffic management for data cards utilizing one and three Gbps links. The data
plane features an extremely low latency, fully meshed, point-to-point fabric
between each card to provide a fully nonblocking data switch backplane.
Furthermore, each card can work independently, allowing the customer to create
a sub-network that can support a specific service.
Software. The Cerent 454 incorporates significant software content within
our A to Z provisioning system, which enables carriers to offer point-to-point
services across their networks. For example, provisioning new services and/or
modifying existing services can be accomplished instantaneously through a point
and click design. Our operating system is based on Wind River's VX-Works real-
time operating system. Major software releases for the 454 are generally
released every six months. Our software supports the standard SONET software
requirement.
Integrated DCS. The SONET plane gives each card slot full access to the core
cross-connect matrix. Cerent 454 full nonblocking cross-connect modules can
groom traffic in STS, up to STS-192, and VT, up to 1344 VT1.5, payloads to any
port on any card. This feature maximizes bandwidth efficiency by making it
possible to groom SONET/SDH traffic in STS or VT increments. Using redundant
cross-connect slots, the Cerent 454 can also be configured as a fully protected
digital cross-connect.
Customers
We began commercial shipments of our products in December 1998 and as of
June 30, 1999, had shipped to 86 customers. The following is a representative
list of our customers as of June 30, 1999:
<TABLE>
<CAPTION>
Emerging IXCs CLECs Independent Carriers Cable Operators
<S> <C> <C> <C>
Frontier Advanced TelCom Group ALLTEL Buckeye TeleSystem
Communications
GST Telecom Allegheny Atlantic Telephone Cablevision Lightpath
Communications Connect
MEANS Cavalier Telephone Chibardun Telephone Charter
Communications
Qwest Kratz Communications Citizens Telephone TCI
Communications Nextlink Commonwealth Telephone
IXC Communications Ovation Communications Conneaut Telephone
Williams Primelink Federated Telephone
Communications RCN Corp. Fiber Four
Sho-Me Power Electric
Sikeston Light & Water Fort Bend Long
Distance
Grand River Mutual
Telephone
Gulf Telephone
Hutchinson Telephone
NTS Communications
Paul Bunyan Rural
Telephone
Surry Telephone
Triangle Telephone
Tularosa Basin
Telephone
</TABLE>
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Customer Applications
Set forth below are examples of typical uses of our Cerent 454 by different
types of service providers.
A CLEC Building Out New Networks
CLECs have recently begun building out thousands of miles of fiber and
communications networks to reach their service objectives. Traditionally,
network providers have had to turn to multiple vendors to satisfy all of their
optical transport needs, purchasing one piece of equipment for OC-48 backbone
transport, a second and third piece of equipment to support OC-12 and OC-3
metropolitan rings, and a fourth piece of equipment for the digital cross-
connect segment of the network. Thus, a CLEC would potentially acquire four
pieces of equipment from multiple vendors. However, a CLEC deploying the
Cerent 454 in its network is capable of integrating the backbone and various
speeds of metropolitan SONET rings into one transport management platform.
[Side by side graphical juxtaposition of traditional implementation versus
implementation with our solution. The "Traditional Implementation"
illustration appears on the left side of the graphic, and shows four cubes
labelled "OC-48" around an oval-shaped ring. One cube is connected by three
lines to a rectangle labelled "3/1 Digital Cross Connect," which is in turn
connected to two circles labelled "Metropolitan Network." One circle has three
boxes labelled "OC-3" around its circumference; the other has three boxes
labelled "OC-12" around its circumference. The words "Four Distinct Equipment
Pieces Required" appear beneath the graphic.
The "Implementation With Our Solution" graphic appears on the right side of
the page and is depicted as three rings connected by our Cerent 454 in the
center of the rings. One ring is labelled "Backbone Transport"; the other two
are labelled "Metropolitan Network." The words "One Network Element For All
Transport Needs" appear beneath the graphic.]
[CHART APPEARS HERE]
With the Cerent 454, a CLEC is able to deploy one network element to
satisfy its transport needs and is able to realize more optimal network build-
out costs. The Cerent 454 provides a single optical transport network platform
to service and maintain the network on an ongoing basis, enabling a CLEC to
realize significant life-cycle cost benefits, as compared to legacy, multi-
product and multi-vendor transport solutions.
A Cable Company Offering Multiple Services
Cable companies are seeking to leverage their hybrid fiber coaxial, or HFC,
networks to move beyond video-only services to deliver voice and data services
at rates significantly lower than those of incumbent carriers. Historically,
if a cable operator wanted to offer multiple services, it would have to deploy
separate transport network infrastructures and three separate fiber rings to
support each of video, data and voice traffic. With the advent of the Cerent
454, a cable operator is able to support multiple services with one common
platform.
[Side by side graphical juxtaposition of traditional implementation versus
implementation with our solution. The "Traditional Implementation" graphic is
two overlapping oval-shaped rings with squares representing data, voice and
video around the circumference of the rings. The words "Multiple Fiber
Overlays to Support Various Services" appear beneath this graphic. The
"Implementation with Our Solution" graphic is one ring representing data,
video and voice with four Cerent 454's around its circumference. The words
"Single Infrastructure for Voice, Data and Video" appear beneath this graphic.
[CHART APPEARS HERE]
With one single optical transport platform that supports existing video
services as well as new voice and data services, a cable company realizes
significant incremental revenue streams at minimal first-time and life-cycle
support costs. Compared to multiple networks, the single multi-purpose optical
transport network enabled by the Cerent 454 is easier to build, install, use
and maintain on an ongoing basis.
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An Emerging IXC Efficiently Grooming Traffic
Emerging inter-exchange carriers, or IXCs, often referred to as the
carrier's carrier, face the challenge of effectively managing disparate data
fed by multiple carrier customers. No matter how service is delivered to and
from the emerging IXC, whether over its own network or handed off from another
carrier, the traffic needs to be groomed, or separated and uniquely
distributed, to the appropriate equipment for further processing. If an
emerging IXC wanted to support multiple traffic types with legacy transport
systems, it would have to install multiple switches, groomers and routers, or
in the case of private line services, an interconnection to another optical
network or carrier hand-off. In traditional networks, one would have to install
numerous pieces of equipment to provide satisfactory grooming capability for
the network. With the Cerent 454, which in this case is deployed as a stand-
alone piece of equipment, an IXC can remove a whole network layer and separate
different optical and electric traffic types within one piece of equipment and
send such traffic to individually specified locations.
[CHART APPEARS HERE]
[Left side of page:
Traditional Implementation
Voice/TDM Digital Switch OC-3 IP IP Router
OC-12 ATM ATM Switch OC-48 Frame Relay Frame Relay Switch OC-192
Numerous Required Networking Equipment
Right side of page:
Implementation with Our Solution
Voice/TDM OC-3
IP Cerent 454
OC-12 ATM OC-48
Frame Relay OC-192
Single, Multi-Purpose Traffic Groomer
The Cerent 454 supports any traffic interface and any optical transport
speed, therefore eliminating the need for numerous pieces of networking
equipment. As a result, the Cerent 454 offers an emerging IXC significant size
advantages as well as initial deployment and life-cycle cost benefits.
Research And Product Development
Our future success depends on our continued ability to develop and introduce
new products, product enhancements and technology that can support a broad
array of network protocols and access methods. Our success in meeting these
objectives is dependent on the efforts of our research and development team. To
this end, we have assembled a team of highly-skilled engineers with extensive
experience in a variety of network system architecture disciplines that work in
parallel on several projects. These individuals have been drawn from leading
computer data networking and telecommunications companies. As a result of our
development efforts, we believe that we have created an industry-leading
optical transport system to cost-effectively increase the efficiency of
bandwidth delivery within today's congested transport network.
We have invested, and intend to continue to invest, significant time and
resources on our research and development activities. We intend to continue to
build our research and development efforts cross-leveraging our intellectual
property and technical expertise to transition to a multi-site multi-project
organization. At present, our engineers are focused on improving our existing
product offering, the Cerent 454, developing next-generation hardware and
software products and designing ASICs that will better integrate our products
with the networks maintained by current and future customers.
As of June 30, 1999, we employed 112 people in our research and development
group.
Our research and development expenses totaled $5.2 million for the period
ended December 31, 1997, $15.6 million for the year ended December 31, 1998,
and $8.8 million for the six month period ended June 30, 1999.
See "Risk Factors--Our future success depends on our ability to develop
innovative products and product enhancements that gain market acceptance," "--
Our products are new and face rapid technological changes and evolving
standards and if we do not respond in a timely manner, our business could be
harmed" and "--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."
Sales And Marketing
We sell and market our products exclusively through our direct sales
organization. Our direct sales organization establishes and maintains direct
relationships with our customers. In addition, we have a team of consulting
engineers who provide our customers with guidance and assistance with the
deployment of our
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product. These consulting engineers also help define the features that are
required for our product to be successful in specific applications. A key
feature in our selling effort is the relationship we establish with individuals
at various levels in our customers' organization. For example, our sales team
maintains contact with key individuals at our customers and prospective
customers who have service planning and infrastructure buildout responsibility.
Our marketing efforts are centered around building brand awareness with a
targeted customer base. We also build our brand name through continued targeted
publicity and referral efforts in both media and industry-centered activities,
including editorial presence in various trade magazines, press releases, public
speaking opportunities, national and regional trade show participation,
advertising, Internet-based communication and promotion, media sponsorships and
participation in industry standards activities.
To date, sales activities have been focused primarily on emerging IXCs,
CLECs, independent carriers and cable companies. We intend to target RBOCs and
incumbent IXCs in the near future. Additionally, we have designed our product
to permit deployment in the international marketplace and we intend to pursue
international carriers.
As of June 30, 1999, we employed 39 people in our sales and marketing
organizations.
See "Risk Factors--Our future success depends on our ability to increase
sales of our products to CLECs and other relatively small telecommunications
carriers and to effectively market and sell our products to large, established
carriers" and "--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."
Customer Service And Support
We are committed to providing our customers with high levels of service and
support. Our service and support organization provides support through a
variety of mechanisms. Telephonic support is available on a 24 hours a day,
seven days a week basis. Customers can obtain repair and replacement of
equipment either on a 15-day, 3-day or 24-hour turnaround, depending on the
urgency of the request. We also provide on-site field engineering services if
our customers require the presence of one of our trained engineers. In
addition, we provide a variety of training courses either at our headquarters
in Petaluma, California or on-site at the customer's facilities. One key
advantage of the Cerent 454 is that customers need only be trained on one piece
of network equipment and thus can save substantially on training costs.
As of June 30, 1999, we employed 22 people in our customer service and
support organization.
See "Risk Factors--If we do not expand substantially our customer service
and support organization, we will be unable to significantly increase our
product sales."
Competition
We compete in a relatively new, rapidly evolving and highly competitive
market. The market historically has been dominated by Alcatel, Fujitsu, Lucent,
NEC, Nortel and Tellabs. Some of these companies, including Nortel, have
announced products that may be competitive with the 454. In addition, a number
of private companies provide products, technologies and/or services that are
competitive to ours. We believe that the principal competitive factors in this
market include, or are likely to include, product performance, initial and
lifecycle cost, installation time, flexibility, scalability, service and
support and interoperability with a broad range of network systems.
See "Risk Factors--Our markets are highly competitive and dominated by large
corporations and we cannot assure you that we will be able to compete
effectively."
40
<PAGE>
Patents and Intellectual Property Rights
Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We currently hold no issued
patents, but we have nine patent applications pending in the United States and
we are currently preparing a number of additional patent applications seeking
protection for our technology. Our software was developed internally and is
protected by United States and other copyright laws.
While we will use patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent
product enhancements and reliable product maintenance are essential to
establishing and maintaining a technology leadership position.
See "Risk Factors--Our business could be adversely affected it we are unable
to protect our intellectual property rights from third party challenges," "--
Necessary licenses of third party technology may not be available to us or may
be very expensive" and "--We could become subject to litigation regarding
intellectual property rights which could seriously harm our business."
Manufacturing
We currently outsource our entire manufacturing and assembly operation to
PCB Assembly. PCB Assembly is a third-party manufacturer of telecommunications
and data networking equipment, which has a high-capacity ISO 9002-registered
facility and specializes in the manufacture of high-end telecom and data
networking equipment. PCB Assembly provides full turnkey production including
material procurement and handling, final assembly, integrated circuit and
functional testing, box build, quality control and shipment to our customers.
We design, specify and monitor all of the tests that are required to meet
functional requirements. Pursuant to the terms of our agreement with PCB
Assembly, PCB Assembly is required to manufacture, assemble and test our
products based on our monthly forecasts. PCB Assembly is required to ship the
finished products, at our direction, to us or directly to our customers upon
submission of purchase orders. Our agreement with PCB Assembly expires in April
2000, subject to automatic renewal for successive one-year periods unless
either we or PCB Assembly provides prior notice of intent to terminate. This
arrangement provides us with the following key benefits:
. we provide manufacturing capabilities to our customers without dedicating
any space to manufacturing operations;
. we conserve the capital that would be required for funding inventory and
equipment acquisition and maintenance;
. we can adjust manufacturing volumes quickly to meet changes in demand;
and
. we can quickly deliver products to customers through PCB Assembly's
turnkey manufacturing and drop shipment capabilities.
Several key components for our platform including our ASICs are acquired
from single or limited sources. For example, we rely on LSI Logic as a sole-
source foundry for certain of our ASICs and KLSI as a sole-source foundry for
certain other of our ASICs.
See "Risk Factors--We currently depend on one contract manufacturer and have
no internal manufacturing capabilities," "--If we fail to accurately predict
our manufacturing requirements, we could incur additional costs or experience
delays" and "--We are dependent on sole source and limited source suppliers for
several key components, including ASICs, and if we are unable to obtain these
components on a timely basis, we will be unable to meet our customers' product
delivery requirements."
41
<PAGE>
Employees
As of June 30, 1999, we had 210 full-time employees, 112 of whom were
engaged in research and development, 39 in sales and marketing, 22 in customer
service and support and 37 in operations, finance and administration. None of
our employees is represented by a labor union. We have not experienced any work
stoppages and we consider our relations with our employees to be good.
See "Risk Factors--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."
Facilities
We lease approximately 82,000 square feet of office space in Petaluma,
California pursuant to a lease that expires in March 31, 2007. We believe that
by 2001, we will need additional space to accommodate our growth. The
commercial real estate market in the San Francisco Bay Area is volatile and
unpredictable in terms of available space, rental fees, occupancy rates and
preferred locations. We cannot be certain that additional space will be
available when we require it, or that it will be affordable or in a preferred
location.
See "Risk Factors--If we fail to manage our rapid growth effectively, our
business, financial conditions and results of operations could be seriously
harmed."
Legal Proceedings
We currently are not a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of June 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Carl Russo (1).............. 42 President, Chief Executive Officer and Director
Michael Ashby............... 50 Chief Financial Officer
Ajaib Bhadare............... 39 Vice President, Engineering
Terry Brown................. 36 Vice President, Field Operations
Tom Corker.................. 34 Vice President, Product Marketing
Scott Lester................ 42 Vice President and General Counsel
Richard Roney............... 54 Vice President, Operations
Vinod Khosla (1)............ 44 Chairman of the Board of Directors
Kevin Compton (2)........... 40 Director
Donald Green (2)............ 68 Director
Promod Haque (1)............ 51 Director
</TABLE>
- ---------------------
(1) Member of compensation committee
(2) Member of audit committee
Carl Russo has served as President and Chief Executive Officer of Cerent
since June 1998 and has served as a director of Cerent since May 1998. From May
1995 to May 1998, Mr. Russo was employed by Xircom, Inc., a manufacturer of
mobile networking equipment, most recently as Chief Operating Officer
responsible for sales, marketing, development and manufacturing of Xircom
products. Mr. Russo has also held executive management positions at Network
Systems Corporation, a networking company, most recently as Senior Vice
President and General Manager, Channel Networking Group, a networking company,
and at AT&T Paradyne, Inc., a manufacturer of broadband network access
products, where he was most recently Vice President and General Manager, Data
Networking Products Division. Mr. Russo is a director of Xircom, Inc.
Michael Ashby has served as Chief Financial Officer of Cerent since July
1999 and served as a consultant to Cerent from May 1999 to July 1999. Prior to
joining Cerent, Mr. Ashby was Executive Vice President and Chief Financial
Officer of Ascend Communications, Inc., a networking company, from November
1997 to June 1999. Mr. Ashby has agreed to continue to work with Lucent
Technologies, Inc. through January 31, 2000, to assist in the transition
related to Lucent's acquisition of Ascend. Before joining Ascend, Mr. Ashby was
Vice President and Chief Financial Officer at Pacific Telesis Enterprise and
subsequently at Pacific Bell, a communications company, from September 1995 to
December 1997. Mr. Ashby was Chief Financial Officer and then President and
Chief Executive Officer of Network Systems Corporation, a networking company,
from September 1992 to September 1995. Mr. Ashby is a director of Xircom, Inc.
Ajaib Bhadare, a co-founder of Cerent, has served as Vice President,
Engineering for Cerent since January 1997. Prior to joining Cerent, Mr. Bhadare
was Senior Director of Engineering with DSC Communications, a networking
company, from March 1988 to January 1998. Prior to DSC, Mr. Bhadare was an
engineer at Optilink Corporation, a networking company. Mr. Bhadare received
his B.S.C. degree from the University of London. Mr. Bhadare also holds a
patent for improving register robustness against software failure.
Terry Brown has served as Vice President, Field Operations for Cerent since
July 1997. From 1993 to 1997, Mr. Brown led the sales effort of Advanced Fibre
Communications, a manufacturer of telecommunications systems. Mr. Brown
received his B.S.E.E. from the University of Notre Dame and his M.M. degree in
marketing and economics from Northwestern University's Kellogg School of
Management.
43
<PAGE>
Tom Corker has served as Vice President, Product Marketing for Cerent since
January 1999. From July 1997 to January 1999, Mr. Corker was the Director of
Product Management at Cerent. From 1991 to 1997, Mr. Corker was the Director,
Product Marketing at Advanced Fibre Communications, Inc. and held various
engineering roles at DSC Communications and Nortel, a networking company. Mr.
Corker received his B.S.E.E. and M.S.E.E. from the Georgia Institute of
Technology.
Scott Lester has served as Vice President and General Counsel of Cerent
since July 1999. From October 1984 to July 1999, Mr. Lester was an attorney
with the law firm of Brobeck, Phleger & Harrison LLP, where he was a partner
since January 1989. From August 1981 to October 1984, he was an attorney with
Milbank, Tweed, Hadley & McCloy. Mr. Lester received his J.D. from Georgetown
University Law School.
Richard Roney has served as Vice President, Operations for Cerent since
November 1998. From May 1997 to October 1998, Mr. Roney was Vice President of
Manufacturing at VINA Technologies, a networking company. From June 1995 to
October 1996, Mr. Roney was Vice President of Operations at Netro Corporation,
a communications company. From January 1993 to May 1995, Mr. Roney served as
Vice President of Operations at Ericsson-Raynet Corporation, a
telecommunications company. Mr. Roney received his B.S. from Cornell University
and his M.B.A. from Stanford Graduate School of Business.
Vinod Khosla has served as Chairman of the Board of Directors of Cerent
since April 1997. Mr. Khosla has been a general partner of Kleiner Perkins
Caufield & Byers, a venture capital firm, since 1987. Mr. Khosla was a co-
founder of Daisy Systems Corporation, an electronic design automation company,
and the founding Chief Executive Officer of Sun Microsystems, Inc., a computer
and data networking company. Mr. Khosla also serves on the boards of Concentric
Network Corporation, Corio Inc., Corvis Corporation, Juniper Networks, Inc. and
Qwest Communications International Inc., as well as several other private
companies. Mr. Khosla received his B.S.E.E. from the Indian Institute of
Technology in New Delhi, an M.S.E. from Carnegie-Mellon University, and an
M.B.A. from the Stanford Graduate School of Business.
Kevin Compton has served as a director of Cerent since March 1999. Mr.
Compton joined Kleiner Perkins Caufield & Byers, a venture capital firm, in
1990 and has been a general partner since 1994. Mr. Compton serves on the
Boards of Citrix Systems, Corsair Communications, OneWorld Systems, formerly
Global Village Communication, Rhythms NetConnections and VeriSign, as well as
several other private companies. He received his B.S. from University of
Missouri.
Donald Green has served as a director of Cerent since August 1997. Mr. Green
has been the Chairman of the Board and a director of Advanced Fibre
Communications, Inc. since June 1998. Mr. Green also served as the Chief
Executive Officer of Advanced Fibre Communications, Inc. from May 1992 until
May 1999 and as the President from May 1992 until June 1998. Mr. Green also
serves on the boards of Larscom Corporation and TCSI. He received his B.S.E.E.
equivalent from British Institute of Electrical Engineers.
Promod Haque has served as a director of Cerent since July 1998. Mr. Haque
joined Norwest Venture Partners, a venture capital firm, in November 1990 and
is currently Managing General Partner of Norwest Venture Partners VII, General
Partner of Norwest Venture Partners VI and General Partner of Norwest Equity
Partners IV and V. Mr. Haque currently serves as a director of Extreme
Networks, Inc., Information Advantage, Inc., Primus Knowledge Solutions, Inc.,
Transaction Systems Architects, Inc., Showcase Corporation, and several other
privately held companies. Mr. Haque holds a Ph.D. from Northwestern University,
an M.B.A. from the J. L. Kellogg Graduate School of Management, Northwestern
University and a B.S.E.E. from the University of Delhi, India.
The board of directors elects executive officers on an annual basis.
Executive officers serve until their successor has been duly elected and
qualified. There are no family relationships among any of the directors,
officers or key employees of Cerent.
44
<PAGE>
Board Composition
Our board of directors currently consists of five members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified.
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 and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to the
compensation and benefits of all of our employees. The current members of the
compensation committee are Carl Russo, Vinod Khosla and Promod Haque. Since the
current members of the compensation committee do not meet the definition of
"non-employee directors" for purposes of SEC Rule 16(b)(3), the full board of
directors will continue to approve stock option grants for our officers in
order to qualify the option grants for an exemption from "short-swing" trading
rules.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent accountants, and our compliance with
legal matters that have a significant impact on our financial reports. The
current members of the audit committee are Donald Green and Kevin Compton.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in April 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
Board Compensation
We currently do not provide any cash compensation to our directors for their
service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the 1997 Stock Plan. Upon completion of this offering,
nonemployee directors will also be eligible to participate in our 1999
Directors' Stock Option Plan. See "--Incentive Stock Plans" for a description
of the 1997 Stock Plan and the 1999 Directors' Stock Option Plan.
45
<PAGE>
Executive Compensation
Summary Compensation. The following table sets forth the compensation
received for services rendered to Cerent for the year ended December 31, 1998
by our Chief Executive Officer and each of the other four most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the year ended December 31, 1998 (collectively, the "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position(1) Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- ------------------------------ --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Carl Russo(2)........... $111,537 $58,331 $54,912(3) 2,700,000 --
President and Chief
Executive Officer
Ajaib Bhadare........... $159,858 $ -- $ -- -- --
Vice President,
Engineering
Terry Brown............. $137,865 $48,500 $44,249(4) -- --
Vice President, Field
Operations
Tom Corker.............. $111,538 $31,486 $ -- 240,000 --
Vice President, Product
Marketing
Richard Roney........... $ 20,192 $20,000 $53,966(5) 600,000 --
Vice President,
Operations
</TABLE>
- ---------------------
(1) Michael Ashby became employed by Cerent in July 1999, as Cerent's Chief
Financial Officer at an annual base salary of $160,000, and a bonus of up
to 25% of his base salary per year based on the achievement of business
goals.
(2) Mr. Russo joined Cerent in April 1998. Prior to that, Vinod Khosla served
as acting Chief Executive Officer.
(3) Represents interest payments made by Cerent on Carl Russo's behalf in
connection with a loan obtained by Mr. Russo for the purchase of his home.
(4) Represents reimbursement for relocation and automobile expenses.
(5) Represents reimbursement for relocation expenses.
Option Grants. The following table sets forth certain information with
respect to stock options granted to each of the Named Executive Officers in the
year ended December 31, 1998. In accordance with the rules of the Securities
and Exchange Commission, also shown below is the potential realizable value
over the term of the option (the period from the grant date to the expiration
date) based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts are based on certain assumed rates of appreciation and
do not represent our estimate of future stock price. Actual gains, if any, on
stock option exercises will depend on the future performance of the common
stock.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Appreciation
Individual Grants For Option Term($)
------------------------------------------ ---------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options During Price Expiration
Name Granted(#) Period(1) ($/share) Date 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Carl Russo.... 2,700,000 39.3% $0.1333 6/7/08 $ 226,345 $ 573,604
Ajaib
Bhadare...... -- -- -- -- -- --
Terry Brown... -- -- -- -- -- --
Tom Corker.... 240,000 3.5% 0.6667 12/22/08 100,628 255,012
Richard
Roney........ 600,000 8.7% 0.2833 11/23/08 106,900 270,904
</TABLE>
Option Grants in Last Fiscal Year
- ---------------------
(1) Based on an aggregate of 6,876,000 options granted by Cerent during the
year ended December 31, 1998 to our employees, including the Named
Executive Officers.
46
<PAGE>
(2) Options were granted at an exercise price equal to the fair market value of
our common stock, as determined in good faith by our board of directors on
the grant date based upon such factors as the purchase price paid by
investors for shares of our preferred stock, the absence of a trading
market for our securities and our financial outlook and results of
operations.
(3) These stock options were granted under the 1997 Stock Plan and were
immediately exercisable. The options granted to Carl Russo and Richard
Roney were exercised prior to December 31, 1998. We retain the right to
repurchase at cost any shares that remain unvested at the time of the
officer's cessation of employment. The shares vest at a rate of 1/4th of
the total number of shares on the first anniversary of the vesting
commencement date, and 1/48th of the total number of shares monthly
thereafter, as long as each continues to provide services to Cerent.
(4) The potential realizable value is based on the term of the option at its
time of grant, which is ten (10) years, and assumes that the fair market
value of our common stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option and that
the option is exercised and sold on the last day of its term for the
appreciated stock price.
Aggregate Option Exercises and Option Values. The following table provides
summary information with respect to our Named Executive Officers in 1998. As of
December 31, 1998, all options granted the Named Executive Officers were
granted under our 1997 Stock Plan, all were immediately exercisable. We retain
the right to repurchase at cost any shares that remain unvested at the time of
the officer's cessation of employment. The shares currently vest at a rate of
1/4th of the total number of shares on the first anniversary of the vesting
commencement date, and 1/48th of the total number of shares monthly thereafter,
as long as each continues to provide services to Cerent.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1998 (#) December 31, 1998 ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carl Russo.............. 2,700,000 $1,440,180 -- -- -- --
Ajaib Bhadare........... -- -- -- -- -- --
Terry Brown............. -- -- -- -- -- --
Tom Corker.............. -- -- 240,000 -- -- --
Richard Roney........... 600,000 230,040 -- -- -- --
</TABLE>
- ---------------------
(1) Based on a value of $0.6667 per share, the fair market value of our common
stock as of December 31, 1998 as determined by the board of directors,
minus the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
Stock Plans
1999 Stock Plan. Our 1999 Stock Plan was adopted by the board of directors
in July 1999 and will be submitted for approval by our stockholders prior to
the completion of this offering. A total of 5,000,000 shares of common stock
has been reserved for issuance under the 1999 Stock Plan, all of which remain
available for future option grants. In addition, the number of shares reserved
under the plan will automatically be increased on the first day of each of our
fiscal years in 2000, 2001, 2002, 2003 and 2004 by an amount equal to the
lesser of (a) 15,000,000 shares, (b) six percent of the shares outstanding on
the last day of the preceding fiscal year or (c) a lesser number of shares as
is determined by the board of directors. The purposes of the 1999 Stock Plan
are to attract and retain the best available personnel to Cerent Corporation,
to provide additional incentives to our employees and consultants and to
promote the success of our business. Our board of directors intends to
determine from time to time whether it is necessary or advisable given our
hiring and growth expectations and the competitive factors affecting the
networking industry to allow the maximum or some lesser number of shares under
the above "evergreen" formula to become available for issuance under the 1999
Stock Plan.
47
<PAGE>
The 1999 Stock Plan provides for the grant of incentive stock options to
employees, including officers and directors, and nonstatutory stock options and
stock purchase rights to employees and consultants, including nonemployee
directors. If not terminated earlier, the 1999 Stock Plan will terminate in
July 2009.
The 1999 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator determines the terms of options and
stock purchase rights granted under the 1999 Stock Plan, including the number
of shares subject to the award, exercise or purchase price, term and
exercisability. In no event, however, may an individual employee receive option
grants or stock purchase rights for more than 5,000,000 shares under the 1999
Stock Plan in any fiscal year.
The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of any incentive stock option granted
to an optionee who owns stock representing more than 10% of the total combined
voting power of all classes of outstanding capital stock of Cerent or any
parent or subsidiary corporation of Cerent must equal at least 110% of the fair
market value of the common stock on the date of grant. The exercise price of a
nonstatutory stock option granted to our chief executive officer or one of our
other four most highly compensated officers will generally equal at least 100%
of the fair market value of the common stock on the date of grant. The exercise
prices of nonstatutory stock options granted to other persons will be specified
by the administrator at the time of grant. Payment of the exercise price may be
made in cash or other consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a 10%
stockholder. Generally, no option may be transferred by the optionee other than
by will or the laws of descent or distribution. However, the administrator may
in its discretion permit limited transferability of nonstatutory stock options
granted under the 1999 Stock Plan. The administrator determines when options
become exercisable. Options granted under the 1999 Stock Plan generally vest
over a four-year period at a rate of 1/4th of the total number of shares
subject to the option twelve months after the vesting commencement date and
1/4th of the total number of shares subject to the options each month
thereafter.
In addition to stock options, the administrator may issue to employees,
directors and consultants stock purchase rights under the 1999 Stock Plan. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting Cerent an option to
repurchase the shares at cost upon termination of the recipient's relationship
with us. This repurchase right generally lapses on the same schedule as options
vest.
If we sell all or substantially all of our assets, merge with another
corporation or engage in specified reorganizations, each outstanding option and
stock purchase right will be assumed or an equivalent option or stock purchase
right substituted by the successor corporation. However, if the successor
corporation does not agree to assume or substitute an option or stock purchase
right, then the option or stock purchase right will automatically terminate as
of the closing of the transaction. The administrator has the authority to amend
or terminate the 1999 Stock Plan as long as the amendment or termination does
not adversely affect any outstanding option or stock purchase right and
provided that stockholder approval shall be obtained to the extent it is
required by applicable law.
1997 Stock Plan. Our 1997 Stock Plan was originally adopted by our board of
directors and stockholders in July 1997. The plan has been amended a number of
times since its adoption. Currently, a total of 18,477,000 shares of our common
stock have been reserved for issuance under the 1997 Stock Plan. As of June 30,
1999, options to purchase 459,875 shares of common stock were outstanding at a
weighted average exercise price of $3.24 per share, 16,590,788 shares had been
issued upon exercise of outstanding options, 1,936,122 shares of
48
<PAGE>
which have been repurchased by Cerent pursuant to its repurchase rights,
1,426,337 shares remained available for future grant and no shares had been
issued pursuant to restricted stock purchase rights. We expect that following
the date of this offering we will make most of our option and stock purchase
right grants to employees and consultants from our 1999 Stock Plan.
The purposes of the 1997 Stock Plan is to attract and retain the best
available personnel to Cerent Corporation, to provide additional incentives to
our employees and consultants and to promote the success of our business. The
plan provides for the grant of incentive stock options to employees, including
officers and directors, and nonstatutory stock options and stock purchase
rights to employees and consultants, including nonemployee directors. If not
terminated earlier, the 1997 Stock Plan will terminate in July 2007.
The terms of options and stock purchase rights issued under the 1997 Stock
Plan are generally the same as those which may be issued under the 1999 Stock
Plan, except with respect to the following features. Prior to the date of this
offering, options granted under the 1997 Stock Plan allowed the optionee to
exercise the option immediately after its grant date, including with respect to
shares that were not yet vested. We have been given a repurchase right at the
optionee's exercise price with respect to any shares purchased upon exercise of
an option prior to its vesting. Our repurchase right lapses over the same
period of time as the vesting schedule that applied to the option prior to its
exercise.
Similar to our 1999 Stock Plan, our 1997 Stock Plan imposes an annual
limitation on the number of shares that may be subject to options and stock
purchase rights granted to an individual employee during any one fiscal year of
5,000,000 shares.
1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan was
adopted by the board of directors in July 1999 and will be submitted for
approval by our stockholders before completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the 1999
Directors' Stock Option Plan, all of which remain available for future grants.
The 1999 Directors' Stock Option Plan provides for the grant of nonstatutory
stock options to nonemployee directors of Cerent. The 1999 Directors' Stock
Option Plan is designed to work automatically without administration; however,
to the extent administration is necessary, it will be performed by the board of
directors. To the extent they arise, it is expected that conflicts of interest
will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which the director has a personal
interest.
The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director of Cerent after the effective date of this offering will
be granted a nonstatutory stock option to purchase 20,000 shares of common
stock on the date on which the optionee is first appointed or elected to our
board of directors. In addition, on the date of our annual stockholders meeting
each year, each nonemployee director will be granted an additional option to
purchase 10,000 shares of common stock if, on such date, he or she has served
on our board of directors for at least six months.
The 1999 Directors' Stock Option Plan sets neither a maximum nor a minimum
number of shares for which options may be granted to any one nonemployee
director, but does specify the number of shares that may be included in any
grant and the method of making a grant. No option granted under the 1999
Directors' Stock Option Plan is transferable by the optionee other than by will
or the laws of descent or distribution or pursuant to a qualified domestic
relations order. Each option is exercisable, during the lifetime of the
optionee, only by the optionee or pursuant to a qualified domestic relations
order.
The 1999 Directors' Stock Option Plan provides that all options granted
under this plan shall be fully exercisable as to 100% of the total number of
shares on the date of grant. If a nonemployee director ceases to serve as a
director of Cerent for any reason other than death or disability, he or she may
within 90 days after the date he or she ceases to be a director, exercise an
option granted under the 1999 Directors' Stock Option
49
<PAGE>
Plan to the extent that he or she was entitled to exercise it at the date of
termination. The exercise price of all stock options granted under the 1999
Directors' Stock Option Plan shall be equal to the fair market value of a share
of our common stock on the date of grant of the option. Options granted under
the 1999 Directors' Stock Option Plan have a term of ten years.
In the event that we are acquired by another company, each option
outstanding under the plan will terminate if not exercised prior to
consummation of the transaction, if the acquiring entity does not assume or
substitute the option. The board of directors may amend or terminate the 1999
Directors' Stock Option Plan at any time as long as such action does not
adversely affect any outstanding option and stockholder approval is obtained
for any amendment as required by applicable law. If not terminated earlier, the
1999 Directors' Stock Option Plan will have a term of ten years.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was
adopted by our board of directors in July 1999 and will be submitted for
approval by our stockholders before completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the 1999
Employee Stock Purchase Plan. The number of shares reserved for issuance under
the 1999 Employee Stock Purchase Plan will automatically increase on the first
day of each of our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 by
an amount equal to the lesser of 500,000 shares, one percent of the total
shares outstanding on the last day of the immediately preceding fiscal year, or
a lesser number of shares as determined by the Board.
The 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on October 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on April 30, 2000, with subsequent purchase periods ending on October 31,
2000, April 30, 2000 and October 31, 2001. The 1999 Employee Stock Purchase
Plan will be administered by the board of directors or by a committee appointed
by the board. Our employees (including officers and employee directors), or
employees of any majority-owned subsidiary designated by the board, are
eligible to participate in the 1999 Employee Stock Purchase Plan if they are
employed by us or a subsidiary of ours for at least 20 hours per week and more
than five months per year. The 1999 Employee Stock Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
initially may not exceed 10% of an employee's base salary, commissions and
bonus. The purchase price is equal to the lower of 85% of the fair market value
of the common stock at the beginning of each offering period or at the end of
each purchase period. In circumstances specified in the 1999 Employee Stock
Purchase Plan, the purchase price may be adjusted during an offering period to
avoid our incurring adverse accounting charges. Employees may end their
participation in the 1999 Employee Stock Purchase Plan at any time during an
offering period, and participation ends automatically on termination of
employment.
An employee cannot be granted an option under the 1999 Employee Stock
Purchase Plan if immediately after the grant the employee would own stock
and/or hold outstanding options to purchase stock equalling 5% or more of the
total voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee to purchase stock under
the 1999 Employee Stock Purchase Plan at a rate that exceeds $25,000 in fair
market value of stock for each calendar year in which the option is
outstanding. In addition, no employee may purchase more than 2,000 shares of
common stock under the 1999 Employee Stock Purchase Plan in any one purchase
period. If the fair market value of the common stock on a purchase date is less
than the fair market value at the beginning of the offering period, each
participant in that offering period shall automatically be withdrawn from the
offering period as of the end of the purchase date and re-enrolled in the new
offering period beginning on the first business day following the purchase
date.
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If we are acquired by another company, each right to purchase stock under
the 1999 Employee Stock Purchase Plan will be assumed or an equivalent right
substituted by our successor corporation. However, the board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 Employee Stock Purchase Plan are exercised prior to the
transaction in the event that our successor corporation refuses to assume each
purchase right or to substitute an equivalent right of the acquiring
corporation. The board of directors has the power to amend or terminate the
1999 Employee Stock Purchase Plan and to change or terminate offering periods
as long as this action does not adversely affect any outstanding rights to
purchase stock thereunder. However, the board of directors may amend or
terminate the 1999 Employee Stock Purchase Plan or an offering period even if
it would adversely affect outstanding options in order to avoid our incurring
adverse accounting charges.
401(k) Plan. Effective January 27, 1997, we adopted the Cerent 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees or by Cerent, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan, and so that contributions by Cerent, if any, will be deductible by Cerent
when made. Under the 401(k) plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($10,000 in 1999)
and to have the amount of such reduction contributed to the 401(k) plan. The
401(k) plan permits, but does not require, additional matching contributions to
participants' 401(k) plan accounts by Cerent on behalf of all participants in
the 401(k) plan. To date, we have not made any matching contributions to the
401(k) plan.
Limitations on Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that Cerent shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or officer of
Cerent, any subsidiary of Cerent or any other company or enterprise to which
the person provides services at the request of Cerent. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
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<PAGE>
RELATED PARTY TRANSACTIONS
Some stock option grants to directors and executive officers of Cerent are
described under the caption "Management--Executive Compensation."
Since our inception in January 1997, we have issued and sold shares of our
preferred stock as follows: an aggregate of 1,800,000 shares of Series A
preferred stock at $0.03 per share in March 1997, an aggregate of 3,286,668
shares of Series B preferred stock, and warrants to purchase an aggregate of
1,500,000 shares of Series B preferred stock, at $0.67 per share in April 1997,
an aggregate of 6,450,000 shares of Series C preferred stock, and warrants to
purchase an aggregate of 967,500 shares of Series C preferred stock, at $1.33
per share in August 1997, an aggregate of 9,165,051 shares of Series D
preferred stock at $1.43 per share in July 1998 and November 1998, an aggregate
of 12,288,972 shares of Series E preferred stock at $2.17 per share in November
1998 and May 1999. The following table summarizes the shares of common stock
and preferred stock purchased by our Chief Executive Officer and five-percent
stockholders and persons and entities associated with them in these
transactions:
<TABLE>
<CAPTION>
Series B Series C
Series A Series B Preferred Series C Preferred Series D Series E
Common Preferred Preferred Stock Preferred Stock Preferred Preferred
Investor (1) Stock Stock Stock Warrants Stock Warrants Stock Stock
- ------------ ---------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carl Russo.............. 2,700,000 -- -- -- -- -- 179,550 573,528
Kleiner Perkins Caufield
& Byers (2)............ 13,333,332 -- 3,166,668 1,500,000 1,500,000 225,000 697,674 600,000
Advanced Fibre
Communications,
Inc. (2)............... -- -- -- -- 2,250,000 337,500 450,000 633,678
Norwest Venture
Partners (2)........... -- -- -- -- -- -- 6,279,069 1,310,604
Cisco Systems (2)....... -- -- -- -- -- -- -- 6,000,000
</TABLE>
- ---------------------
(1) Shares held by affiliated persons and entities have been added together for
the purposes of this chart. See "Principal Stockholders" for a chart of
beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
In October 1998, Cerent entered into a technology license agreement with
Siara Systems, Inc. pursuant to which Cerent granted limited license rights to
Siara to use technology developed by Cerent related to two ASICs. Siara was
established in 1998 by former employees of Cerent and was initially financed by
Kleiner Perkins Caufield & Byers, which is a significant stockholder of Cerent.
Vinod Khosla, our chairman of the board of directors and a general partner of
Kleiner Perkins Caufield & Byers, and Promod Haque, a director of Cerent, are
also directors of Siara. In February 1999, Cerent and Siara entered into an
amendment and supplement to the technology license agreement pursuant to which
Siara agreed to pay Cerent $403,000 and a royalty of 2% of its gross revenues
resulting from sales of products incorporating the licensed technology, up to a
maximum of $500,000.
On May 15, 1998, in connection with the hiring of Carl Russo as our
President and Chief Executive Officer, we entered into an agreement with Mr.
Russo pursuant to which we agreed to assist Mr. Russo in obtaining a line of
credit of up to $1.0 million and we agreed to pay the interest on this loan for
three years from the date of the loan. In July 1998, in connection with the
exercise of an option to purchase 2,700,000 shares of our common stock, we
loaned Mr. Russo $359,100 in exchange for a full-recourse promissory note which
bears interest at a rate of 5.6% per annum. The principal and interest under
this note become due and payable on the earlier of July 7, 2002 or the date of
termination of Mr. Russo's employment or consulting relationship with us.
52
<PAGE>
Mr. Russo purchased 179,550 shares of our Series D preferred stock in
November 1998 at $1.433 per share. Additionally, in May 1999, Mr. Russo
purchased 573,528 shares of our Series E preferred stock at $2.167 per share.
Mr. Russo paid an amount of $1,242,644 to us through the issuance of a full-
recourse promissory note, with an interest rate of 5.22% per annum, which is
secured by the Series E preferred stock held by Mr. Russo pursuant to the terms
of a security agreement. The principal and interest under this note become due
and payable on the earlier of May 17, 2004 or promptly upon the sale of shares
of Cerent's stock forming the security interest under the security agreement.
To facilitate the exercise of stock options, we loaned the following
executive officers the following amounts in exchange for full-recourse
promissory notes: Michael Ashby--$2,599,600; Terry Brown--$24,875, and
$324,950; Tom Corker--$159,920; Scott Lester--$1,999,800; and Richard Roney--
$169,800. Each of these notes accrues interest at the minimum federal rate and
matures on the four-year anniversary of the date of issuance. The principal and
interest under these notes become due and payable on the earlier of their
respective maturity dates or the date of termination of the holder's
employment. These notes are secured by the stock purchased with the loaned
amounts.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification" for a description of the indemnification obligations.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 1999, by (a) each person or entity
who is known by us to own beneficially more than 5% of our outstanding common
stock, (b) each of the Named Executive Officers, (c) each of our directors and
(d) all directors and executive officers of Cerent as a group.
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Beneficial Owner Number of Shares Beneficially Owned
- ------------------- Beneficially ----------------------------------------
Owned (1) Prior to the Offering After the Offering
---------------- --------------------- ------------------
<S> <C> <C> <C>
Kleiner Perkins Caufield
& Byers (2)............ 21,022,674 30.8%
Norwest Venture Partners
VI, LP (3)............. 7,589,673 11.4
Cisco Systems, Inc.
(4).................... 6,000,000 9.0
Advanced Fibre
Communications, Inc.
(5).................... 3,671,178 5.5
Carl Russo (6).......... 3,453,078 5.2
Ajaib Bhadare (7)....... 1,586,250 2.4
Terry Brown (8)......... 525,000 *
Tom Corker (9).......... 435,000 *
Richard Roney (10)...... 600,000 *
Vinod Khosla (11)....... 21,022,674 30.8
Kevin Compton (12)...... 21,022,674 30.8
Promod Haque (13)....... 7,589,673 11.4
Donald Green (14)....... 4,102,428 6.1
All directors and
officers as a group
(11 persons) (15)...... 61,736,777 87.6
</TABLE>
- ---------------------
*Less than 1% of the outstanding shares of common stock.
(1) Applicable percentage ownership in the above table is based on 66,603,167
shares of common stock outstanding as of June 30, 1999, as adjusted to
reflect the conversion of all outstanding shares of preferred stock into
common stock upon the closing of this offering and as adjusted to reflect
the sale of common stock offered hereby. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after June 30, 1999 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percentage ownership of any other person. To our knowledge and
except as otherwise indicated, we believe that the beneficial owners of the
common stock listed above, based on information furnished by such owners,
have sole voting power and investment power with respect to such shares,
subject to community property laws where applicable. Unless otherwise
indicated, the address for each stockholder listed in the table is c/o
Cerent Corporation, 1450 North McDowell Blvd., Petaluma, California 94954.
(2) Represents 17,785,860 shares held by Kleiner Perkins Caufield & Byers VIII,
1,029,372 shares held by KPCB VIII Founders Fund, 482,442 shares held by
KPCB Information Sciences Zaibatsu Fund II, warrants to purchase 1,589,868
shares of common stock held by Kleiner Perkins Caufield & Byers VIII,
warrants to purchase 92,007 shares of common stock held by KPCB VIII
Founders Fund and warrants to
54
<PAGE>
purchase 43,125 shares of common stock held by KPCB Information Sciences
Zaibatsu Fund II. The address of these stockholders is 2750 Sand Hill
Road, Menlo Park, California 94025.
(3) Norwest Venture Partners VI, LP is located at 245 Lytton Avenue, Suite
250, Palo Alto, California 94301.
(4) Cisco Systems, Inc. is located at 170 West Tasman Drive, San Jose,
California 95134.
(5) Represents 3,333,678 shares and a warrant to purchase 337,500 shares of
common stock. Advanced Fibre Communications, Inc. is located at One Willow
Brook Court, Petaluma, California 94954.
(6) Includes 2,700,000 shares subject to a stock pledge agreement in favor of
Cerent, 1,968,750 of which are subject to our right to repurchase at cost
upon cessation of employment. Also includes 573,528 shares subject to a
security agreement in favor of Cerent.
(7) Includes a warrant to purchase 11,250 shares of common stock and 437,719
shares which are subject to our right to repurchase at cost upon cessation
of employment.
(8) The shares listed are subject to stock pledge agreements in favor of
Cerent, 345,313 of which are subject to our right to repurchase at cost
upon cessation of employment.
(9) Includes 240,000 shares subject to a stock pledge agreement in favor of
Cerent, 125,000 of which are subject to our right to repurchase at cost
upon cessation of employment. Also includes 101,563 shares subject to our
right to repurchase at cost upon cessation of employment
(10) The shares listed are subject to a stock pledge agreement in favor of
Cerent, all of which are subject to our right to repurchase at cost upon
cessation of employment.
(11) Mr. Khosla is a general partner of KPCB VIII Associates, LP. which is the
general partner of Kleiner Perkins Caufield & Byers VIII and KPCB VIII
Founders Fund. Mr. Khosla is also a general partner of KPCB VII
Associates, L.P., which is the general partner of KPCB Information
Sciences Zaibatsu Fund II. Mr. Khosla's address is c/o Kleiner Perkins
Caufield & Byers, 2750 Sand Hill Road, Menlo Park, California 94025. The
shares listed represent 17,785,860 shares held by Kleiner Perkins
Caufield & Byers VIII, 1,029,372 shares held by KPCB VIII Founders Fund,
482,442 shares held by KPCB Information Sciences Zaibatsu Fund II,
warrants to purchase 1,589,868 shares of common stock held by Kleiner
Perkins Caufield & Byers VIII, warrants to purchase 92,007 shares of
common stock held by KPCB VIII Founders Fund and warrants to purchase
43,125 shares of common stock held by KPCB Information Sciences Zaibatsu
Fund II. Mr. Khosla disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
(12) Mr. Compton is a general partner of KPCB VIII Associates, L.P., which is
the general partner of Kleiner Perkins Caufield & Byers VIII and KPCB
VIII Founders Fund. Mr. Compton is also a general partner of KPCB VII
Associates, L.P. which is the general partner of KPCB Information
Services Zaibatsu Fund II. Mr. Compton's address is c/o Kleiner Perkins
Caufield & Byers, 2750 Sand Hill Road, Menlo Park, California 94025. The
shares listed represent 17,785,860 shares held by Kleiner Perkins
Caufield & Byers VIII, 1,029,372 shares held by KPCB VIII Founders Fund,
482,442 shares held by KPCB Information Sciences Zaibatsu Fund II,
warrants to purchase 1,589,868 shares of common stock held by Kleiner
Perkins Caufield & Byers VIII, warrants to purchase 92,007 shares of
common stock held by KPCB VIII Founders Fund and warrants to purchase
43,125 shares of common stock held by KPCB Information Sciences Zaibatsu
Fund II. Mr. Kompton disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
(13) Mr. Haque is a partner of Itasca VC Partners VI, LLP, the general partner
of Norwest Venture Partners VI. The shares listed represent shares held
by Norwest Venture Partners VI. Mr. Haque disclaims beneficial ownership
of these shares, except to the extent of his pecuniary interest therein.
Mr. Haque's address is c/o Norwest Venture Partners, 245 Lytton Avenue,
Suite 250, Palo Alto, California 94301.
(14) Mr. Green is the Chairman of the Board and a director of Advanced Fibre
Communications, Inc. The shares listed represent 3,333,678 shares held by
Advanced Fibre Communications, Inc. and a warrant to purchase 337,500
shares of common stock held by Advanced Fibre Communications, Inc. Mr.
Green disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest therein. Also includes 375,000 shares
held in Mr. Green's retirement account and a warrant to purchase 56,250
shares of common stock held in Mr. Green's retirement account. Mr.
Green's address is c/o Advanced Fibre Communications, Inc., One Willow
Brook Court, Petaluma, California 94954.
55
<PAGE>
(15) See footnotes (1) through (14). Also includes shares beneficially owned by
certain officers who joined Cerent subsequent to June 30, 1999.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, we will be authorized to issue 300,000,000
shares of common stock, $0.001 par value, and 10,000,000 shares of undesignated
preferred stock, $0.001 par value. The following description of our capital
stock is not complete and is qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.
Common Stock
As of June 30, 1999, there were 66,603,167 shares of common stock
outstanding that were held of record by approximately 250 stockholders after
giving pro-forma effect to the conversion of our preferred stock into common
stock at a one-to-one ratio and assuming no exercise or conversion of
outstanding convertible securities after June 30, 1999. There will be
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise or conversion of outstanding convertible
securities after June 30, 1999) after giving effect to the sale of the shares
of common stock offered hereby.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of our policy of distribution
of dividends. In the event of a liquidation, dissolution or winding up of
Cerent, 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 the closing of this offering will be fully paid and
nonassessable.
On July 20, 1999, Cerent entered into a convertible note purchase agreement
with certain entities affiliated with MSD Capital, L.P., the private investment
firm for Michael S. Dell. Pursuant to this agreement, Cerent issued $30,000,000
of convertible notes, which will be automatically convertible into shares of
Cerent's common stock upon completion of the initial public offering. In
connection with the sale of the convertible notes, the investors were granted
certain other rights, including registration rights with respect to the shares
issuable upon the conversion of the convertible notes.
Preferred Stock
Effective upon the closing of this offering, the board of directors will
have the authority, without action by the stockholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. However, the effects might include, among
other things, restricting dividends on the common stock, diluting the voting
power of the common stock, impairing the liquidation rights of the common stock
and delaying or preventing a change in control of Cerent without further action
by the stockholders. We have no present plans to issue any shares of preferred
stock.
Warrants
As of June 30, 1999, we had warrants outstanding that, following the
completion of this offering, will be exercisable for up to an aggregate of
4,014,618 shares of common stock including 393,702 shares reserved for issuance
in connection with drawdowns on a credit line. In addition, as of June 30,
1999, we also had warrants outstanding to purchase an aggregate of 967,500
shares of Series C convertible preferred stock that, to the extent not
exercised, will expire upon the completion of this offering.
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<PAGE>
Registration Rights of Certain Holders
The holders of 49,193,898 shares of common stock, 4,982,118 shares issuable
upon exercise of warrants and shares to be issued upon automatic
conversion of convertible promissory notes, assuming an initial public offering
price of $ per share (the "registrable securities"), or their permitted
transferees, are entitled to certain rights with respect to registration of
such shares under the Securities Act. These rights are provided under the terms
of an agreement between Cerent and the holders of registrable securities. Under
these registration rights, beginning on the earlier of August 15, 2002, or six
months after the effective date of the offering contemplated by this
prospectus, holders of at least 51% of the then-outstanding registrable
securities may require on two occasions that Cerent register at least 30% of
the registrable securities then outstanding for public resale. In addition,
holders of at least 30% of the then-outstanding registrable securities may
require that we register their shares for public resale on Form S-3 or similar
short-form registration, provided we are eligible to use Form S-3 or similar
short-form registration statement and provided further that the value of the
securities to be registered is at least $500,000. Furthermore, in the event
Cerent elects to register any of its shares of common stock for purposes of
effecting any public offering, the holders of registrable securities are
entitled to include their shares of common stock in the registration, subject
however to our right to reduce the number of shares proposed to be registered
in view of market conditions. All expenses in connection with any registration
(other than underwriting discounts and commissions) will be borne by us. All
registration rights will terminate five years after the date of this public
offering or, with respect to each holder of registrable securities, at such
time as the holder is entitled to sell all of its shares in any three month
period under Rule 144 of the Securities Act or another similar exemption.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of Cerent by a third party and the
removal of incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire
control of Cerent to first negotiate with us. We believe that the benefits of
increased protection of our ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Cerent outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by the
board of directors and authorized by 66 2/3% vote at an annual or special
meeting or stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
58
<PAGE>
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Cerent. These and other
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Cerent.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation. The transfer agent's address is 1745 Gardena Avenue, 2nd Floor,
Glendale, CA 91204, and its telephone number is (818) 502-1404.
Listing
We have applied to list our common stock on The Nasdaq National Market under
the trading symbol "CERE."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering and based on shares outstanding at June 30,
1999, we will have outstanding shares of common stock. Of these
shares, all the shares sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below.
Our directors, officers and stockholders have entered into lock-up
agreements with the underwriters of this offering generally providing that they
will not offer, sell, contract to sell, pledge or otherwise dispose of our
shares of common stock or any securities exercisable for or convertible into
our common stock owned by them prior to this offering for a period of 180 days
after the date of this offering without the prior written consent of Credit
Suisse First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by Credit Suisse First Boston
Corporation. Taking into account the lock-up agreements, and assuming Credit
Suisse First Boston Corporation does not release stockholders from these
agreements prior to the expiration of the 180 day lock-up period, the following
shares will be eligible for sale in the public market at the following times:
. Beginning on the effective date of the registration statement, only the
shares sold in this offering, will be immediately available for sale
in the public market;
59
<PAGE>
. Beginning 180 days after the effective date, additional shares
will become eligible for sale under Rule 701, Rule 144 and Rule 144(k),
subject to volume restrictions as described below, of which all but
shares are held by affiliates;
. An additional shares will be eligible for sale pursuant to Rule
701 at various times beginning 180 days after the effective date when
these shares are released from our repurchase option with respect to
these shares, of which, all but shares are held by affiliates;
and
. An additional 573,528 shares will be eligible for sale pursuant to Rule
144 in May 2000, and an additional 6,000 shares will be eligible for sale
pursuant to Rule 144 in June 2000.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
Cerent. Under Rule 144(k), a person who is not deemed to have been an affiliate
of Cerent at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors, or consultant who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, we intend to file
registration statements under the Securities Act as promptly as possible after
the completion of this offering to register approximately 7,886,212 shares to
be issued pursuant to our employee benefit plans. As a result, any options or
rights exercise under the 1997 Stock Plan, the 1999 Employee Stock Purchase
Plan or the 1999 Directors' Stock Option Plan after the effectiveness of the
registration statements will be available for sale in the public market 180
days after the effective date of this offering upon the expiration of lock-up
agreements. However, such shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701. As of June
30, 1999, there were outstanding options for the purchase of 459,875 shares of
our common stock under the 1997 stock Plan and 1,426,337 shares were available
for future grant.
Also beginning 6 months after the date of this offering, holders of
restricted shares and certain holders of warrants to purchase
shares of common stock will be entitled to certain registration
rights. See "Description of Capital Stock--Registration Rights." Registration
of such shares under the Securities Act would result in such shares becoming
freely tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
60
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
and Warburg Dillon Read LLC are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation...........................
BancBoston Robertson Stephens Inc................................
Dain Rauscher Wessels............................................
Warburg Dillon Read LLC..........................................
---
Total..........................................................
===
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions payable
by us.................. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and our stockholders have agreed that we and
they will not offer, sell, contract to sell, announce an intention to sell,
pledge or directly or indirectly dispose of, or file with the Commission a
registration statement under the Securities Act relating to, any additional
shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus.
61
<PAGE>
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.
We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "CERE."
Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between us
and the underwriters. The principal factors to be considered in determining the
public offering price include:
. the information set forth in this prospectus and otherwise available to
the underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed to cover
syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market and, if commenced, may be discontinued
at any time.
62
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission of rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that a purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility of Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Cerent by Venture Law Group, A Professional Corporation, Menlo Park,
California. Joshua L. Green, a director of Venture Law Group, is the
63
<PAGE>
Secretary of Cerent. Legal matters in connection with this offering will be
passed upon for the underwriters by Wilson Sonsini Goodrich and Rosati,
Professional Corporation, Palo Alto, California. As of the date of this
prospectus, an investment partnership associated with Venture Law Group owns an
aggregate of 37,500 shares of our common stock, and one director of Venture Law
Group beneficially owns 7,500 shares of our common stock.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1998 and the
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (January 27, 1997) through December 31, 1997 and for
the year ended December 31, 1998 included in this prospectus and in the related
financial statement schedule included elsewhere in the registration statement,
have been included in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective June 17, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our Board of Directors on June 17, 1999. Prior to June 17, 1999, our former
auditors issued a report on the period from inception (January 27, 1997) to
December 31, 1997. The report of our former auditors did not contain an adverse
opinion or disclaimer of opinion qualified or modified as to audit scope or
accounting principle. The auditor's opinion did contain an uncertainty as to
substantial doubt regarding the Company's ability to continue as a going
concern. In connection with the audit for the period from inception (January
27, 1997) through December 31, 1997 and through June 17, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former auditors,
would have caused them to make reference thereto in their report. Our former
auditors have not audited or reported on any of the financial statements or
information included in this prospectus. Prior to June 17, 1999, we had not
consulted with Ernst & Young LLP on items that involved our accounting
principles or the form of audit opinion to be issued on our financial
statements. We have requested that our former auditors furnish us with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of this letter is filed as an exhibit to the registration
statement of which this prospectus forms a part.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, 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 thereto. For further information with respect to Cerent and such
common stock, we refer you 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 in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
64
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CERENT CORPORATION
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cerent Corporation
We have audited the accompanying consolidated balance sheets of Cerent
Corporation as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from January 27, 1997 (inception) through December 31, 1997 and for the year
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cerent Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for the period from January 27,
1997 (inception) through December 31, 1997 and for the year ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Walnut Creek, California
July 19, 1999, except for Note 9, as to which the date is
September , 1999
F-2
<PAGE>
CERENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except par value data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
----------------- June 30, June 30,
1997 1998 1999 1999
------- -------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 6,758 $ 22,245 $ 5,794
Accounts receivable, net of
allowance for doubtful accounts
of $0 at December 31, 1998 and
$200 at June 30, 1999.......... -- 231 5,827
Inventories..................... -- 2,013 4,418
Prepaid expenses and other
current assets................. 338 785 557
------- -------- --------
Total current assets.............. 7,096 25,274 16,596
Property and equipment, net....... 3,003 5,996 14,179
Other assets...................... 44 607 2,853
------- -------- --------
Total assets...................... $10,143 $ 31,877 $ 33,628
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................ $ 526 $ 3,481 $ 8,676
Accrued compensation and related
liabilities.................... 167 210 1,046
Accrued expenses................ 144 800 1,601
Current portion of long-term
debt........................... 1,391 2,272 3,820
------- -------- --------
Total current liabilities......... 2,228 6,763 15,143
Long-term debt, net of discount... 3,718 4,229 5,001
------- -------- --------
Total liabilities................. 5,946 10,992 20,144
Commitments
Stockholders' equity:
Convertible preferred stock,
$0.00033 par value, issuable in
series: 19,570, 37,597 and
37,709 shares authorized at
December 31, 1997 and 1998 and
June 30, 1999, respectively
(10,000 shares pro forma);
11,537, 32,417 and 32,991
shares issued and outstanding
at December 31, 1997 and 1998
and June 30, 1999, respectively
(none pro forma); aggregate
liquidation preference of
$50,614 at June 30, 1999 (none
pro forma)..................... 11,124 49,878 64,989 $ --
Common stock, $0.00033 par
value, 67,986 shares authorized
at December 31, 1997 and 1998
and 150,000 shares authorized
at June 30, 1999 (300,000
shares pro forma); 25,194,
28,744 and 33,612 shares issued
and outstanding at December 31,
1997 and 1998 and June 30,
1999, respectively (66,603
shares pro forma).............. 1,247 4,905 55,868 120,857
Notes receivable from
stockholders................... (316) (1,023) (11,891) (11,891)
Deferred stock compensation..... -- (2,467) (35,770) (35,770)
Accumulated deficit............. (7,858) (30,408) (59,712) (59,712)
------- -------- -------- --------
Total stockholders' equity........ 4,197 20,885 13,484 $ 13,484
------- -------- -------- ========
Total liabilities and
stockholders' equity............. $10,143 $ 31,877 $ 33,628
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CERENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Period from
January 27, Six Months Ended
1997 (inception) Year Ended June 30,
to December 31, December 31, -----------------
1997 1998 1998 1999
---------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 220 $ -- $ 9,917
Cost of revenue......... -- 1,061 -- 7,943
------- -------- ------- --------
Gross profit (loss)..... -- (841) -- 1,974
Operating expenses:
Research and
development.......... 5,159 15,553 6,723 8,792
Selling, general and
administrative....... 2,470 5,039 1,673 10,251
Stock compensation.... -- 510 -- 10,800
------- -------- ------- --------
Total operating
expenses............... 7,629 21,102 8,396 29,843
------- -------- ------- --------
Operating loss.......... (7,629) (21,943) (8,396) (27,869)
Interest income......... 122 249 91 197
Interest expense........ (351) (749) (394) (1,471)
Other income (expense).. -- (107) 35 (161)
------- -------- ------- --------
Net loss................ $(7,858) $(22,550) $(8,664) $(29,304)
======= ======== ======= ========
Basic and diluted net
loss per share......... $ (0.82) $ (1.33) $ (0.57) $ (1.36)
======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per share......... 9,535 16,901 15,091 21,470
======= ======== ======= ========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.67) $ (0.54)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 33,850 54,026
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CERENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Receivable Deferred Total
--------------- ---------------- from Stock Accumulated Stockholders'
Shares Amount Shares Amount Stockholders Compensation Deficit Equity
------ -------- ------ -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ -- $ -- 8,073 $ 2 $ -- $ -- $ -- $ 2
Issuance of Series A
convertible preferred
stock, net of issuance
costs.................. 1,800 60 -- -- -- -- -- 60
Issuance of Series B
convertible preferred
stock, net of issuance
costs.................. 3,287 2,167 -- -- -- -- -- 2,167
Issuance of warrants to
purchase Series B and C
convertible preferred
stock.................. -- 338 -- -- -- -- -- 338
Issuance of Series C
convertible preferred
stock, net of issuance
costs.................. 6,450 8,559 -- -- -- -- -- 8,559
Issuance of common stock
to third-party......... -- -- 13,333 890 -- -- -- 890
Exercise of stock
options by employees... -- -- 4,881 363 (316) -- -- 47
Repurchase of common
stock from employees
and founders........... -- -- (1,093) (8) -- -- -- (8)
Net loss and
comprehensive loss..... -- -- -- -- -- -- (7,858) (7,858)
------ -------- ------ -------- --------- --------- --------- --------
Balances of December 31,
1997................... 11,537 11,124 25,194 1,247 (316) -- (7,858) 4,197
Issuance of Series D
convertible preferred
stock, net of issuance
costs.................. 9,165 13,277 -- -- -- -- -- 13,277
Issuance of warrants to
purchase Series D
convertible preferred
stock.................. -- 163 -- -- -- -- -- 163
Issuance of Series E
convertible preferred
stock, net of issuance
costs.................. 11,715 25,314 -- -- -- -- -- 25,314
Exercise of stock
options by employees... -- -- 6,827 1,010 (707) -- -- 303
Repurchase of common
stock from employees
and founders........... -- -- (3,277) (151) -- -- -- (151)
Deferred stock
compensation........... -- -- -- 2,799 -- (2,799) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- 332 -- 332
Net loss and
comprehensive loss..... -- -- -- -- -- -- (22,550) (22,550)
------ -------- ------ -------- --------- --------- --------- --------
Balances of December 31,
1998................... 32,417 49,878 28,744 4,905 (1,023) (2,467) (30,408) 20,885
Issuance of Series E
convertible preferred
stock, net of issuance
costs (unaudited)...... 574 6,300 -- -- (1,243) -- -- 5,057
Issuance of warrants to
purchase Series D and E
convertible preferred
stock (unaudited)...... -- 8,811 -- -- -- -- -- 8,811
Issuance of warrants to
purchase common stock
(unaudited)............ -- -- -- 2,350 -- -- -- 2,350
Exercise of stock
options by employees
(unaudited)............ -- -- 4,889 9,646 (9,625) -- -- 21
Repurchase of common
stock from employees
(unaudited)............ -- -- (21) (1) -- -- -- (1)
Deferred stock
compensation
(unaudited)............ -- -- -- 38,968 -- (38,968) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- 5,665 -- 5,665
Net loss and
comprehensive loss
(unaudited)............ -- -- -- -- -- -- (29,304) (29,304)
------ -------- ------ -------- --------- --------- --------- --------
Balances at June 30,
1999 (unaudited)....... 32,991 $ 64,989 33,612 $ 55,868 $ (11,891) $ (35,770) $ (59,712) $ 13,484
====== ======== ====== ======== ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CERENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 27, Six Months Ended
1997 (inception) Year Ended June 30
to December 31, December 31, -----------------
1997 1998 1998 1999
---------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss..................... $(7,858) $(22,550) $(8,664) $(29,304)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 563 1,670 758 1,116
Amortization of discount on
long-term debt related to
issuance of warrants........ 76 139 -- 1,041
Stock compensation........... -- 510 -- 16,800
Loss on sale of property and
equipment................... -- 56 -- --
Changes in operating assets
and liabilities:
Accounts receivable......... -- (231) (21) (5,596)
Inventories................. -- (2,013) -- (2,405)
Prepaid expenses and other
current assets............. (338) (447) 61 228
Other assets................ (44) (563) (322) (26)
Accounts payable............ 526 2,955 1,295 5,195
Accrued compensation and
related liabilities........ 167 43 (167) 836
Accrued expenses............ 144 656 (144) 801
------- -------- ------- --------
Net cash used in operating
activities................... (6,764) (19,775) (7,204) (17,314)
Investing activities
Purchases of property and
equipment................... (3,566) (4,312) (2,541) (9,299)
Proceeds from sale of
property and equipment...... -- 87 -- 25
------- -------- ------- --------
Net cash used in investing
activities................... (3,566) (4,225) (2,541) (9,274)
Financing activities
Proceeds from issuance of
preferred stock............. 10,786 38,413 -- --
Proceeds from issuance of
common stock................ 937 303 822 20
Repurchase of common stock
from employees.............. (8) (151) (76) --
Proceeds from issuance of
long-term debt.............. 5,640 2,632 2,979 11,824
Payments on long-term debt... (267) (1,710) -- (1,707)
------- -------- ------- --------
Net cash provided by financing
activities................... 17,088 39,487 3,725 10,137
------- -------- ------- --------
Net increase (decrease) in
cash and cash equivalents.... 6,758 15,487 (6,020) (16,451)
Cash and cash equivalents at
beginning of period.......... -- 6,758 6,758 22,245
------- -------- ------- --------
Cash and cash equivalents at
end of period................ $ 6,758 $ 22,245 $ 738 $ 5,794
======= ======== ======= ========
Supplemental disclosures of
cash flow information
Cash paid for interest....... $ 204 $ 610 $ 302 $ 442
======= ======== ======= ========
Noncash financing activities
Acquisition of equipment
under capital leases........ $ -- $ 351 $ -- $ --
======= ======== ======= ========
Warrants issued in connection
with long-term debt
agreements and customer
commitments................. $ 338 $ 163 $ -- $ 11,161
======= ======== ======= ========
Employee notes issued in
exchange for the exercise of
stock options and
convertible preferred
stock....................... $ 316 $ 707 $ 58 $ 10,868
======= ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
1. Organization and Summary of Significant Accounting Policies
The Company
The Company was incorporated on January 27, 1997 as Fiberlane
Communications, Inc. in Petaluma, California, under the laws of the State of
Delaware. The Company subsequently changed its name to Cerent Corporation (the
Company).
The Company develops and delivers a multi-service optical transport platform
designed to lower network operating costs and increase the efficiency of
bandwidth delivery within today's transport networks. The Company was in the
development stage until December 1998, when sales of its sole product, the
Cerent 454, commenced. The Company's target market includes emerging inter-
exchange carriers, the local exchange carriers, independent carriers and cable
companies. The Company markets its products through direct sales.
Unaudited Interim Financial Information
The accompanying consolidated financial statements as of June 30, 1999 and
for the six months ended June 30, 1998 and 1999 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its consolidated financial
position, operating results, and cash flows for the interim date and periods
presented. Results for the six months ended June 30, 1999 are not necessarily
indicative of results for the entire fiscal year or future periods.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
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 amounts reported in the financial statement and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market accounts at December 31, 1998 and 1997.
Concentrations of Credit Risk and Credit Risk Evaluations
Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, trade accounts
receivable and long-term debt. The Company maintains its demand deposit
accounts and its money market accounts primarily with one financial
institution. The Company has partially financed its operations through long-
term debt issuance through a lending institution. The Company generally does
not require collateral for sales to customers. The Company maintains reserves
for potential credit losses. For the year ended December 31, 1998, one customer
accounted for 62% and a second customer accounted for 38% of the Company's
revenue. No customer accounted for more than 10% of the Company's revenue for
the six months ended June 30, 1999.
F-7
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
Suppliers
The Company receives certain custom semi-conductor chips from two sole
sources. Additionally, the Company relies on one hardware manufacturer for the
production of its product and does not have an internal manufacturing facility.
The inability of the supplier or manufacturer to fulfill supply requirements of
the Company could negatively impact future results.
Inventories
Inventories consist of raw materials, work-in-process and finished products.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method. Finished products principally consist of items shipped to
customers that are subject to completion of obligations or customer acceptance.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three years, or
the lease term of the respective assets.
Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed" (FAS 86) under
which certain development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated
lives of the related products. Technological feasibility is established upon
completion of a working model. To date, the Company has not capitalized any
development costs related to software products, as the costs incurred
subsequent to the establishment of technological feasibility have not been
significant and all software development costs have been charged to product
development expense in the accompanying consolidated statements of operations.
Revenue Recognition
The Company generally recognizes product revenue at the time of shipment,
assuming that collectibility is probable, unless the Company has future
obligations or is required to obtain customer acceptance, in which cases
revenue is deferred until these obligations are met.
Warranty Obligations
The Company's products generally carry a three-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses for
warranty obligations are accrued as revenue is recognized.
Income Taxes
The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Research and Development
Costs to develop the Company's products are expensed as incurred in
accordance with Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," (FAS 2) which establishes accounting and
reporting standards for research and development.
F-8
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
Other Comprehensive Income
The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net loss for the period ended December 31, 1997 and the
year ended December 31, 1998 does not differ from the reported net loss.
Stock-Based Compensation
The Company accounts for its stock options and equity awards in accordance
with the provisions of the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and has elected to follow
the "disclosure only" alternative prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).
Fair Value of Financial Instruments
The fair value of long-term debt is estimated based on current interest
rates available to the Company for debt instruments with similar terms, degrees
of risk, and remaining maturities. The carrying values of these obligations
approximate their fair values.
Net Loss Per Share
Basic net loss per share and diluted net loss per share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128), for all periods presented. In accordance with FAS 128,
basic and diluted net loss per share has been computed using the weighted-
average number of shares of common stock outstanding during the period, less
the weighted average number of shares of common stock issued to founders,
investors and employees that are subject to repurchase. Pro forma basic and
diluted net loss per share, as presented in the consolidated statements of
operations, have been computed as described above and also give effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance, using an assumed initial public offering price of $ per
share to calculate the conversion ratio for convertible preferred stock.
F-9
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Period from
January 27, Six Months Ended
1997 (inception) Year Ended June 30,
to December 31, December 31, -----------------
1997 1998 1998 1999
---------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Historical:
Net loss................. $(7,858) $(22,550) $(8,664) $(29,304)
======= ======== ======= ========
Weighted-average shares
used in computing basic
and diluted net loss per
share................... 9,535 16,901 15,091 21,470
======= ======== ======= ========
Basic and diluted net
loss per share.......... $ (0.82) $ (1.33) $ (0.57) $ (1.36)
======= ======== ======= ========
Pro forma:
Net loss................. $(22,550) $(29,304)
======== ========
Shares used above........ 16,901 21,470
Pro forma adjustment to
reflect the weighted
effect of the assumed
conversion of
convertible preferred
stock................... 16,949 32,556
-------- --------
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)....... 33,850 54,026
-------- --------
Pro forma basic and
diluted net loss per
share (unaudited)....... $ (0.67) $ (0.54)
======== ========
</TABLE>
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. Unaudited pro forma stockholders' equity at June 30, 1999, as
adjusted for the assumed conversion of convertible preferred stock based on the
shares of convertible preferred stock outstanding at June 30, 1999 is disclosed
on the consolidated balance sheets.
Business Segments
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (FAS
131). The Company operates solely in one segment, the development and marketing
of communications infrastructure equipment; and therefore, there are no
separate disclosures required for segment information as required by FAS 131.
F-10
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
Computer Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria have been met. To date SOP 98-1 has had no material impact on its
consolidated financial position, results of operations, or cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which will be effective for the fiscal year
ended December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133, however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position, results
of operations, or cash flows as the Company has not entered into any derivative
contracts.
2. Balance Sheet Details
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Raw materials....................................... $ 210 $ 186
Work-in-process..................................... 1,179 --
Finished products................................... 624 4,232
------ ------
$2,013 $4,418
====== ======
</TABLE>
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Computer equipment............................................ $1,770 $4,379
Furniture and fixtures........................................ 189 432
Software...................................................... 1,575 3,238
Leasehold improvements........................................ 32 37
------ ------
3,566 8,086
Less accumulated depreciation and amortization................ 563 2,090
------ ------
$3,003 $5,996
====== ======
</TABLE>
F-11
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
Certain computer and office equipment are recorded under capital leases that
aggregated $351,000 as of December 31, 1998 (none as of December 31, 1997).
Accumulated amortization on the assets recorded under capital leases aggregated
$12,000 as of December 31, 1998 (none as of December 31, 1997).
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Customer support and warranty expenses........................ $ -- $ 207
Other accrued expenses........................................ 144 593
------ ------
$ 144 $ 800
====== ======
</TABLE>
3. Stockholders' Equity
Stock Split
In June 1999, the Company's Board of Directors approved a 3-for-1 stock
split of the Company's authorized, issued and outstanding common and
convertible preferred stock. All common and convertible preferred share and per
share amounts in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
Common Stock
In 1997, the Company entered into Stock Purchase Agreements with its
founders to initially capitalize the Company. The Company has the right to
repurchase, at the original issue price, a declining percentage of certain of
the shares of common stock issued. The repurchase right generally declines on a
percentage basis over four years based on the length of the founder's and each
respective employee's continued employment with the Company. As of December 31,
1997 and 1998, 7,101,000 and 1,572,000 shares, respectively, of common stock
issued under this agreement were subject to repurchase.
Convertible Preferred Stock
Convertible preferred stock consists of the following series (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Shares Issued
and Outstanding at Per share Aggregate Aggregate
Shares ---------------------- ------------------------- Liquidation Liquidation
Designated at December 31, Preference at Preference at
December 31, ------------- June 30, Noncumulative Liquidation December 31, June 30,
Series 1998 1997 1998 1999 Dividend Preference 1998 1999
------ ------------- ------ ------ -------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A....................... 1,800 1,800 1,800 1,800 $-- $ .03 $ 60 $ 60
B....................... 5,552 3,287 3,287 3,287 .07 .67 2,191 2,191
C....................... 7,418 6,450 6,450 6,450 .13 1.33 8,600 8,600
D....................... 10,212 -- 9,165 9,165 .14 1.43 13,136 13,136
E....................... 12,615 -- 11,715 12,289 .22 2.17 25,383 26,627
------ ------ ------ ------ ------- -------
37,597 11,537 32,417 32,991 $49,370 $50,614
====== ====== ====== ====== ======= =======
</TABLE>
F-12
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
The holders of Series A, B, C, D, and E convertible preferred stock are
entitled to annual noncumulative dividends per share as shown above when-and-if
declared by the Board of Directors. In the event of any voluntary or
involuntary liquidation of the Company, the Series A, B, C, D, and E
convertible preferred stockholders are entitled to a liquidation preference per
share as shown above plus any undeclared but unpaid dividends, all in
preference to the holders of the common stock. Upon the completion of a
distribution, the holders of the common stock will receive any and all
remaining assets of the Company.
The holders of Series A, B, C, D and E convertible preferred stock have the
right, at any time after the date of issuance to convert each of their shares
into common shares at a pre-defined conversion ratio, initially set at a ratio
of 1:1. Convertible preferred stock is anti-dilutive for the Series C Warrants
and upon the earlier of i) August 2000, ii) sale or merger of the Company or
substantially all of the Company's assets, or iii) the closing of an initial
public offering of the Company's common stock. The holders of each share of
convertible preferred stock have the right to one vote for each share of common
stock into which the preferred stock can be converted.
Convertible preferred shares automatically convert into shares of common
stock at the conversion price in effect upon the earlier of the Company's sale
of its common stock in a public offering with cash proceeds to the Company of
at least $10,000,000 and an offering price of which is not less than $2.87 per
share or upon the agreement of the holders of a majority of the outstanding
shares of Series A, B, C, D and E convertible preferred stock, voting together
as a class.
In November 1998, in connection with the issuance of 343,000 shares of
Series D convertible preferred stock to the Company's executives, the Company
recognized a stock compensation expense of $178,000 for the difference between
the exercise price and the fair value of the convertible preferred stock.
Additionally, in May 1999, in connection with the issuance of 574,000 shares of
Series E convertible preferred stock to the Company's executives, the Company
recognized a stock compensation expense of $5,057,000 for the difference
between the exercise price and the fair value of the convertible preferred
stock.
Warrants
In connection with the issuance of Series B and Series C convertible
preferred stock in April and August 1997, the Company issued warrants to
purchase 1,500,000 shares of Series B convertible preferred stock at an
exercise price of $0.67 per share and 967,000 shares of Series C convertible
preferred stock at an exercise price of $1.33 per share, respectively. The
warrants are immediately exercisable and expire in April 2000.
In connection with the long-term debt agreements entered into in May 1997
and October 1998, the Company issued warrants to purchase 765,000 shares of
Series B convertible preferred stock at an exercise price of $0.67 per share
and 174,000 shares of Series D convertible preferred stock at an exercise price
of $1.43 per share. The Company imputed a value for the Series B and Series D
warrants using the Black Scholes valuation model of $338,000 and $163,000,
respectively, which amounts were recorded as a discount on the long-term debt.
These discounts are being amortized over the term of the long-term debt to
interest expense. The warrants are immediately exercisable and expire between
April and June 2000.
In connection with a long-term debt agreement entered into in April 1999,
the Company issued warrants to purchase 520,000 shares of Series D convertible
preferred stock at an exercise price of $1.43 per share and 233,000 shares of
Series E convertible preferred stock at an exercise price of $2.17 per share.
The warrants are immediately exercisable and expire in April 2006. The Company
may be required to issue additional warrants of Series D and Series E preferred
stock, respectively depending upon the type and amount of outstanding
F-13
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
borrowings under the agreement. In May 1999, the Company borrowed $10,000,000
for working capital purposes and issued warrants to purchase 213,000 shares of
Series D convertible preferred stock at an exercise price of $1.43 per share
and 90,000 shares of Series E convertible preferred stock at an exercise price
of $2.17 per share in connection with the borrowing. The Company imputed a
value for these warrants using the Black Scholes model of $8,811,000 which
amount was recorded as a discount on the long term debt, and is being amortized
over the term of the long-term debt to interest expense. The warrant described
above to acquire 174,000 shares of Series D convertible preferred stock which
was issued in October 1998 was canceled as part of this agreement.
In connection with a customer sales arrangement entered into in April 1999,
the Company issued warrants to purchase 300,000 shares of common stock at an
exercise price of $2.17 per share. The warrants are immediately exercisable and
expire in December 2004. The Company recorded a deferred charge of $2,350,000
reflecting the value of the warrants as determined using the Black Scholes
model. This asset is included in other assets in the accompanying consolidated
balance sheet and is being amortized over the term of the sales arrangement.
The Company recognized a charge of $78,000 for amortization of the deferred
long-term asset for the six months ended June 30, 1999 which is included in
stock compensation in the accompanying consolidated statement of operations.
Notes Receivable from Stockholders
Notes receivable from stockholders for common and convertible preferred
stock issued in 1997 and 1998 bear interest at interest rates ranging from
4.47% to 6.14% and are generally due four years after issuance. All notes
receivable are full recourse to the assets of the borrower.
Shares of Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Common stock reserved for:
Convertible preferred stock........................ 32,417 32,991
1997 stock option plan............................. 3,319 1,880
Convertible preferred stock warrants (as converted
into common stock)................................ 3,406 4,288
Common stock warrants.............................. -- 300
------ ------
39,142 39,459
====== ======
</TABLE>
4. Stock Plan
In July 1997, the Company established the 1997 Stock Plan (the 1997 Plan)
under which incentive stock options may be granted to employees, directors and
consultants of the Company to purchase up to 14,127,000 shares of common stock.
In October 1998 and April 1999, the Board of Directors of the Company increased
the number of shares authorized for issuance under the 1997 Plan to 15,027,000
and 18,477,000, respectively. Under the 1997 Plan, stock purchase rights may be
issued either alone, in addition to, or in tandem with other awards granted
under the 1997 Plan and/or cash awards made outside of the 1997 Plan.
Nonstatutory stock options (the NSO) and stock purchase rights may be granted
to employees and consultants, and incentive stock options (the ISO) may be
granted only to employees. In the case of an ISO that is granted to an employee
who, at the time of the grant of such option, owns stock representing more than
10% of the
F-14
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is Unaudited)
total combined voting power of all classes of stock of the Company, the per
share exercise price shall not be less than 110% of the fair market value per
share on the date of grant or, granted to any other employee, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant. In the case of a NSO that is granted to a person who, at the
time of the grant of such option, owns stock representing more than 10% of the
total combined voting power of all classes of stock of the Company, the per
share exercise price shall not be less than 110% of the fair value per share on
the date of grant or, granted to an executive of the Company, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant, or, granted to another person, the per share exercise price
shall not be less than 85% of the fair value per share on the date of grant.
For the period from inception (January 27, 1997) through December 31, 1997,
for the year ending December 31, 1998 and for the six months ending June 30,
1999, 120,000, 1,715,000 and 21,000 shares were repurchased under the 1997
Plan, respectively, at the original issuance price.
The 1997 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1997 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.
Options issued under the 1997 Plan are immediately exercisable and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter. At December 31, 1997 and 1998 and at June 30,
1999, the Company had 4,671,000, 7,146,000, and 10,443,000 outstanding common
shares which were subject to repurchase rights under the 1997 Plan,
respectively.
Option activity is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Outstanding Options
------------------------
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Options granted................................... 7,459 $ .08
Options exercised................................. (4,881) .07
Options canceled.................................. (450) .07
------ -----
Balance at December 31, 1997........................ 2,128 .10
Options granted................................... 6,876 .17
Options exercised................................. (6,827) .15
Options canceled.................................. (1,879) .11
------ -----
Balance at December 31, 1998........................ 298 .51
Options granted (unaudited)....................... 5,069 2.18
Options exercised (unaudited)..................... (4,889) 1.98
Options canceled (unaudited)...................... (18) 2.17
------ -----
Balance at June 30, 1999 (unaudited)................ 460 3.24
====== =====
</TABLE>
At December 31, 1997 and 1998, the weighted average remaining contractual
life of options outstanding is 9.62 and 9.82 years, respectively. At June 30,
1999, 1,426,000 shares were available for future option grants under the 1997
Plan.
F-15
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is Unaudited)
During the year ended December 31, 1998 and the six months ended June 30,
1999, the Company recorded deferred stock compensation of $2,799,000 and
$38,968,000, respectively, representing the difference between the exercise
price and the deemed fair value of the Company's common stock on the date such
stock options were granted. For the year ended December 31, 1998 and the six
months ended June 30, 1999, the company recorded amortization of deferred stock
compensation of $332,000 and $5,665,000, respectively. At December 31, 1998 and
June 30, 1999, the Company had $2,467,000 and $35,770,000, respectively, of
remaining unamortized deferred compensation. Such amount is included as a
reduction of stockholders' equity and is being amortized over the corresponding
period of each respective option.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of FAS 123. The fair value for each options granted was estimated
at the date of grant using the Black Scholes valuation model with the following
weighted-average assumptions: a risk-free interest rate of 5.50%, and 5.69%,
respectively for the period ended December 31, 1997 and the year ended December
31, 1998, no dividend yield and an exercisable life of 5 years for 1997 and
1998.
The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
January 27, 1997
(inception) to Year Ended
December 31, December 31,
1997 1998
---------------- ------------
<S> <C> <C>
Pro forma net loss........................... $(7,878) $(22,631)
======= ========
Pro forma basic and diluted net loss per
share....................................... $ (0.83) $ (1.34)
======= ========
</TABLE>
The weighted average grant-date fair value of options granted, which is the
value assigned to the options under FAS 123, was $0.02 and $0.04 for options
granted for the period ended December 31, 1997 and the year ended December 31,
1998, respectively.
The pro forma impact of options on the net loss for the period ended
December 31, 1997 and the year ended December 31, 1998 is not representative of
the effects on net income (loss) for future years, as future years will include
the effects of additional years of stock option grants.
F-16
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
5. Income Taxes
There has been no provision for U.S. federal, U.S. state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying consolidated statements of
operations is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
U.S. federal taxes:
At statutory rate.......................................... 34.0% 34.0%
State...................................................... 5.8 5.8
Valuation allowance........................................ (39.8) (39.8)
------ ------
Total........................................................ 0.0% 0.0%
====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards....................... $ 2,120 $ 8,157
Capitalized expenditures................................ 890 2,989
Research and development credits........................ 390 697
Accrued expenses........................................ -- 804
------- --------
Total deferred tax assets................................. 3,400 12,647
Valuation allowance....................................... (3,400) (12,647)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $3,400,000 and $9,247,000 during 1997 and
1998, respectively.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $20,392,000 which expire in
the years 2012 through 2018 and federal research and development tax credits of
approximately $394,000 which also expire in the years 2012 through 2018.
The Company also had net operating loss carryforwards for state income tax
purposes of approximately $20,392,000 expiring in 2005 and state research tax
credits of approximately $303,000 which carryforward indefinitely.
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
F-17
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
6. Long-Term Debt
In May 1997, the Company entered into a financing agreement with a financial
institution which provides for borrowings of up to $3,000,000 for working
capital purposes and up to $3,000,000 for the purchase of equipment.
Outstanding borrowings for working capital purposes bear interest at 4.60%,
mature in April 2000, and are secured by the general assets of the Company.
Outstanding borrowings for the purchase of equipment bear interest at 6.60%,
mature in April 2002, and are secured by the equipment purchased.
In October 1998, the Company entered into a financing agreement with the
same financial institution for borrowings of up to $5,000,000 for either
working capital purposes or for the purchase of equipment. Outstanding
borrowings bear interest at 7.50%, mature in December 1999, and are secured by
either the general assets of the Company or the equipment purchased depending
upon the type of borrowing.
In April 1999, the Company entered into a financing agreement with a group
of lenders led by the same financial institution for borrowings up to
$15,000,000 for working capital purposes and up to $10,000,000 for the purchase
of equipment. In addition, the Company canceled the October 1998 agreement and
transferred the amounts outstanding under this agreement to the new management.
Outstanding borrowings for working capital purposes bear interest at rates
ranging from 7.42% to 12.27%, mature in December 2001 and are secured by the
general assets of the Company. Outstanding borrowings for the purchase of
equipment bear interest at rates ranging from 8.05% to 8.46%, mature in various
dates ranging from June 2002 to January 2003, and are secured by the equipment
purchased.
At December 31, 1997 and 1998, the Company has outstanding debt balances,
including obligations under capital leases, in the amount of $5,109,000 and
$6,501,000 respectively, related to these financing agreements, net of
discounts of $262,000 and $286,000, respectively.
Future payments due on the long-term debt obligations, including obligations
under capital leases, are as follows as of December 31, 1998: 1999--$2,400,000;
2000--$2,456,000; 2001--$1,530,000; 2002--$401,000.
7. Lease Commitments
The Company leases certain facilities and equipment under noncancelable
operating and capital leases. Future minimum lease payments under operating and
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
Year ending December 31,
1999................................................... $ 407 $ 51
2000................................................... 438 44
2001................................................... 446 5
2002................................................... 460 5
2003 and thereafter.................................... 1,447 5
------ ----
Total minimum lease payments............................. $3,198 110
======
Less amount representing interest........................ 15
----
Present value of minimum lease payments.................. 95
Less current portion of obligations under capital
leases.................................................. 66
----
Obligations under capital leases, excluding current
portion................................................. $ 29
====
</TABLE>
F-18
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
Amounts outstanding under capital lease obligations are classified as long-
term debt in the accompanying consolidated balance sheets.
Rent expense for the period ended December 31, 1997 and the year ended
December 31, 1998, was $410,000 and $480,000, respectively.
8. Defined Contribution Plan
The Company has a defined contribution retirement plan qualified under
Section 401(k) of the Internal Revenue Code which covers substantially all
employees. Eligible employees may contribute amounts to the plan, via payroll
withholdings, subject to certain limitations. To date, the Company has not
matched contributions by plan participants.
9. Subsequent Events
Proposed Public Offering of Common Stock
On July 19, 1999, the Company's Board of Directors authorized the Company to
proceed with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock.
Convertible Note Financing
On July 21, 1999, the Company entered into three separate subordinated
convertible promissory note agreements ("notes") for a total of $30 million.
These notes i) bear interest at 10%, ii) have interest and principal due on the
earlier of September 28, 2000, the receipt of $30 million of proceeds from new
debt or equity financings or the closing of a debt or equity facility of not
less than $30 million, iii) have principal that is automatically convertible
into the Company's common stock upon the closing of an initial public offering
on or before June 30, 2000 at 70% of the public offering price or, at the
option of the holder and subject to an independent appraisal, the notes
principal and interest can be converted into the Company's common stock at 70%
of the appraised value. In connection with these notes, the Company will record
a $12.9 million discount on the notes in the third quarter of fiscal 1999. This
discount will be amortized to interest expense over fifteen months. Should the
Company complete an initial public offering on or before June 30, 2000, any
remaining unamortized discount on the notes will be immediately amortized to
interest expense.
1999 Employee Stock Purchase Plan
In July, 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Employee Stock Purchase Plan. The plan becomes
effective upon the completion of the Company's initial public offering of its
common stock. A total of 500,000 shares of common stock have been reserved for
issuance under the plan, plus an automatic annual increase on the first day of
each of the Company's fiscal years from 2000 through 2005 equal to the lesser
of: i) 500,000 shares, ii) one percent of the Company's outstanding common
stock on the last day of the preceding fiscal year, or iii) a lesser number of
shares as determined by the Company's Board of Directors. Under the plan,
eligible employees may purchase common stock through payroll deductions, which
in any event may not exceed 10% of an employee's compensation, at a price equal
to the lower of 85% of the fair market value of the common stock at the
beginning of each offering period or at the end of each purchase period. The
overlapping offering periods will last for a duration of
F-19
<PAGE>
CERENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited)
twenty-four months. The initial offering period will begin on the closing of
the Company's initial public offering and end on April 30, 2000.
1999 Directors' Stock Option Plan
In July 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Directors' Stock Option Plan. A total of 500,000
shares of common stock have been reserved for issuance under the plan. Under
the plan, each person who becomes a non-employee director after the effective
date of the Company's initial public offering will receive an automatic initial
grant of an option to purchase 20,000 shares of common stock, that immediately
vest, on appointment or election to the Board of Directors and all non-employee
directors will receive an additional grant, that immediately vest, to purchase
10,000 shares of common stock on the date of each annual meeting provided the
Director has served in this capacity for the previous six month period.
1999 Stock Plan
The 1999 Stock Plan was adopted by the Board of Directors in July 1999 and
will be submitted for approval by our stockholders prior to the completion of
this offering. A total of 5,000,000 shares of common stock have been reserved
for issuance under the 1999 Stock Plan, all of which remain available for
future option grants. In addition, the number of shares reserved under the plan
will automatically be increased on the first day of each of our fiscal years in
2000, 2001, 2002, 2003 and 2004 by an amount equal to the lesser of (a)
15,000,000 shares, (b) six percent of the shares outstanding on the last day of
the preceding fiscal year or (c) a lesser number of shares as is determined by
the Board of Directors. The Plan's terms are similar to the 1997 Stock Option
Plan.
F-20
<PAGE>
[LOGO]
<PAGE>
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 Cerent in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee............................................. $27,800.00
NASD filing fee.................................................. 10,563.00
Nasdaq National Market listing fee............................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky qualification fees and expenses......................... *
Transfer Agent and Registrar fees................................ *
Miscellaneous fees and expenses.................................. *
----------
Total.......................................................... *
</TABLE>
---------------------
* To be filed by amendment
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, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article XIII of
Cerent's certificate of incorporation and sections 6.1 and 6.2 of Article VI of
Cerent's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Cerent has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Cerent, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. The underwriting agreement (Exhibit 1.1 hereto)
also provides for cross indemnification among Cerent and the underwriters with
respect to certain matters, including matters arising under the 1933 Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in January 1997, Cerent has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:
(1) In March 1997, registrant issued and sold 8,073,000 shares of common
stock to 28 purchases for a total offering price of $2,691.
(2) In March 1997, registrant issued and sold shares of Series A
preferred stock convertible into a total of 1,800,000 shares of common
stock to one purchaser for an offering price of $60,000.
(3) In April 1997, registrant issued and sold 13,333,332 shares of
common stock to a total of 2 investors for an aggregate purchase price of
$888,889, including the cancellation of indebtedness in the amount of
$400,000. Registrant also issued and sold shares of Series B preferred
stock convertible into a total of 3,166,668 shares of common stock to a
total of five investors for an aggregate purchase price of $2,111,112.
Registrant also issued warrants to purchase shares of Series B preferred
stock convertible into 1,500,000 shares of common stock to two investors
for a total purchase price of $500 in connection with the preferred stock
financing.
II-1
<PAGE>
(4) In May and June of 1997, registrant issued warrants to purchase
shares of Series B preferred stock convertible into a total of 765,000
shares of common stock in connection with a credit line.
(5) In August 1997, registrant issued and sold shares of Series C
preferred stock convertible into a total of 6,450,000 shares of common
stock to a total of 14 investors for an aggregate purchase price of
$8,600,000. Registrant also issued warrants to purchase shares of Series C
preferred stock convertible into 967,500 shares of common stock to 14
investors for a total purchase price of $322.50 in connection with the
preferred stock financing.
(6) In July 1998, registrant issued and sold shares of Series D
preferred stock convertible into a total of 8,822,091 shares of common
stock to a total of seven investors for an aggregate purchase price of
$12,644,997.10. In November 1998, registrant issued and sold shares of
Series D preferred stock convertible into a total of 342,960 shares of
common stock to two investors for a total purchase price of $491,576.
(7) In November 1998, registrant issued and sold shares of Series E
preferred stock convertible into a total of 11,715,444 shares of common
stock to a total of ten investors for a total purchase price of
$25,383,462. In May 1999, registrant issued and sold shares of Series E
preferred stock convertible into a total of 573,528 shares of common stock
to one investor for a total purchase price of $1,242,644, which price was
paid for by the issuance of a promissory note.
(8) In April 1999, registrant issued warrants to purchase shares of
Series D preferred stock convertible into a total of up to 1,010,241 shares
of common stock and warrants to purchase shares of Series E preferred stock
convertible into a total of up to 439,377 shares of common stock in
connection with an equipment lease and working capital credit line,
including the transfer of a warrant to purchase shares of Series D
preferred stock convertible into 174,000 shares of common stock issued in
connection with a credit line in October 1998. As of June 30, 1999,
registrant has drawn down $15,000,000 under this credit facility and has
issued warrants to purchase shares of Series D preferred stock convertible
into 733,410 shares of common stock and warrants to purchase shares of
Series E preferred stock convertible into 322,506 shares of common stock.
(9) In April 1999, registrant issued a warrant to purchase 300,000
shares of common stock in connection with a corporate partnership
agreement.
(10) In July 1999, registrant issued and sold convertible promissory
notes in the total principal amount of $30,000,000 convertible into shares
of common stock.
(11) From September 1997 to June 30, 1999, registrant issued 16,590,788
shares of common stock in connection with option exercises.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(10) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Item 15(a)(11) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition, such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. 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 where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about Cerent.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Cerent.
3.2 Form of Amended and Restated Certificate of Incorporation of Cerent, to
be filed and effective upon completion of this offering.
3.3 Bylaws of Cerent, as amended.
3.4 Proposed Bylaws of Cerent.
4.1* Form of Cerent's common stock certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 1997 Stock Plan, as amended.
10.2 1999 Stock Plan.
10.3 1999 Employee Stock Purchase Plan.
10.4 1999 Directors' Stock Option Plan.
10.5 Form of Indemnification Agreement between Cerent and each of its
officers and directors.
10.6 Amended and Restated Investors' Rights Agreement dated July 20, 1999.
10.7 Promissory Note and Security Agreement dated May 7, 1999, executed by
Carl Russo in connection with a loan from Cerent in connection with
purchase of Series E preferred stock.
10.8 Form of Promissory Note and Pledge and Security Agreement issued by
employees in connection with the exercise of options to purchase common
stock.
10.9 Promissory Note and Pledge and Security Agreement dated July 8, 1998,
executed by Carl Russo in connection with a loan from Cerent in
connection with the exercise of options to purchase common stock.
10.10* Offer Letter dated November 20, 1996, between Cerent and Ajaib Bhadare.
10.11* Offer Letter dated June 23, 1997, between Cerent and Terry Brown.
10.12* Offer Letter dated July 2, 1997, between Cerent and Tom Corker.
10.13 Full Service Lease dated April 22, 1998, between Cerent and G &
W/Copley Redwood Business Park, L.P. for offices at 1450 N. McDowell
Blvd., Petaluma, CA 94954, together with Amendment No. 1 dated January
21, 1999.
10.14 Net Lease dated March 30, 1999, between Cerent and G & W/Copley Redwood
Business Park, L.P. for offices at 1455 N. McDowell Blvd., Petaluma, CA
94954
10.15 Standard Sublease dated June 30, 1999, between Cerent and Advanced
Fibre Communications, Inc. for offices at 1440 N. McDowell Blvd.,
Petaluma, CA 94954.
10.16+ Purchase Agreement dated April 23, 1999, between Cerent and Williams
Communications, Inc., together with the Amendment dated as of April 28,
1999 and the form of Warrant to Purchase Common Stock.
10.17+ Manufacturing Agreement dated April 1, 1999, between Cerent and P.C.B.
Assembly, Inc.
10.18+ Custom Product Development and Production Agreement dated November 10,
1997, between Cerent and Hamilton Hallmark.
10.19+ Agreement dated May 19, 1999, between Cerent and Kawasaki LSI U.S.A.
Inc., together with the Nondisclosure Agreement dated July 10, 1998.
10.20 Offer Letter dated May 15, 1998, between Cerent and Carl Russo,
together with Amendment No. 1 dated July 22, 1999.
10.21* Offer Letter dated October 8, 1998, between Cerent and Richard Roney.
10.22* Offer Letter dated July 1, 1999, between Cerent and Michael Ashby.
16.1 Change in Independent Accountants.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
27.1 Financial Data Schedule for the six-month periods ended June 30, 1998 and
1999 (EDGAR-filed version only).
27.2 Financial Data Schedule for the period ended December 31, 1997 and the
year ended December 31, 1998 (EDGAR-filed version only).
</TABLE>
- ---------------------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
(b) Financial Statement Schedules
Item 17. Undertakings
The undersigned 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
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, 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 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, 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 whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 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 this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Petaluma, State of California, on July 22, 1999.
Cerent Corporation
/s/ Carl Russo
By: _________________________________
Carl Russo
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl Russo and Michael Ashby, and each one of
them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. This Power of Attorney may be signed in
several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Carl Russo President, Chief Executive July 22, 1999
______________________________________ Officer and Director
Carl Russo (Principal Executive
Officer)
/s/ Michael Ashby Chief Financial Officer July 22, 1999
______________________________________ (Principal Financial and
Michael Ashby Accounting Officer)
/s/ Vinod Khosla Chairman of the Board of July 22, 1999
______________________________________ Directors
Vinod Khosla
/s/ Kevin Compton Director July 22, 1999
______________________________________
Kevin Compton
/s/ Donald Green Director July 22, 1999
______________________________________
Donald Green
/s/ Promod Haque Director July 22, 1999
______________________________________
Promod Haque
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Name
------- ------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Cerent.
3.2 Form of Amended and Restated Certificate of Incorporation of Cerent,
to be filed and effective upon completion of this offering.
3.3 Bylaws of Cerent, as amended.
3.4 Proposed Bylaws of Cerent.
4.1* Form of Cerent's common stock certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 1997 Stock Plan, as amended.
10.2 1999 Stock Plan.
10.3 1999 Employee Stock Purchase Plan.
10.4 1999 Directors' Stock Option Plan.
10.5 Form of Indemnification Agreement between Cerent and each of its
officers and directors.
10.6 Amended and Restated Investors' Rights Agreement dated July 20, 1999.
10.7 Promissory Note and Security Agreement dated May 7, 1999, executed by
Carl Russo in connection with a loan from Cerent in connection with
purchase of Series E preferred stock.
10.8 Form of Promissory Note and Pledge and Security Agreement issued by
employees in connection with the exercise of options to purchase
common stock.
10.9 Promissory Note and Pledge and Security Agreement dated July 8, 1998,
executed by Carl Russo in connection with a loan from Cerent in
connection with the exercise of options to purchase common stock.
10.10* Offer Letter dated November 20, 1996, between Cerent and Ajaib
Bhadare.
10.11* Offer Letter dated June 23, 1997, between Cerent and Terry Brown.
10.12* Offer Letter dated July 2, 1997, between Cerent and Tom Corker.
10.13 Full Service Lease dated April 22, 1998, between Cerent and G &
W/Copley Redwood Business Park, L.P. for offices at 1450 N. McDowell
Blvd., Petaluma, CA 94954, together with Amendment No. 1 dated January
21, 1999.
10.14 Net Lease dated March 30, 1999, between Cerent and G & W/Copley
Redwood Business Park, L.P. for offices at 1455 N. McDowell Blvd.,
Petaluma, CA 94954
10.15 Standard Sublease dated June 30, 1999, between Cerent and Advanced
Fibre Communications, Inc. for offices at 1440 N. McDowell Blvd.,
Petaluma, CA 94954.
10.16+ Purchase Agreement dated April 23, 1999, between Cerent and Williams
Communications, Inc., together with the Amendment dated as of April
28, 1999 and the form of Warrant to Purchase Common Stock.
10.17+ Manufacturing Agreement dated April 1, 1999, between Cerent and P.C.B.
Assembly, Inc.
10.18+ Custom Product Development and Production Agreement dated November 10,
1997, between Cerent and Hamilton Hallmark.
10.19+ Agreement dated May 19, 1999, between Cerent and Kawasaki LSI U.S.A.
Inc., together with the Nondisclosure Agreement dated July 10, 1998.
10.20 Offer Letter dated May 15, 1998, between Cerent and Carl Russo,
together with Amendment No. 1 dated July 22, 1999.
10.21* Offer Letter dated October 8, 1998, between Cerent and Richard Roney.
10.22* Offer Letter dated July 1, 1999, between Cerent and Michael Ashby.
16.1 Change in Independent Accountants.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule for the six-month periods ended June 30, 1998
and 1999 (EDGAR-filed version only).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Name
------- ------------
<C> <S>
27.2 Financial Data Schedule for the period ended December 31, 1997 and the
year ended December 31, 1998 (EDGAR-filed version only).
</TABLE>
- ---------------------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.1
[_____________]
CERENT CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
_________, 1999
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Warburg Dillon Read LLC
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Cerent Corporation, a Delaware corporation ("Company"),
proposes to issue and sell [_______________] shares ("Firm Securities") of its
Common Stock ("Securities") and also proposes to issue and sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
[______________] additional shares ("Optional Securities") of its Securities as
set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". As part of the offering
contemplated by this Agreement, [Credit Suisse First Boston Corporation] (the
"Designated Underwriter") has agreed to reserve out of the Firm Securities
purchased by it under this Agreement, up to shares,
for sale to the Company's directors, officers, employees and other parties
associated with the Company (collectively, "Participants"), as set forth in the
Prospectus (as defined herein) under the heading "Underwriters" (the "Directed
Share Program"). The Firm Securities to be sold by the Designated Underwriter
pursuant to the Directed Share Program (the "Directed Shares") will be sold by
the Designated Underwriter pursuant to this Agreement at the public offering
price. Any Directed Shares not orally confirmed for purchase by a Participant by
the end of the business day on which this Agreement is executed will be offered
to the public by the Underwriters as set forth in the Prospectus. The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-[______]) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial
registration statement") has been declared effective, either (i) an
additional registration statement ("additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
become effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional
registration statement or (ii) such an additional registration statement is
proposed to be filed with the Commission pursuant
<PAGE>
to Rule 462(b) and will become effective upon filing pursuant to such Rule
and upon such filing the Offered Securities will all have been duly
registered under the Act pursuant to the initial registration statement and
such additional registration statement. If the Company does not propose to
amend the initial registration statement or if an additional registration
statement has been filed and the Company does not propose to amend it, and
if any post-effective amendment to either such registration statement has
been filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (i) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (ii) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration Statement".
The form of prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
424(b)") under the Act or (if no such filing is required) as included in a
Registration Statement, is hereinafter referred to as the "Prospectus". No
document has been or will be prepared or distributed in reliance on Rule
434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
rules and regulations of the Commission ("Rules and Regulations") and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will
-2-
<PAGE>
conform, in all respects to the requirements of the Act and the Rules and
Regulations and did not include, or will not include, any untrue statement
of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) on the date of this Agreement,
the Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such
filing is required) at the Effective Date of the Additional Registration
Statement in which the Prospectus is included, each Registration Statement
and the Prospectus will conform, in all respects to the requirements of the
Act and the Rules and Regulations, and neither of such documents includes,
or will include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. If the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery
of this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement of
a material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification and the failure to be
so qualified would have a material adverse effect on the condition
(financial or other), business, capitalization, properties or results of
operations of the Company and its subsidiaries, taken as a whole ("Material
Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification and the failure to be so qualified would have a material
adverse effect on the Company and its subsidiaries, taken as a whole; all
of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and, when the Offered Securities have
been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined below), such Offered Securities will have been,
validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus; and the stockholders of
the Company have no preemptive rights with respect to the Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against
-3-
<PAGE>
the Company or any Underwriter for a brokerage commission, finder's fee or
other like payment in connection with this offering.
(g) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under the
Act which have not been validly waived.
(h) The Offered Securities have been approved for listing on the
Nasdaq Stock Market's National Market, subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required to be made or
obtained by the Company for the consummation of the transactions
contemplated by this Agreement in connection with the issuance and sale of
the Offered Securities by the Company, except such as have been obtained
and made under the Act and such as may be required under state securities
laws.
(j) The execution, delivery and performance of this Agreement, and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any agreement or instrument to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is subject, or
the charter or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered by
the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(m) The Company and its subsidiaries possess all material
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by them
and have not received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently
employed by them,
-4-
<PAGE>
and have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property rights
that, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, to the Company's knowledge,
neither the Company nor any of its subsidiaries is in violation of any
statute, any rule, regulation, decision or order of any governmental agency
or body or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any real
property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or contamination
pursuant to any environmental laws, or is subject to any claim relating to
any environmental laws, which violation, contamination, liability or claim
would individually or in the aggregate have a Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to
such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against, or to the Company's knowledge,
affecting the Company, any of its subsidiaries or any of their respective
properties that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect, or would materially and adversely affect the ability of the
Company to perform its obligations under this Agreement, or which are
otherwise material in the context of the sale of the Offered Securities;
and no such actions, suits or proceedings are threatened or, to the
Company's knowledge, contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis,
and the schedules included in each Registration Statement present fairly
the information required to be stated therein; and the assumptions used in
preparing the pro forma financial statements included in each Registration
Statement and the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(u) The Company has reviewed its operations and those any third
parties with which the Company has a material relationship to evaluate the
extent to which the business or operations of the Company will be affected
by the Year 2000 Problem. As a result of such review, the Company has no
reason to believe, and does not believe, that the Year 2000 Problem will
have a
-5-
<PAGE>
Material Adverse Effect. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission
or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January 1, 2000.
(v) Furthermore, the Company represents and warrants to the
Underwriters that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations or foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with
the Directed Share Program, and that (ii) no authorization, approval,
consent, license, order, registration or qualification of or with any
government, governmental instrumentality or court, other than such as have
been obtained, is necessary under the securities law and regulations of
foreign jurisdictions in which the Directed Shares are offered outside the
United States.
(w) The Company has not offered, or caused the Underwriters to offer,
any offered Securities to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $[______] per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn
to the order of the Company at the office of Venture Law Group at 9:30 A.M., New
York time, on [_______], 1999, or at such other time not later than seven full
business days thereafter as CSFBC and the Company determine, such time being
herein referred to as the "First Closing Date". For purposes of Rule 15c6-1
under the Securities Exchange Act of 1934, the First Closing Date (if later than
the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered Securities sold
pursuant to the offering. The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the above office of Venture Law Group at least 24 hours prior to
the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously
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<PAGE>
have been, or simultaneously are, sold and delivered. The right to purchase the
Optional Securities or any portion thereof may be exercised from time to time
and to the extent not previously exercised may be surrendered and terminated at
any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the above office of Venture Law Group. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the above
office of Venture Law Group at a reasonable time in advance of such Optional
Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) or (2) (as consented to by CSFBC) of Rule 424(b) not later
than the second business day following the execution and delivery of this
Agreement) (or, if applicable and if consented to by CSFBC, subparagraph
(4) or (5)).
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed
or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent (which
consent shall not be unreasonably withheld); and the Company will also
advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of any
stop order proceedings in respect of a Registration Statement and will use
its best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements
-7-
<PAGE>
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to
comply with the Act, the Company will promptly notify CSFBC of such event
and will promptly prepare and file with the Commission, at its own expense,
an amendment or supplement which will correct such statement or omission or
an amendment which will effect such compliance. Neither CSFBC's consent to,
nor the Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other information concerning
the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale for the
filing fee incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. of the Offered Securities, for any
travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings
with prospective purchasers of the Offered Securities and for expenses
incurred in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of,
-8-
<PAGE>
directly or indirectly, or file with the Commission a registration
statement under the Act relating to, any additional shares of its
Securities or securities convertible into or exchangeable or exercisable
for any shares of its Securities, or publicly disclose the intention to
make any such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC, except issuances of Securities pursuant to the
conversion or exchange of convertible or exchangeable securities or the
exercise of warrants or options, in each case outstanding on the date
hereof, grants of employee stock options or restricted stock pursuant to
the terms of a plan in effect on the date hereof, issuances of Securities
pursuant to the exercise of such options.
(j) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the
NASD rules from the sale, transfer, assignment, pledge or hypothecation for
a period of three months following the date of the effectiveness of the
Registration Statement. The Designated Underwriter will notify the Company
as to which Participants will need to be so restricted. The Company will
direct the transfer agent to place stop transfer restrictions upon such
securities for such period of time.
(k) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Shares Program
and stamp duties, similar taxes or duties or other taxes, if any, incurred
by the underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with the Underwriters that the
Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Ernst & Young LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating to the effect that:
(i) in their opinion the financial statements and schedules examined
by them and included in the Registration Statements comply as to form
in all material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements included in the Registration Statements;
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(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements and summary of earnings
included in the Registration Statements do not comply as to form
in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to such
unaudited financial statements and summary of earnings for them
to be in conformity with generally accepted accounting
principles;
(B) the unaudited consolidated net sales, net operating income,
net income and net income per share amounts for the 3-month
periods ended [June 30, 1998, September 30, 1998, December 31,
1998, March 31, 1999 and June 30, 1999] included in the
Prospectus do not agree with the amounts set forth in the
unaudited consolidated financial statements for those same
periods or were not determined on a basis substantially
consistent with that of the corresponding amounts in the audited
statements of income;
(C) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than
three business days prior to the date of such letter, there was
any change in the capital stock or any increase in short-term
indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any decrease in
consolidated net current assets or net assets, as compared with
amounts shown on the latest balance sheet included in the
Prospectus; or
(D) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the
latest available income statement read by such accountants there
were any decreases, as compared with the corresponding period of
the previous year and with the period of corresponding length
ended the date of the latest income statement included in the
Prospectus, in consolidated net sales, net operating income or
the total or per share amounts of consolidated net income,
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery
of this Agreement, "Registration
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<PAGE>
Statements" shall mean the initial registration statement as proposed to be
amended by the amendment or post-effective amendment to be filed shortly
prior to its Effective Time, (ii) if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "Registration Statements" shall
mean the Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the post-
effective amendment to be filed shortly prior to its Effective Time, and
(iii) "Prospectus" shall mean the prospectus included in the Registration
Statements.
The Company shall have received from (and furnished to the
Representatives an examination report with respect to Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company for fiscal years ending December 31, 1997 and December 31, 1998
and review report with respect to Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company for the six
month period ending June 30, 1999 and the corresponding period for the
prior fiscal year, each in accordance with Statement on Standards for
Attestation Engagement No. 8 issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants, and such examination
report shall be included in the Registration Statement.
If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by
CSFBC. If the Effective Time of the Additional Registration Statement (if
any) is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus
is printed and distributed to any Underwriter, or shall have occurred at
such later date as shall have been consented to by CSFBC. If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 5(a) of
this Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated by
the Commission.
(b) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its
subsidiaries taken as one enterprise which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the
New York Stock Exchange, or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal authorities; or (v) any outbreak or
escalation of major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority in
interest of the Underwriters including the Representatives, the effect of
any such outbreak, escalation, declaration, calamity or emergency makes it
impractical or
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<PAGE>
inadvisable to proceed with completion of the public offering or the sale
of and payment for the Offered Securities.
(c) The Representatives shall have received an opinion, dated such
Closing Date, of Venture Law Group, a Professional Corporation, counsel for
the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification and the
failure to be so qualified would have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(ii) Each subsidiary of the Company has been duly incorporated
and is existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own its properties and conduct its business as described
in the Prospectus; and each subsidiary is duly qualified to do
business as a foreign corporation in good standing in all of the
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification and failure to be
so qualified would have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(iii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive
rights with respect to the Securities;
(iv) All of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully-paid and assessable and are owned directly by the
Company, free and clear of all liens, encumbrances, equities of
claims;
(v) There are no contracts, agreements or understandings known
to such counsel between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company
owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the Act
which have not been validly waived;
(vi) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(vii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
made or obtained by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the
issuance or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be
required under state securities laws;
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<PAGE>
(viii) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result in
a material breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court having
jurisdiction over the Company or any subsidiary of the Company or any
of their properties, or any agreement or instrument known to counsel
to which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement;
(ix) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate in all material respects
and fairly present in all material respects the information required
to be shown; and such counsel do not know of any legal or governmental
proceedings required to be described in a Registration Statement or
the Prospectus which are not described as required or of any contracts
or documents of a character required to be described in a Registration
Statement or the Prospectus or to be filed as exhibits to a
Registration Statement which are not described and filed as required;
it being understood that such counsel need express no opinion as to
the financial statements or other financial data contained in the
Registration Statements or the Prospectus; and
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(d) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel for the Underwriters,
such opinion or opinions, dated such Closing Date, with respect to the
incorporation of the Company, the validity of the Offered Securities
delivered on such Closing Date, the Registration Statements, the Prospectus
and other related matters as the Representatives may require, and the
Company shall have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass upon such
matters.
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<PAGE>
(e) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by
the Commission; the Additional Registration Statement (if any) satisfying
the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing fee in
accordance with Rule 111(a) or (b) under the Act, prior to the time the
Prospectus was printed and distributed to any Underwriter; and, subsequent
to the date of the most recent financial statements in the Prospectus,
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(f) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and offi cers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below and provided, further,
that with respect to any untrue statement or alleged untrue statement in or
omission or alleged omission from any preliminary prospectus the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase and any loss,
claim, damage or liability of such Underwriter results from the fact that there
was not sent or given to such person, at or prior to the written confirmation of
the sale of such Offered Securities to such person, a copy of the Prospectus if
the Company had previously furnished copies thereof to such Underwriter.
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<PAGE>
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "Designated Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any who
controls the Company within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting" and the information contained in the
sixth and tenth paragraphs under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. Notwithstanding anything contained herein to
the contrary, if indemnity may be sought pursuant to the last paragraph of
Section 7(a) hereof in respect of such action or proceeding, then in addition to
such separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for the Designated Underwriter for the
defense of any losses, claims, damages and liabilities arising out of the
Directed Share Program, and all persons, if any, who control the Designed
Underwriter within the meaning of either Section 15 of the Act of Section 20 of
the Exchange Act. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action in respect of which any
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indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other from the offering
of the Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are
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not made within 36 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company,
except as provided in Section 9 (provided that if such default occurs with
respect to Optional Securities after the First Closing Date, this Agreement will
not terminate as to the Firm Securities or any Optional Securities purchased
prior to such termination). As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section. Nothing
herein will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 1450 North McDowell Boulevard,
Petaluma, CA 94954, Attention: Michael Ashby; provided, however, that any notice
to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
-17-
<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
CERENT CORPORATION.
By...................................
Name: Carl Russo
Title: President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Warburg Dillon Read LLC
Acting on behalf of themselves and as the Representatives of the several
Underwriters
By Credit Suisse First Boston Corporation
By....................................
Name: Bill Brady
Title: Managing Director
-18-
<PAGE>
SCHEDULE A
Number of
Underwriter Firm Securities
----------- ---------------
Credit Suisse First Boston Corporation..............
BancBoston Robertson Stephens Inc...................
Dain Rauscher Wessels...............................
Warburg Dillon Read LLC.............................
---------------
Total..........................................
===============
-19-
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CERENT CORPORATION
The undersigned, Carl Russo and Joshua L. Green, hereby certify that:
1. They are the duly elected and acting President and Chief Executive
Officer and Secretary, respectively, of Cerent Corporation, a Delaware
corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on January 27, 1997, under the
name of Fiberlane Communications, Inc.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
"ARTICLE I
The name of the corporation is Cerent Corporation (the "Corporation").
-----------
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware, 19805, County of New Castle. The
name of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
Upon the effective date of the filing of this Amended and Restated
Certificate of Incorporation, each one share of this Corporation's outstanding
Common Stock and each one share of this Corporation's outstanding Preferred
Stock shall be converted and reconstituted into three shares of the like class
and series of the Corporation's capital stock from which such share was
converted (the "Stock Split"). All share amounts and amounts per share set
-----------
forth in this Amended and Restated Certificate of Incorporation have been
appropriately adjusted to reflect the Stock Split. Unless otherwise provided
herein, no further adjustment of any Dividend
<PAGE>
Preference, Liquidation Preference or Conversion Price pursuant to this Article
IV shall be made as a result of the Stock Split.
ARTICLE V
(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is One
Hundred Eighty-Seven Million Seven Hundred Nine Thousand Eighty-Eight
(187,709,088) shares, each with a par value of $0.00033 per share. One Hundred
Fifty Million (150,000,000) shares shall be Common Stock and Thirty-Seven
Million Seven Hundred Nine Thousand Eighty-Eight (37,709,088) shares shall be
Preferred Stock.
(B) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by this Restated Certificate of Incorporation may be issued
from time to time in one or more series. The first series of Preferred Stock
shall be designated "Series A Preferred Stock" and shall consist of One Million
------------------------
Eight Hundred Thousand (1,800,000) shares. The second series of Preferred Stock
shall be designated "Series B Preferred Stock" and shall consist of Five Million
------------------------
Five Hundred Fifty-One Thousand Six Hundred Sixty-Eight (5,551,668) shares. The
third series of Preferred Stock shall be designated "Series C Preferred Stock"
------------------------
and shall consist of Seven Million Four Hundred Seventeen Thousand Five Hundred
(7,417,500) shares. The fourth series of Preferred Stock shall be designated
"Series D Preferred Stock" and shall consist of Ten Million Two Hundred Eleven
- -------------------------
Thousand Five Hundred Seventy One (10,211,571) shares. The fifth series of
Preferred Stock shall be designated "Series E Preferred Stock" and shall consist
------------------------
of Twelve Million Seven Hundred Twenty-Eight Thousand Three Hundred Forty-Nine
(12,728,349) shares. The rights, preferences, privileges, and restrictions
granted to and imposed on the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock and Series E
Preferred Stock are as set forth below in this Article IV(B).
1. Dividend Provisions. Subject to the rights of series of Preferred
-------------------
Stock which may from time to time come into existence, the holders of shares of
Series E Preferred Stock, Series D Preferred Stock, Series C Preferred Stock and
Series B 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 the Corporation) on the
Series A Preferred Stock and the Common Stock of the Corporation, at the rate of
$0.2167 per share (as adjusted for stock splits, stock dividends
recapitalization and the like) per annum on each outstanding share of Series E
Preferred Stock, $0.1433 per share (as adjusted for stock splits, stock
dividends recapitalization and the like) per annum on each outstanding share of
Series D Preferred Stock, $0.1333 per share (as adjusted for stock splits, stock
dividends, recapitalizations and the like) per annum on each outstanding share
of Series C Preferred Stock, and $0.0667 per share (as adjusted for stock
splits, stock dividends, recapitalizations and the like) per annum on each
outstanding share of Series B Preferred Stock. Provided dividends have been
paid on or declared and set
-2-
<PAGE>
apart on all shares of Series E Preferred Stock, Series D Preferred Stock,
Series C Preferred Stock and Series B Preferred Stock at such annual rates, the
holders of Series A Preferred Stock shall be entitled to receive dividends, out
of any assets legally available therefore, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation) on the Common Stock of the Corporation, at the rate of $0.0033 per
share (as adjusted for stock splits, stock dividends, recapitalizations and the
like) per annum on each outstanding share of Series A Preferred Stock. Dividends
may be declared and paid upon shares of Common Stock in any fiscal year of the
Corporation only if dividends shall have been paid on or declared and set apart
upon all shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, at each
respective annual rate, and if such further dividends are paid to all
stockholders of the Corporation on a pro rata basis. All dividends shall be
payable only when, as and if declared by the Board of Directors and shall not be
cumulative.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up
of the 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 the Series E Preferred Stock, the Series D Preferred Stock, the
Series C Preferred Stock, and the Series B Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Series A Preferred Stock and Common Stock by
reason of their ownership thereof, an amount per share equal to $2.1667 per
share (as adjusted for stock splits, stock dividends, recapitalization and the
like) for each share of Series E Preferred Stock then held by them, plus
declared but unpaid dividends, $1.4333 per share (as adjusted for stock splits,
stock dividends, recapitalization and the like) for each share of Series D
Preferred Stock then held by them, plus declared but unpaid dividends, $1.3333
per share (as adjusted for stock splits, stock dividends, recapitalizations and
the like) for each share of Series C Preferred Stock then held by them, plus
declared but unpaid dividends, and $0.6667 per share (as adjusted for stock
splits, stock dividends, recapitalizations and the like) for each share of
Series B Preferred Stock then held by them, plus declared but unpaid dividends.
If, upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Series E Preferred Stock, Series D Preferred Stock,
Series C Preferred Stock and Series B 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 the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series E Preferred Stock, Series D Preferred Stock, the Series C Preferred Stock
and Series B Preferred Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive.
(b) Upon the completion of the distribution required by Section
2(a) above, if assets remain in the Corporation, the holders of the Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of the Corporation to the holders of Common
Stock by reason of their ownership thereof, an amount
-3-
<PAGE>
per share equal to $0.0333 per share (as adjusted for stock splits, stock
dividends, recapitalizations and the like) for each share of Series A Preferred
Stock then held by them, plus declared but unpaid dividends. If, upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A 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 the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series A Preferred Stock, in proportion to the preferential amount each such
holder is otherwise entitled to receive.
(c) Upon the completion of the distribution required by Section 2(a)
and the distribution required by Section 2(b) above and any other distribution
that may be required with respect to any series of Preferred Stock that may from
time to time come into existence, if assets remain in the Corporation, the
holders of the Common Stock of the Corporation shall receive all of the
remaining assets of the Corporation.
(d) For purposes of this Section 2, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, or to
include, (i) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation, but excluding any
merger effected exclusively for the purpose of changing the domicile of the
Corporation); or (ii) a sale of all or substantially all of the assets of the
Corporation, unless the Corporation's stockholders of record as constituted
------
immediately prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration for the
Corporation's acquisition or sale or otherwise) hold greater than 50% of the
voting power of the surviving or acquiring entity in approximately the same
relative percentages after such acquisition or sale as before such acquisition
or sale.
(e) In any of the events specified in (d) above, if the consideration
received by the Corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
(A) If traded on a securities exchange or the Nasdaq
National Market System, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Corporation and the
holders of at least a majority of the voting power of all then outstanding
shares of Preferred Stock.
-4-
<PAGE>
(ii) 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 (i) (A), (B) or (C) to reflect the approximate fair
market value thereof, as mutually determined by the Corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
Preferred Stock.
(iii) In the event the requirements of Sections 2(d) or 2(e) are not
complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until such time as the
requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E 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 Section 2(e)(iv) hereof.
(iv) The Corporation shall give each holder of record of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E 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 the 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 the Corporation has given
the first notice provided for herein or sooner than ten (10) days after the
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 Preferred Stock is not redeemable.
----------
4. Conversion. The holders of the Series A Preferred Stock, Series B
----------
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, shall have conversion rights as follows (the "Conversion
----------
Rights"):
- ------
(a) Right to Convert. Subject to Section 4(c), each share of Series A
----------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E 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 the 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 (i) $0.0333 in the case of Series A Preferred Stock, (ii)
$0.6667 in the
-5-
<PAGE>
case of the Series B Preferred Stock, (iii) $1.3333 in the case of the Series C
Preferred Stock, (iv) $1.4333 in the case of the Series D Preferred Stock, and
(v) $2.1667 in the case of the Series E Preferred Stock, by the Conversion Price
applicable to such shares, determined as hereafter provided, in effect on the
date the certificate is surrendered for conversion. The initial Conversion Price
per share shall be $0.0333 for shares of Series A Preferred Stock, $0.6667 for
shares of Series B Preferred Stock, $1.3333 for shares of Series C Preferred
Stock, $1.4333 in the case of the Series D Preferred Stock and $2.1667 in the
case of the Series E Preferred Stock. Such initial Conversion Price shall be
subject to adjustment as set forth in Section 4(d) below.
(b) Automatic Conversion. Each share of Series A Preferred Stock,
--------------------
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, shall automatically be converted into shares of Common
Stock at the Conversion Price at the time in effect for such share immediately
upon the earlier of (i) except as provided below in Section 4(c), the
Corporation's sale of its Common Stock in a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act of 1933,
as amended, the public offering price of which is not less than $2.87 per share
(as adjusted to reflect subsequent stock dividends, stock splits or
recapitalizations) and which results in aggregate cash proceeds to the
Corporation of at least $10,000,000 (net of underwriting discounts and
commissions) or (ii) the date specified by written consent or agreement of the
holders of a majority of the then outstanding shares of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, voting together as a class.
(c) Mechanics of Conversion. Before any holder of 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 the Corporation or of any transfer agent for the Preferred Stock, and shall
give written notice to the 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.
The Corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of 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 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, the conversion may, at the option of any holder
tendering 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 Common Stock upon conversion of such
Preferred Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
- -------------------------------------------
E Preferred
-6-
<PAGE>
Stock, the Conversion Price of the Series D Preferred Stock, the Conversion
Price of the Series C Preferred Stock and the Conversion Price of the Series B
Preferred Stock shall be subject to adjustment from time to time as follows:
(i) Issuance of Additional Stock below Purchase Price . If the
--------------------------------------------------
Corporation shall issue, after the date upon which any shares of Series E
Preferred Stock, Series D Preferred Stock, Series C Preferred Stock or Series B
Preferred Stock were first issued (the "Purchase Date" with respect to such
-------------
series), any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
automatically be adjusted as set forth in this Section 4(d)(i), unless otherwise
provided in this Section 4(d)(i).
(A) Adjustment Formula. Whenever the Conversion Price is
------------------
adjusted pursuant to this Section (4)(d)(i), the new Conversion Price shall be
determined by multiplying the Conversion Price then in effect by a fraction, (x)
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (the "Outstanding Common") plus the number of
------------------
shares of Common Stock that the aggregate consideration received by the
Corporation for such issuance would purchase at such Conversion Price; and (y)
the denominator of which shall be the number of shares of Outstanding Common
plus the number of shares of such Additional Stock. For purposes of the
foregoing calculation, the term "Outstanding Common" shall include shares of
Common Stock deemed issued pursuant to Section 4(d)(i)(E) below.
(B) Definition of "Additional Stock". For purposes of this
-------------------------------
Section 4(d)(i), "Additional Stock" shall mean any shares of Common Stock issued
----------------
(or deemed to have been issued pursuant to Section 4(d)(i)(E)) by the
Corporation after the Purchase Date) other than
(1) Common Stock issued pursuant to a transaction described
in Section 4(d)(ii) hereof,
(2) Up to 7,050,000 shares of Common Stock issuable or
issued to employees, consultants or directors of the Corporation directly or
pursuant to a stock option plan or restricted stock plan approved by the Board
of Directors of the Corporation,
(3) Capital stock, or options or warrants to purchase
capital stock, issued to financial institutions or lessors in connection with
commercial credit arrangements, equipment financings or similar transactions,
approved by the Company's Board of Directors,
(4) Shares of Common Stock or Preferred Stock issuable upon
exercise of warrants outstanding as of the date of this Amended and Restated
Certificate of Incorporation,
-7-
<PAGE>
(5) Capital stock or warrants or options to purchase capital stock
issued in connection with bona fide acquisitions, mergers or similar
transactions, the terms of which are approved by the Board of Directors of the
Corporation,
(6) Shares of Common Stock issued or issuable upon conversion of the
Series E, Series D, Series C or Series B Preferred Stock, and
(7) Shares of Common Stock issued or issuable in a public offering
prior to or in connection with which all outstanding shares of Series E
Preferred Stock, Series D Preferred Stock, Series C Preferred Stock and Series B
Preferred Stock will be converted to Common Stock.
(C) No Fractional Adjustments. No adjustment of the Conversion Price for
-------------------------
the Series E Preferred Stock, Series D Preferred Stock, Series C Preferred Stock
or Series B Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments which are not required to be made by reason
of this sentence shall be carried forward and shall be either taken into account
in any subsequent adjustment made prior to three years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three years from the date of the event giving rise to the adjustment
being carried forward.
(D) Determination of Consideration. In the case of the issuance of Common
------------------------------
Stock for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by the Corporation for any underwriting or
otherwise in connection with the issuance and sale thereof. In the case of the
issuance of the Common Stock for a consideration in whole or in part other than
cash, the consideration other than cash shall be deemed to be the fair value
thereof as determined by the Board of Directors irrespective of any accounting
treatment.
(E) Deemed Issuances of Common Stock. In the case of the issuance (whether
--------------------------------
before, on or after the applicable Purchase Date) of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this Section 4(d)(i):
(1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in Section
4(d)(i)(D)), if any, received by the Corporation upon the issuance of such
options or rights plus the minimum exercise price provided in such options or
rights (without taking into account potential antidilution adjustments) for the
Common Stock covered thereby.
-8-
<PAGE>
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the satisfaction of any
conditions to convertibility or exchangeability, including, without limitation,
the passage of time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in Section 4(d)(i)(D)).
(3) In the event of any change in the number of shares of Common
Stock deliverable or in the consideration payable to the Corporation upon
exercise of such options or rights or upon conversion of or in exchange for such
convertible or exchangeable securities, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Conversion Price of each
of the Series E Preferred Stock, Series D Preferred Stock, Series C Preferred
Stock and Series B Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of each of the Series E Preferred Stock, Series D Preferred
Stock, Series C Preferred Stock and Series B Preferred Stock, to the extent in
any way affected by or computed using such options, rights or securities or
options or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
(5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to Sections 4(d)(i)(E)(1) and
4(d)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 4(d)(i)(E)(3) or
4(d)(i)(E)(4).
(F) No Increased Conversion Price. Notwithstanding any other provisions of
-----------------------------
this Section (4)(d)(i), except to the limited extent provided for in Sections
4(d)(i)(E)(3) and 4(d)(i)(E)(4), no adjustment of the Conversion Price pursuant
to this Section
-9-
<PAGE>
4(d)(i) shall have the effect of increasing the Conversion Price above the
Conversion Price in effect immediately prior to such adjustment.
(ii) Stock Splits and Dividends. In the event the Corporation should
--------------------------
at any time or from time to time after the Purchase Date 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 of the Series E Preferred Stock, Series D Preferred
Stock, Series C Preferred Stock and Series B 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 with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time.
(iii) Reverse Stock Splits. 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 of the Series E Preferred Stock, the
Series D Preferred Stock, the Series C Preferred Stock and the Series B
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 the Corporation shall declare a
-------------------
distribution payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends) or
options or rights not referred to in Section 4(d)(ii), then, in each such case
for the purpose of this Section 4(e), the holders of Series E Preferred Stock,
Series D Preferred Stock, Series C Preferred Stock and Series B 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 Preferred Stock 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 4 or
Section 2) provision shall be made so that the holders of Series E Preferred
Stock, Series D Preferred Stock, Series C Preferred Stock and Series B Preferred
Stock shall thereafter be entitled to receive upon conversion of such Preferred
Stock the number of shares of stock or other securities or property
-10-
<PAGE>
of the 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 such 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 such Preferred Stock) shall be applicable
after that event and be as nearly equivalent as practicable.
(g) No Impairment. The Corporation will not, without the consent of
-------------
the holders of the outstanding Preferred Stock as required under Section 6, by
amendment of its 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 the 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 Preferred Stock against impairment.
(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 Series E Preferred Stock, Series D Preferred Stock,
Series C Preferred Stock or Series B Preferred Stock, and the number of shares
of Common Stock to be issued shall be rounded to the nearest whole share. The
number of shares issuable upon such conversion shall be determined on the basis
of the total number of shares of Series E Preferred Stock, Series D Preferred
Stock, Series C Preferred Stock or Series B 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 Series E Preferred Stock, Series D Preferred Stock,
Series C Preferred Stock or Series B Preferred Stock pursuant to this Section 4,
the 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 such Preferred Stock a certificate executed by the Corporation's
President or Chief Financial Officer setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series E Preferred Stock, Series D Preferred Stock, Series
C Preferred Stock or Series B 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 which at the time would be received upon the conversion
of a share of such series of Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining
-11-
<PAGE>
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, the Corporation shall mail to each
holder of Series E Preferred Stock, Series D Preferred Stock, Series C Preferred
Stock or Series B 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. The 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 Series E Preferred Stock, Series D Preferred Stock, Series C
Preferred Stock and Series B 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 such series of 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 such
series of Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the 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 of Incorporation.
(k) Notices. Any notice required by the provisions of this Section 4
-------
to be given to the holders of shares of Series E Preferred Stock, Series D
Preferred Stock, Series C Preferred Stock or Series B Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5. Voting Rights. The holder of each share of Preferred Stock shall the
-------------
right to one vote for each share of Common Stock into which such 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
the 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 Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
6. Protective Provisions.
---------------------
(a) Subject to the rights of series of Preferred Stock which may from
time to time come into existence, so long as any shares of Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent, as
-12-
<PAGE>
provided by law) of a majority of the voting power of the then outstanding
shares of the Preferred Stock, voting together as a class:
(i) enter into any transaction for the sale of all or
substantially all of the Company's assets;
(ii) enter into any transaction qualifying as a
liquidation, dissolution or winding up of the Corporation pursuant to Article
IV, Section 2 hereof;
(iii) authorize 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 Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock;
(iv) redeem, repurchase or otherwise acquire (or pay into
or set aside for a sinking fund for such purpose) any share or shares of
Preferred Stock or Common Stock; provided, however, that this restriction shall
not apply to the repurchase of shares of Common Stock from employees, officers,
directors, consultants or other persons performing services for the Company or
any subsidiary pursuant to agreements under which the Company has the option to
repurchase such shares at cost or at cost upon the occurrence of certain events,
such as the termination of employment;
(v) amend the Corporation's Certificate of Incorporation
or Bylaws;
(vi) change the authorized number of directors of the
Corporation, or
(b) Subject to the rights of series of Preferred Stock which may
from time to time come into existence, so long as any shares of Series B
Preferred Stock are outstanding, this corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of a
majority of the voting power of the then outstanding shares of the Series B
Preferred Stock, voting as a separate class:
(i) alter or change the rights, preferences or privileges
of the shares of Series B Preferred Stock so as to affect adversely the shares
of such series; or
(ii) increase or decrease (other than by conversion) the
total number of authorized shares of Series B Preferred Stock; or
(iii) amend Article IV, Section 4(b) hereof.
(c) Subject to the rights of series of Preferred Stock which may
from time to time come into existence, so long as any shares of Series C
Preferred Stock are outstanding, this corporation shall not, without first
obtaining the approval (by vote or written
-13-
<PAGE>
consent, as provided by law) of a majority of the voting power of the then
outstanding shares of the Series C Preferred Stock, voting as a separate class:
(i) alter or change the rights, preferences or privileges
of the shares of Series C Preferred Stock so as to affect adversely the shares
of such series; or
(ii) increase or decrease (other than by conversion) the
total number of authorized shares of Series C Preferred Stock; or
(iii) amend Article IV, Section 4(b) hereof.
(d) Subject to the rights of series of Preferred Stock which may
from time to time come into existence, so long as any shares of Series D
Preferred Stock are outstanding, this corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of a
majority of the voting power of the then outstanding shares of the Series D
Preferred Stock, voting as a separate class:
(i) alter or change the rights, preferences or privileges
of the shares of Series D Preferred Stock so as to affect adversely the shares
of such series; or
(ii) increase or decrease (other than by conversion) the
total number of authorized shares of Series D Preferred Stock; or
(iii) amend Article IV, Section 4(b) hereof.
(e) Subject to the rights of series of Preferred Stock which may
from time to time come into existence, so long as any shares of Series E
Preferred Stock are outstanding, this Corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of a
majority of the voting power of the then outstanding shares of the Series E
Preferred Stock, voting as a separate class:
(i) alter or change the rights, preferences or privileges
of the shares of Series E Preferred Stock so as to affect adversely the shares
of such series; or
(ii) increase or decrease (other than by conversion) the
total number of authorized or designated shares of Series E Preferred Stock;
(iii) amend Article IV, Section 4(b) hereof; or
(iv) take any action (including amending the Certificate
of Incorporation) that would impact the Series E Preferred Stock in a manner
differently than other Preferred Stockholders.
7. Status of Converted Stock. In the event any shares of Preferred
-------------------------
Stock shall be converted pursuant to Section 4 hereof, the shares so converted
shall be canceled and shall not be issuable by the Corporation. The Certificate
of Incorporation of the Corporation
-14-
<PAGE>
shall be appropriately amended to effect the corresponding reduction in the
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 the 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 the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Division (B) of this Article IV.
3. Redemption. The Common Stock is not redeemable.
----------
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE VI
Subject to Article IV, Section 6(a)(v) hereof, the Board of Directors of
the Corporation is expressly authorized to make, alter or repeal Bylaws of the
Corporation.
ARTICLE VII
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VIII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
-15-
<PAGE>
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision."
* * *
-16-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Menlo Park, California, on July 16, 1999.
/s/ Carl Russo
--------------------------------------------------
Carl Russo, President and Chief Executive Officer
/s/ Joshua L. Green
--------------------------------------------------
Joshua L. Green, Secretary
-17-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CERENT CORPORATION
The undersigned, Carl Russo and Joshua L. Green, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Cerent Corporation, a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on January 27, 1997, under the
name of Fiberlane Communications, Inc.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
"The name of this corporation is Cerent Corporation (the "Corporation").
-----------
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware, 19805, County of New Castle. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
------------ ---------------
The total number of shares which the Corporation is authorized to issue is Three
Hundred Ten Million (310,000,000) shares, each with a par value of $0.001 per
share. Three Hundred Million (300,000,000) shares shall be Common Stock and
Ten Million (10,000,000) shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate of Incorporation, to determine or alter
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and the number of shares
constituting any such series and the designation thereof, or any of them; and to
<PAGE>
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of 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 which
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
In the election of directors, each holder of shares of any class or series
of capital stock of the Corporation shall be entitled to one vote for each share
held. No stockholder will be permitted to cumulate votes at any election of
directors.
ARTICLE VII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE VIII
The 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.
ARTICLE IX
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal the Bylaws of the Corporation.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
The Corporation shall have perpetual existence.
-2-
<PAGE>
ARTICLE XII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of the Corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIII
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) through bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 145 of the Delaware General Corporation Law, subject only to limits
created by applicable Delaware law (statutory or non-statutory), with respect to
actions for breach of duty to a corporation, its stockholders, and others.
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
-3-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Petaluma, California, on
--------------------.
---------------------------------
Carl Russo, President
---------------------------------
Joshua L. Green, Secretary
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
CERENT CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES................................................... 1
1.1 Registered Office.................................................. 1
1.2 Other Offices...................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS........................................... 1
2.1 Place of Meetings.................................................. 1
2.2 Annual Meeting..................................................... 1
2.3 Special Meeting.................................................... 1
2.4 Notice of Stockholders' Meetings................................... 2
2.5 Manner of Giving Notice; Affidavit of Notice....................... 2
2.6 Quorum............................................................. 2
2.7 Adjourned Meeting; Notice.......................................... 2
2.8 Conduct of Business................................................ 3
2.9 Voting............................................................. 3
2.10 Waiver of Notice................................................... 3
2.11 Stockholder Action by Written Consent Without a Meeting............ 3
2.12 Record Date for Stockholder Notice; Voting; Giving Consents........ 4
2.13 Proxies............................................................ 4
ARTICLE III - DIRECTORS......................................................... 5
3.1 Powers............................................................. 5
3.2 Number of Directors................................................ 5
3.3 Election, Qualification and Term of Office of Directors............ 5
3.4 Resignation and Vacancies.......................................... 5
3.5 Place of Meetings; Meetings by Telephone........................... 6
3.6 Regular Meetings................................................... 6
3.7 Special Meetings; Notice........................................... 6
3.8 Quorum............................................................. 7
3.9 Waiver of Notice................................................... 7
3.10 Board Action by Written Consent Without a Meeting.................. 7
3.11 Fees and Compensation of Directors................................. 8
3.12 Approval of Loans to Officers...................................... 8
3.13 Removal of Directors............................................... 8
3.14 Chairman of the Board of Directors................................. 8
ARTICLE IV - COMMITTEES......................................................... 9
4.1 Committees of Directors............................................ 9
4.2 Committee Minutes.................................................. 9
4.3 Meetings and Action of Committees.................................. 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V - OFFICERS............................................................ 10
5.1 Officers........................................................... 10
5.2 Appointment of Officers............................................ 10
5.3 Subordinate Officers............................................... 10
5.4 Removal and Resignation of Officers................................ 10
5.5 Vacancies In Offices............................................... 11
5.6 Chief Executive Officer............................................ 11
5.7 President.......................................................... 11
5.8 Vice Presidents.................................................... 11
5.9 Secretary.......................................................... 11
5.10 Chief Financial Officer............................................ 12
5.11 Representation Of Shares Of Other Corporations..................... 12
5.12 Authority And Duties Of Officers................................... 12
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 13
6.1 Indemnification Of Directors And Officers.......................... 13
6.2 Indemnification Of Others.......................................... 13
6.3 Payment Of Expenses In Advance..................................... 13
6.4 Indemnity Not Exclusive............................................ 13
6.5 Insurance.......................................................... 14
6.6 Conflicts.......................................................... 14
ARTICLE VII - RECORDS AND REPORTS............................................... 14
7.1 Maintenance And Inspection Of Records.............................. 14
7.2 Inspection By Directors............................................ 15
7.3 Annual Statement To Stockholders................................... 15
ARTICLE VIII - GENERAL MATTERS.................................................. 15
8.1 Checks............................................................. 15
8.2 Execution Of Corporate Contracts And Instruments................... 15
8.3 Stock Certificates; Partly Paid Shares............................. 15
8.4 Special Designation On Certificates................................ 16
8.5 Lost Certificates.................................................. 16
8.6 Construction; Definitions.......................................... 17
8.7 Dividends.......................................................... 17
8.8 Fiscal Year........................................................ 17
8.9 Seal............................................................... 17
8.10 Transfer Of Stock.................................................. 17
8.11 Stock Transfer Agreements.......................................... 17
8.12 Registered Stockholders............................................ 18
ARTICLE IX - AMENDMENTS......................................................... 18
</TABLE>
-ii-
<PAGE>
BYLAWS
OF
CERENT CORPORATION
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Corporation Service Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 Annual Meeting.
--------------
The annual meeting of stockholders shall be held on such date, time
and place, either within or without the State of Delaware, as may be designated
by resolution of the Board of Directors each year. At the meeting, directors
shall be elected and any other proper business may be transacted.
2.3 Special Meeting.
---------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the chairman of the board, the president or by one or more
stockholders holding shares in the aggregate entitled to cast not less than ten
percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
Board of Directors, the president or the chairman of the board, the request
shall be in writing, specifying
<PAGE>
the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the chairman of the board, the
president, any vice president, or the secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The officer receiving the request shall cause notice to be promptly
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting, not less than thirty-
five (35) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after the receipt of the request,
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
2.4 Notice of Stockholders' Meetings.
--------------------------------
All notices of meetings with stockholders shall be in writing and
shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
2.5 Manner of Giving Notice; Affidavit of Notice.
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof
-2-
<PAGE>
are announced at the meeting at which the adjournment is taken. At the adjourned
meeting the corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.8 Conduct of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
2.9 Voting.
------
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.12 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 Stockholder Action by Written Consent Without a Meeting.
-------------------------------------------------------
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 that 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, is 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.
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Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.12 Record Date for Stockholder Notice; Voting; Giving Consents.
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is delivered to the corporation.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.13 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed
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signed if the stockholder's name is placed on the proxy (whether by manual
signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number of Directors.
-------------------
The Board of Directors shall consist of not fewer than three (3) nor
more than five (5) persons. The exact number of directors shall be three (3)
persons until changed by a proper amendment of this Section 3.2. No reduction
of the authorized number of directors shall have the effect of removing any
director before that director's term of office expires.
3.3 Election, Qualification and Term of Office of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation and Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
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<PAGE>
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place of Meetings; Meetings by Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
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<PAGE>
3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
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3.10 Board Action by Written Consent Without a Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the board
or committee may be executed by telex, telecopy or other facsimile transmission,
and such facsimile shall be valid and binding to the same extent as if it were
an original.
3.11 Fees and Compensation of Directors.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval of Loans to Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman of the Board of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
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ARTICLE IV
COMMITTEES
----------
4.1 Committees of Directors.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members 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 or in the Bylaws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the Bylaws of the corporation; and, unless the board
resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings and Action of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum),
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Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of
these Bylaws, with such changes in the context of such provisions as are
necessary to substitute the committee and its members for the Board of Directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the Board of Directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the Board of Directors and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment of Officers.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal and Resignation of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
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Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all
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meetings and actions of directors, committees of directors, and stockholders.
The minutes shall show the time and place of each meeting, the names of those
present at directors' meetings or committee meetings, the number of shares
present or represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by the person having such
authority.
5.12 Authority And Duties Of Officers.
--------------------------------
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In addition to the foregoing authority and duties, all officers of
the corporation shall respectively have such authority and perform such duties
in the management of the business of the corporation as may be designated from
time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
--------------------------------------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
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6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the certificate
of incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its
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stockholders, and its other books and records and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or other
agent is the person who seeks the right to inspection, the demand under oath
shall be accompanied by a power of attorney or such other writing that
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the corporation at its registered
office in Delaware or at its principal place of business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
-15-
<PAGE>
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
-16-
<PAGE>
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 Seal.
----
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
-17-
<PAGE>
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
-18-
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
CERENT CORPORATION
(as amended and restated on July 19, 1999)
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - CORPORATE OFFICES............................................... 1
1.1 Registered Office......................................... 1
-----------------
1.2 Other Offices............................................. 1
-------------
ARTICLE II - MEETINGS OF STOCKHOLDERS....................................... 1
2.1 Place of Meetings......................................... 1
-----------------
2.2 Annual Meeting............................................ 1
--------------
2.3 Special Meeting........................................... 3
---------------
2.4 Notice of Stockholders' Meetings.......................... 3
--------------------------------
2.5 Advance Notice of Stockholder Nominees.................... 3
--------------------------------------
2.6 Quorum.................................................... 4
------
2.7 Adjourned Meeting; Notice................................. 4
-------------------------
2.8 Conduct of Business....................................... 4
-------------------
2.9 Voting.................................................... 5
------
2.10 Waiver of Notice.......................................... 5
----------------
2.11 Record Date for Stockholder Notice; Voting;
--------------------------------------------
Giving Consents........................................... 5
---------------
2.12 Proxies................................................... 6
-------
ARTICLE III - DIRECTORS..................................................... 6
3.1 Powers.................................................... 6
------
3.2 Number of Directors....................................... 6
-------------------
3.3 Election, Qualification and Term of Office of Directors... 6
-------------------------------------------------------
3.4 Resignation and Vacancies................................. 7
-------------------------
3.5 Place of Meetings; Meetings by Telephone.................. 8
----------------------------------------
3.6 Regular Meetings.......................................... 8
----------------
3.7 Special Meetings; Notice.................................. 8
------------------------
3.8 Quorum.................................................... 8
------
3.9 Waiver of Notice.......................................... 9
----------------
3.10 Board Action by Written Consent Without a Meeting......... 9
-------------------------------------------------
3.11 Fees and Compensation of Directors........................ 9
----------------------------------
3.12 Approval of Loans to Officers............................. 9
-----------------------------
3.13 Removal of Directors...................................... 10
--------------------
3.14 Chairman of the Board of Directors........................ 10
----------------------------------
ARTICLE IV - COMMITTEES..................................................... 10
4.1 Committees of Directors................................... 10
-----------------------
4.2 Committee Minutes......................................... 11
-----------------
4.3 Meetings and Action of Committees......................... 11
---------------------------------
ARTICLE V - OFFICERS........................................................ 11
5.1 Officers.................................................. 11
--------
<PAGE>
5.2 Appointment of Officers................................... 12
-----------------------
5.3 Subordinate Officers...................................... 12
--------------------
5.4 Removal and Resignation of Officers....................... 12
-----------------------------------
5.5 Vacancies In Offices...................................... 12
--------------------
5.6 Chief Executive Officer................................... 12
-----------------------
5.7 President................................................. 13
---------
5.8 Vice Presidents........................................... 13
---------------
5.9 Secretary................................................. 13
---------
5.10 Chief Financial Officer................................... 13
-----------------------
5.11 Representation Of Shares Of Other Corporations............ 14
----------------------------------------------
5.12 Authority And Duties Of Officers.......................... 14
--------------------------------
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS...................................................................... 14
6.1 Indemnification Of Directors And Officers................. 14
-----------------------------------------
6.2 Indemnification Of Others................................. 15
-------------------------
6.3 Payment Of Expenses In Advance............................ 15
------------------------------
6.4 Indemnity Not Exclusive................................... 15
-----------------------
6.5 Insurance................................................. 16
---------
6.6 Conflicts................................................. 16
--- ---------
ARTICLE VII - RECORDS AND REPORTS........................................... 16
7.1 Maintenance And Inspection Of Records..................... 16
-------------------------------------
7.2 Inspection By Directors................................... 16
-----------------------
7.3 Annual Statement To Stockholders.......................... 17
--------------------------------
ARTICLE VIII - GENERAL MATTERS.............................................. 18
8.1 Checks.................................................... 18
------
8.2 Execution Of Corporate Contracts And Instruments.......... 18
------------------------------------------------
8.3 Stock Certificates; Partly Paid Shares.................... 18
--------------------------------------
8.4 Special Designation On Certificates....................... 19
-----------------------------------
8.5 Lost Certificates......................................... 19
-----------------
8.6 Construction; Definitions................................. 19
-------------------------
8.7 Dividends................................................. 19
---------
8.8 Fiscal Year............................................... 20
-----------
8.9 Seal...................................................... 20
----
8.10 Transfer Of Stock......................................... 20
-----------------
8.11 Stock Transfer Agreements................................. 20
-------------------------
8.12 Registered Stockholders................................... 20
-----------------------
ARTICLE IX - AMENDMENTS..................................................... 21
-ii-
<PAGE>
BYLAWS
OF
CERENT CORPORATION
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Corporation Service Company.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place of Meetings.
-----------------
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 Annual Meeting.
--------------
(a) The annual meeting of stockholders shall be held each year on a date
and at a time designated by the Board of Directors. At the meeting, directors
shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be transacted by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice with respect to such meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of the notice provided for in this
Section 2.2, who is entitled to vote at the meeting and who has complied with
the notice procedures set forth in this Section 2.2.
<PAGE>
(c) In addition to the requirements of Section 2.5, for nominations or
other business to be properly brought before an annual meeting by a stockholder
pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder
must have given timely notice thereof in writing to the secretary of the
Corporation and such business must be a proper matter for stockholder action
under the General Corporation Law of Delaware. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting of stockholders; provided,
however, that in the event that the date of the annual meeting is more than 30
days prior to or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made.
Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); (ii) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of such business, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; and (iii) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made (A)
the name and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner and (B) the class and number of shares of
the Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.2. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
-2-
<PAGE>
2.3 Special Meeting.
---------------
(a) A special meeting of the stockholders may be called at any time by
the Board of Directors, or by the chairman of the board, or by the president.
(b) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 Notice of Stockholders' Meetings.
--------------------------------
All notices of meetings of stockholders shall be in writing and shall
be sent or otherwise given in accordance with this Section 2.4 of these Bylaws
not less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting (or such longer or shorter time as
is required by Section 2.5 of these Bylaws, if applicable). The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.5 Advance Notice of Stockholder Nominees.
---------------------------------------
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 60 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by
-3-
<PAGE>
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Exchange Act (including, without limitation, such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall furnish to
the secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 2.5. The chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
the Bylaws, and if he or she should so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
2.6 Quorum.
------
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
-------------------------
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 Conduct of Business.
-------------------
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
-4-
<PAGE>
2.9 Voting.
------
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 Record Date for Stockholder Notice; Voting; Giving Consents.
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to 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 (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
-5-
<PAGE>
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.12 Proxies.
-------
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number of Directors.
-------------------
Upon the adoption of these Bylaws, the number of directors
constituting the entire Board of Directors shall be five. Thereafter, this
number may be changed by a resolution of the Board of Directors or of the
stockholders, subject to Section 3.4 of these Bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before that director's term of office expires.
3.3 Election, Qualification and Term of Office of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
-6-
<PAGE>
3.4 Resignation and Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
A vacancy created by the removal of a director by the vote of the stockholders
or by court order may be filled only by the affirmative vote of a majority of
the shares represented and voting at a duly held meeting at which a quorum is
present (which shares voting affirmatively also constitute a majority of the
quorum). Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and
qualified.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
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<PAGE>
3.5 Place of Meetings; Meetings by Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
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A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.10 Board Action by Written Consent Without a Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the
board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 Fees and Compensation of Directors.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval of Loans to Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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3.13 Removal of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman of the Board of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
ARTICLE IV
COMMITTEES
----------
4.1 Committees of Directors.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members 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 or in the Bylaws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the
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stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or (v) amend
the Bylaws of the corporation; and, unless the board resolution establishing the
committee, the Bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings and Action of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment of Officers.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
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<PAGE>
5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal and Resignation of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in
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the office of president of a corporation and such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by
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the Board of Directors, shall render to the president, the chief executive
officer, or the directors, upon request, an account of all his or her
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of
the corporation shall respectively have such authority and perform such duties
in the management of the business of the corporation as may be designated from
time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
--------------------------------------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent and in
the manner permitted by the General Corporation Law of Delaware, to indemnify
each of its employees and agents (other than directors and officers) against
expenses (including attorneys' fees), judgments,
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fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.2, an
"employee" or "agent" of the corporation (other than a director or officer)
includes any person (i) who is or was an employee or agent of the corporation,
(ii) who is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the certificate
of incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses
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were incurred or other amounts were paid, which prohibits or otherwise limits
indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
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ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon
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partly paid shares of the same class, but only upon the basis of the percentage
of the consideration actually paid thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
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The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.9 Seal.
----
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
-20-
<PAGE>
EXHIBIT 10.1
CERENT CORPORATION
1997 STOCK PLAN
(As amended through July 19, 1999)
1. Purposes of the Plan. The purposes of this PlanYear~ Stock Plan
--------------------
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall
-----------
apply:
(a) "Administrator" means the Board or its Committee appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary (as
---------
defined below) in which the Company owns an equity interest or which, together
with the Company, is under common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to
---------------
the administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means one or more committees or subcommittees of
the Board appointed by the Board to administer the Plan in accordance with
Section 4 below.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means CompanyName~, a Delaware corporation and
-------
formerly, Fiberlane Communications, Inc.
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent, Subsidiary or Affiliate to render services
and is compensated for such services, and any director of the Company whether
compensated for such services or not.
<PAGE>
(j) "Continuous Status as an Employee or Consultant" means the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Parents, Subsidiaries, Affiliates or their
respective successors. Unless otherwise determined by the Administrator or the
Company, a change in status from an Employee to a Consultant or from a
Consultant to an Employee will not constitute an interruption of Continuous
Status as an Employee or Consultant.
(k) "Corporate Transaction" means a sale of all or substantially
---------------------
all of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(l) "Director" means a member of the Board.
--------
(m) "Employee" means any person (including, if appropriate, any
--------
Named Executive Officer, Officer or Director) employed by the Company or any
Parent, Subsidiary or Affiliate of the Company, with the status of employment
determined based upon such minimum number of hours or periods worked as shall be
determined by the Administrator in its discretion, subject to any requirements
of the Code. The payment by the Company of a director's fee to a Director shall
not be sufficient to constitute "employment" of such Director by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(o) "Fair Market Value" means, as of any date, the fair market
-----------------
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported) as quoted
on such system or exchange on the date of determination (or if no trading or
bids occurred on the date of determination, on the last trading day prior to the
date of determination), as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the date of determination (or if no bids occurred on the date of
determination, on the last trading day prior to the date of determination); or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
-2-
<PAGE>
(p) "Incentive Stock Option" means an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable Option Agreement.
(q) "Listed Security" means any security of the Company that is
---------------
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(r) "Named Executive" means any individual who, on the last day
---------------
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four most highly compensated officers
of the Company (other than the chief executive officer). Such officer status
shall be determined pursuant to the executive compensation disclosure rules
under the Exchange Act.
(s) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means a written document, the form(s) of
----------------
which shall be approved from time to time by the Administrator, reflecting the
terms of an Option granted under the Plan and includes any documents attached to
or incorporated into such Option Agreement, including, but not limited to, a
notice of stock option grant and a form of exercise notice.
(v) "Option Exchange Program" means a program approved by the
-----------------------
Administrator whereby outstanding Options are exchanged for Options with a lower
exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option
--------------
or a Stock Purchase Right.
(x) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(y) "Parent" means a "parent corporation", whether now or
------
hereafter existing, as defined in Section 424(e) of the Code, or any successor
provision.
(z) "Participant" means any holder of one or more Options or
-----------
Stock Purchase Rights, or the Shares issuable or issued upon exercise of such
awards, under the Plan.
(aa) "Plan" means this PlanYear~ Stock Plan.
----
(bb) "Reporting Person" means an officer, Director, or greater
----------------
than ten percent stockholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.
-3-
<PAGE>
(cc) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(dd) "Restricted Stock Purchase Agreement" means a written
-----------------------------------
document, the form(s) of which shall be approved from time to time by the
Administrator, reflecting the terms of a Stock Purchase Right granted under the
Plan and includes any documents attached to such agreement.
(ee) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
----------
Act, as amended from time to time, or any successor provision.
(ff) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.
(gg) "Stock Exchange" means any stock exchange or consolidated
--------------
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(hh) "Stock Purchase Right" means the right to purchase Common
--------------------
Stock pursuant to Section 11 below.
(ii) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(jj) "Ten Percent Holder" means a person who owns stock
------------------
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section
-------------------------
14 of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 18,477,000/1// shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full, or
is surrendered pursuant to an Option Exchange Program, the unpurchased Shares
that were subject thereto shall, unless the Plan shall have been terminated,
become available for future grant under the Plan. In addition, any Shares of
Common Stock which are retained by the Company upon exercise of an Option or
Stock Purchase Right in order to satisfy the exercise or purchase price for such
Option or Stock Purchase Right or any withholding taxes due with respect to such
exercise or purchase shall be treated as not issued and shall continue to be
available under the Plan. Shares issued under the Plan and later repurchased by
the Company pursuant to any repurchase right which the Company may have shall
not be available for future grant under the Plan.
____________
/1// This figure reflects the Company's 3:1 stock split effected in July 1999
and includes the 3,450,000 share increase approved by the Board on April 30,
1999 and certain other changes to the plan adopted by the Board on July 19, 1999
in anticipation of the Company's initial public offering, both of which
amendments are to be submitted to the stockholders for approval within one year
of such dates.
-4-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may be
administered by different administrative bodies with respect to different
classes of Participants and, if permitted by the Applicable Laws, the Board may
authorize one or more officers to grant Options or Stock Purchase Rights to
Employees and Consultants.
(b) Administration with respect to Reporting Persons. With respect to
------------------------------------------------
Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed pursuant
---------------------
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan pursuant
to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and
Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Employees and Consultants to whom Options and
Stock Purchase Rights or any combination thereof may from time to time be
granted;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted;
(iv) to determine the number of Shares of Common Stock to be
covered by each such award granted;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise or purchase price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option,
Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
-5-
<PAGE>
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted and to
make any other amendments or adjustments to any Option that the Administrator
determines, in its discretion and under the authority granted to it under the
Plan, to be necessary or advisable, provided however that no amendment or
adjustment to an Option that would materially and adversely affect the rights of
any Optionee shall be made without the prior written consent of the Optionee;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights;
(x) to initiate an Option Exchange Program;
(xi) to construe and interpret the terms of the Plan and awards
granted under the Plan; and
(xii) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
Participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Participants.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees, provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An Employee
or Consultant who has been granted an Option or Stock Purchase Right may, if he
or she is otherwise eligible, be granted additional Options or Stock Purchase
Rights.
(b) Type of Option. Each Option shall be designated in Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
-6-
<PAGE>
(c) No Employment Rights. The Plan shall not confer upon any
--------------------
Participant any right with respect to continuation of an employment or
consulting relationship with the Company, nor shall it interfere in any way with
such Participant's right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to a person who at the time of such grant is a
Ten Percent Holder, the term of the Option shall be five (5) years from the date
of grant thereof or such shorter term as may be provided in the Option
Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as
---------------------------------
provided in Section 13 below, the maximum number of Shares which may be subject
to Options and Stock Purchase Rights granted to any one Employee under this Plan
for any fiscal year of the Company shall be 5,000,000 (after giving effect to
the Company's three-for-one stock split effected in July 1999).
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator and set forth in the Option Agreement, but shall be subject to
the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who at the time of grant is a Ten
Percent Holder, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a person who is at the time of grant is a Ten
Percent Holder, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant if required by the Applicable
Laws and, if not so required, shall be such price as is determined by the
Administrator;
-7-
<PAGE>
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant if such
Option is intended to qualify as performance-based compensation under Section
162(m) of the Code and if not so intended shall be such price as is determined
by the Administrator; or
(C) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to any person other than a Named Executive or a
Ten Percent Holder, the per Share exercise price shall be no less than 85% of
the Fair Market Value per Share on the date of grant if required by Applicable
Law and, if not so required, shall be such price as is determined by the
Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) Permissible Consideration. The consideration to be paid for the
-------------------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash; (2) check; (3) delivery of Optionee's promissory note with such
recourse, interest, security and redemption provisions as the Administrator
determines to be appropriate (subject to the provisions of Section 153 of the
Delaware General Corporation Law); (4) cancellation of indebtedness; (5) other
Shares that (x) in the case of Shares acquired upon exercise of an Option either
have been owned by the Optionee for more than six months on the date of
surrender (or such other period as may be required to avoid a charge to the
Company's earnings) or were not acquired, directly or indirectly, from the
Company, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which the Option is exercised; (6)
authorization from the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a Fair Market Value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised; (7) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect exercise of the Option and
prompt delivery to the Company of the sale or loan proceeds required to pay the
exercise price and any applicable withholding taxes; (8) any combination of the
foregoing methods of payment; or (9) such other consideration and method of
payment for the issuance of Shares to the extent permitted under the Applicable
Laws. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company and the Administrator may refuse to
accept a particular form of consideration at the time of any Option exercise if,
in its sole discretion, acceptance of such form of consideration is not in the
best interests of the Company at such time.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the
-8-
<PAGE>
Administrator, consistent with the terms of the Plan, and reflected in the
Option Agreement, including vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided however that, if
required by the Applicable Laws, any Option granted prior to the date, if any,
upon which the Common Stock becomes a Listed Security shall become exercisable
at a rate of at least 20% per year over five years from the date the Option is
granted. In the event that any of the Shares issued upon exercise of an Option
(which exercise occurs prior to the date, if any, upon which the Common Stock
becomes a Listed Security) should be subject to a right of repurchase in the
Company's favor, such repurchase right shall, if required by the Applicable
Laws, lapse at the rate of at least 20% per year over five years from the date
the Option is granted. Notwithstanding the above, in the case of an Option
granted to an officer, Director or Consultant, the Option may become
exercisable, or a repurchase right, if any, in favor of the Company shall lapse,
at any time or during any period established by the Administrator. The
Administrator shall have the discretion to determine whether and to what extent
the vesting of Options shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) after the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise his or her
Option to the extent that the Optionee was entitled to exercise it at the date
of such termination. To the extent that the Optionee was not entitled to
exercise the Option at the date of such termination, or if the Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate. No termination shall be deemed to occur and this
Section 10(b) shall
-9-
<PAGE>
not apply if (i) the Optionee is a Consultant who becomes an Employee; or (ii)
the Optionee is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
(or such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option made at the time of grant
of the Option) from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months (or
such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option made at the time of grant
of the Option) from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. However, to the extent that such Optionee fails
to exercise an Option which is an Incentive Stock Option ("ISO") (within the
---
meaning of Section 422 of the Code) within three (3) months of the date of such
termination, the Option will not qualify for ISO treatment under the Code. To
the extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within six months (6) from the date of termination, the Option shall
terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months (or such other period of time as is
determined by the Administrator, with such determination in the case of an
Incentive Stock Option made at the time of grant of the Option) following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
death or, if earlier, the date of termination of Optionee's Continuous Status as
an Employee or Consultant. To the extent that Optionee was not entitled to
exercise the Option at the date of death or termination, as the case may be, or
if Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
-10-
<PAGE>
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Service
Status from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in
the Option Agreement to such greater time as the Administrator shall deem
appropriate, provided that in no event shall such Option be exercisable later
than the date of expiration of the term of such Option as set forth in the
Option Agreement.
(f) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted under the Plan
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. In the case of a Stock Purchase Right granted prior to the date, if any,
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws at such time, the purchase price of Shares subject to such Stock
Purchase Rights shall not be less than 85% of the Fair Market Value of the
Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer. If the Applicable Laws do not impose the requirements
set forth in the preceding sentence and with respect to any Stock Purchase
Rights granted after the date, if any, on which the Common Stock becomes a
Listed Security, the purchase price of Shares subject to Stock Purchase Rights
shall be as determined by the Administrator. The offer to purchase Shares
subject to Stock Purchase Rights shall be accepted by execution of a Restricted
Stock Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided however that with respect to a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security to a purchaser who is not an officer, Director or
Consultant of the Company or of any Parent or Subsidiary of the Company, it
shall lapse at a minimum rate of 20% per year if required by the Applicable
Laws.
-11-
<PAGE>
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. Taxes.
-----
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising the Option or Stock Purchase Right)
shall make such arrangements as the Administrator may require for the
satisfaction of any applicable federal, state, local or foreign withholding tax
obligations that may arise in connection with the exercise of Option or Stock
Purchase Right and the issuance of Shares. The Company shall not be required to
issue any Shares under the Plan until such obligations are satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option or Stock Purchase Right.
(c) This Section 12(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. For purposes of this Section 12,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Laws (the "Tax Date").
--------
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six (6) months on the date of surrender, and (ii)
have a Fair Market Value determined as of the applicable Tax Date equal to the
amount required to be withheld.
-12-
<PAGE>
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 12(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Participant shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution; provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. An Option or Stock Purchase Right may be exercised, during the
lifetime of the holder of Option or Stock Purchase Right, only by such holder or
a transferee permitted by this Section 13.
14. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, the number of Shares set forth
in Sections 3(a)(i) and 8 above, and the number of shares of Common Stock that
have been authorized for issuance under the Plan but as to which no Options or
Stock Purchase Rights have yet been granted or that have been returned to the
Plan upon cancellation or expiration of an Option or Stock Purchase Right, as
well as the price per share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares of Common Stock subject to an
Option or Stock Purchase Right.
-13-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Corporate Transaction. In the event of a Corporate Transaction,
---------------------
each outstanding Option or Stock Purchase Right shall be assumed or an
equivalent option or right shall be substituted by such successor corporation or
a parent or subsidiary of such successor corporation, unless the successor
corporation does not agree to assume the Option or Stock Purchase Right or to
substitute an equivalent option or right, in which case such Option or Stock
Purchase Right shall terminate upon the consummation of the merger or sale of
assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
15. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation (other than an adjustment pursuant to Section 14 above) shall
be made that would materially and adversely affect the rights of any Optionee or
holder of Stock Purchase Rights under any outstanding grant, without his or her
consent. In addition, to the extent necessary and desirable to comply with the
Applicable Laws, the Company shall obtain stockholder approval of any Plan
amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall materially and adversely affect Options or Stock Purchase
Rights already granted, unless mutually agreed otherwise between the Optionee or
holder of the Stock Purchase Rights and the Administrator, which agreement must
be in writing and signed by the Optionee or holder and the Company.
17. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the
-14-
<PAGE>
Plan unless such issuance or delivery would comply with the Applicable Laws,
with such compliance determined by the Company in consultation with its legal
counsel. As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by law.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
Option Agreements and Restricted Stock Purchase Agreements, respectively, in
such form(s) as the Administrator shall from time to time approve.
20. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted. Such
stockholder approval shall be obtained in the manner and to the degree required
under the Applicable Laws.
21. Information and Documents to Optionees and Purchasers. Prior to the
-----------------------------------------------------
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information.
-15-
<PAGE>
EXHIBIT 10.2
CERENT CORPORATION
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this 9 Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants and
to promote the success of the Company's business. Options granted under the Plan
may be Incentive Stock Options or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant of an option and subject to the
applicable provisions of Section 422 of the Code and the regulations promulgated
thereunder. Stock purchase rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or its Committee appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary (as defined
---------
below) in which the Company owns an equity interest or which, together with the
Company, is under common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any Stock Exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means one or more committees or subcommittees of the
---------
Board appointed by the Board to administer the Plan in accordance with Section 4
below.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Cerent Corporation, a Delaware corporation and
-------
formerly, Fiberlane Communications, Inc.
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent, Subsidiary or Affiliate to render services
and is compensated for such services, and any director of the Company whether
compensated for such services or not.
(j) "Continuous Status as an Employee or Consultant" means the absence
----------------------------------------------
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as
<PAGE>
an Employee or Consultant shall not be considered interrupted in the case of:
(i) sick leave; (ii) military leave; (iii) any other leave of absence approved
by the Administrator, provided that such leave is for a period of not more than
ninety (90) days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute, or unless provided otherwise pursuant to
Company policy adopted from time to time; or (iv) in the case of transfers
between locations of the Company or between the Company, its Parents,
Subsidiaries, Affiliates or their respective successors. Unless otherwise
determined by the Administrator or the Company, a change in status from an
Employee to a Consultant or from a Consultant to an Employee will not constitute
an interruption of Continuous Status as an Employee or Consultant.
(k) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(l) "Director" means a member of the Board.
--------
(m) "Employee" means any person (including, if appropriate, any Named
--------
Executive Officer, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company, with the status of employment determined
based upon such minimum number of hours or periods worked as shall be determined
by the Administrator in its discretion, subject to any requirements of the Code.
The payment by the Company of a director's fee to a Director shall not be
sufficient to constitute "employment" of such Director by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(o) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported) as quoted
on such system or exchange on the date of determination (or if no trading or
bids occurred on the date of determination, on the last trading day prior to the
date of determination), as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the date
of determination (or if no bids occurred on the date of determination, on the
last trading day prior to the date of determination); or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
<PAGE>
(p) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable Option Agreement.
(q) "Listed Security" means any security of the Company that is
---------------
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(r) "Named Executive" means any individual who, on the last day of
---------------
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(s) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means a written document, the form(s) of which
----------------
shall be approved from time to time by the Administrator, reflecting the terms
of an Option granted under the Plan and includes any documents attached to or
incorporated into such Option Agreement, including, but not limited to, a notice
of stock option grant and a form of exercise notice.
(v) "Option Exchange Program" means a program approved by the
-----------------------
Administrator whereby outstanding Options are exchanged for Options with a lower
exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(x) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(y) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(z) "Participant" means any holder of one or more Options or Stock
-----------
Purchase Rights, or the Shares issuable or issued upon exercise of such awards,
under the Plan.
(aa) "Plan" means this 1999 Stock Plan.
----
(bb) "Reporting Person" means an officer, Director, or greater than
----------------
ten percent stockholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
<PAGE>
(cc) "Restricted Stock" means Shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(dd) "Restricted Stock Purchase Agreement" means a written document,
-----------------------------------
the form(s) of which shall be approved from time to time by the Administrator,
reflecting the terms of a Stock Purchase Right granted under the Plan and
includes any documents attached to such agreement.
(ee) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as amended from time to time, or any successor provision.
(ff) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.
(gg) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(hh) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(ii) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(jj) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 5,000,000 Shares of Common Stock, plus an annual increase on
the first day of each of the Company's fiscal years beginning in 2000, 2001,
2002, 2003 and 2004 equal to the lesser of (i) 15,000,000 Shares, (ii) six
percent (6%) of the Shares outstanding on the last day of the immediately
preceding fiscal year, or (iii) such lesser number of Shares as the Board shall
determine. The Shares may be authorized, but unissued, or reacquired Common
Stock. If an Option should expire or become unexercisable for any reason
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares that were subject thereto shall, unless
the Plan shall have been terminated, become available for future grant under the
Plan. In addition, any Shares of Common Stock which are retained by the Company
upon exercise of an Option or Stock Purchase Right in order to satisfy the
exercise or purchase price for such Option or Stock Purchase Right or any
withholding taxes due with respect to such exercise or purchase shall be treated
as not issued and shall continue to be available under the Plan. Shares issued
under the Plan and later repurchased by the Company pursuant to any repurchase
right which the Company may have shall not be available for future grant under
the Plan.
<PAGE>
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Participants and, if permitted by the Applicable Laws, the Board may
authorize one or more officers to grant Options or Stock Purchase Rights to
Employees and Consultants.
(b) Administration with respect to Reporting Persons. With respect to
------------------------------------------------
Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed pursuant
---------------------
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan pursuant
to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and
Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Employees and Consultants to whom Options
and Stock Purchase Rights or any combination thereof may from time to time be
granted;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted;
(iv) to determine the number of Shares of Common Stock to be
covered by each such award granted;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise or purchase price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option,
<PAGE>
Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted and to
make any other amendments or adjustments to any Option that the Administrator
determines, in its discretion and under the authority granted to it under the
Plan, to be necessary or advisable, provided however that no amendment or
adjustment to an Option that would materially and adversely affect the rights of
any Optionee shall be made without the prior written consent of the Optionee;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights;
(x) to initiate an Option Exchange Program;
(xi) to construe and interpret the terms of the Plan and awards
granted under the Plan; and
(xii) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
Participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Participants.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees, provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he or she is otherwise eligible, be granted additional Options or Stock
Purchase Rights.
(b) Type of Option. Each Option shall be designated in Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in
<PAGE>
which they were granted, and the Fair Market Value of the Shares subject to an
Incentive Stock Option shall be determined as of the date of the grant of such
Option.
(c) No Employment Rights. The Plan shall not confer upon any
--------------------
Participant any right with respect to continuation of an employment or
consulting relationship with the Company, nor shall it interfere in any way with
such Participant's right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to a person who at the time of such grant is a
Ten Percent Holder, the term of the Option shall be five (5) years from the date
of grant thereof or such shorter term as may be provided in the Option
Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in Section 13 below, the maximum number of Shares which may be subject to
Options and Stock Purchase Rights granted to any one Employee under this Plan
for any fiscal year of the Company shall be 5,000,000 (after giving effect to
the Company's three-for-one stock split effected in July 1999).
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator and set forth in the Option Agreement, but shall be subject to
the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who at the time of grant is a
Ten Percent Holder, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a person who is at the time of grant is a Ten
Percent Holder, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the
<PAGE>
date of grant if required by the Applicable Laws and, if not so required, shall
be such price as is determined by the Administrator;
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant if such
Option is intended to qualify as performance-based compensation under Section
162(m) of the Code and if not so intended shall be such price as is determined
by the Administrator; or
(C) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to any person other than a Named Executive or a
Ten Percent Holder, the per Share exercise price shall be no less than 85% of
the Fair Market Value per Share on the date of grant if required by Applicable
Law and, if not so required, shall be such price as is determined by the
Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) Permissible Consideration. The consideration to be paid for the
-------------------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash; (2) check; (3) delivery of Optionee's promissory note with such
recourse, interest, security and redemption provisions as the Administrator
determines to be appropriate (subject to the provisions of Section 153 of the
Delaware General Corporation Law); (4) cancellation of indebtedness; (5) other
Shares that (x) in the case of Shares acquired upon exercise of an Option either
have been owned by the Optionee for more than six months on the date of
surrender (or such other period as may be required to avoid a charge to the
Company's earnings) or were not acquired, directly or indirectly, from the
Company, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which the Option is exercised; (6)
authorization from the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a Fair Market Value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised; (7) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect exercise of the Option and
prompt delivery to the Company of the sale or loan proceeds required to pay the
exercise price and any applicable withholding taxes; (8) any combination of the
foregoing methods of payment; or (9) such other consideration and method of
payment for the issuance of Shares to the extent permitted under the Applicable
Laws. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company and the Administrator may refuse to
accept a particular form of consideration at the time of any Option exercise if,
in its sole discretion, acceptance of such form of consideration is not in the
best interests of the Company at such time.
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, consistent with the terms of the Plan, and
reflected in the Option Agreement, including vesting requirements and/or
performance criteria with respect to the Company and/or the Optionee; provided
however that, if required by the Applicable Laws, any Option granted prior to
the date, if any, upon which the Common Stock becomes a Listed Security shall
become exercisable at a rate of at least 20% per year over five years from the
date the Option is granted. In the event that any of the Shares issued upon
exercise of an Option (which exercise occurs prior to the date, if any, upon
which the Common Stock becomes a Listed Security) should be subject to a right
of repurchase in the Company's favor, such repurchase right shall, if required
by the Applicable Laws, lapse at the rate of at least 20% per year over five
years from the date the Option is granted. Notwithstanding the above, in the
case of an Option granted to an officer, Director or Consultant, the Option may
become exercisable, or a repurchase right, if any, in favor of the Company shall
lapse, at any time or during any period established by the Administrator. The
Administrator shall have the discretion to determine whether and to what extent
the vesting of Options shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Subject to
----------------------------------------------------
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) after the
date of such termination (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise his or her
Option to the
<PAGE>
extent that the Optionee was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of such termination, or if the Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate. No termination shall be deemed to occur and this Section
10(b) shall not apply if (i) the Optionee is a Consultant who becomes an
Employee; or (ii) the Optionee is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
(or such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option made at the time of grant
of the Option) from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months (or
such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option made at the time of grant
of the Option) from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. However, to the extent that such Optionee fails
to exercise an Option which is an Incentive Stock Option ("ISO") (within the
---
meaning of Section 422 of the Code) within three (3) months of the date of such
termination, the Option will not qualify for ISO treatment under the Code. To
the extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within six months (6) from the date of termination, the Option shall
terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months (or such other period of time as is
determined by the Administrator, with such determination in the case of an
Incentive Stock Option made at the time of grant of the Option) following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date
<PAGE>
of death or, if earlier, the date of termination of Optionee's Continuous Status
as an Employee or Consultant. To the extent that Optionee was not entitled to
exercise the Option at the date of death or termination, as the case may be, or
if Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Service
Status from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in
the Option Agreement to such greater time as the Administrator shall deem
appropriate, provided that in no event shall such Option be exercisable later
than the date of expiration of the term of such Option as set forth in the
Option Agreement.
(f) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted under the Plan
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. In the case of a Stock Purchase Right granted prior to the date, if any,
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws at such time, the purchase price of Shares subject to such Stock
Purchase Rights shall not be less than 85% of the Fair Market Value of the
Shares as of the date of the offer, or, in the case of a Ten Percent Holder, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer. If the Applicable Laws do not impose the requirements
set forth in the preceding sentence and with respect to any Stock Purchase
Rights granted after the date, if any, on which the Common Stock becomes a
Listed Security, the purchase price of Shares subject to Stock Purchase Rights
shall be as determined by the Administrator. The offer to purchase Shares
subject to Stock Purchase Rights shall be accepted by execution of a Restricted
Stock Purchase Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine;
<PAGE>
provided however that with respect to a Stock Purchase Right granted prior to
the date, if any, on which the Common Stock becomes a Listed Security to a
purchaser who is not an officer, Director or Consultant of the Company or of any
Parent or Subsidiary of the Company, it shall lapse at a minimum rate of 20% per
year if required by the Applicable Laws.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. Taxes.
-----
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising the Option or Stock Purchase Right)
shall make such arrangements as the Administrator may require for the
satisfaction of any applicable federal, state, local or foreign withholding tax
obligations that may arise in connection with the exercise of Option or Stock
Purchase Right and the issuance of Shares. The Company shall not be required to
issue any Shares under the Plan until such obligations are satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option or Stock Purchase Right.
(c) This Section 12(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. For purposes of this Section 12,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Laws (the "Tax Date").
--------
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right
<PAGE>
by surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Participant for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value
determined as of the applicable Tax Date equal to the amount required to be
withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 12(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 12(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Participant shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution; provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. An Option or Stock Purchase Right may be exercised, during the
lifetime of the holder of Option or Stock Purchase Right, only by such holder or
a transferee permitted by this Section 13.
14. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of Shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, the number of Shares set forth
in Sections 3(a)(i) and 8 above, and the number of Shares of Common Stock that
have been authorized for issuance under the Plan but as to which no Options or
Stock Purchase Rights have yet been granted or that have been returned to the
Plan upon cancellation or expiration of an Option or Stock Purchase Right, as
well as the price per share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration."
<PAGE>
Such adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Corporate Transaction. In the event of a Corporate Transaction,
---------------------
each outstanding Option or Stock Purchase Right shall be assumed or an
equivalent option or right shall be substituted by such successor corporation or
a parent or subsidiary of such successor corporation, unless the successor
corporation does not agree to assume the Option or Stock Purchase Right or to
substitute an equivalent option or right, in which case such Option or Stock
Purchase Right shall terminate upon the consummation of the merger or sale of
assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
15. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation (other than an adjustment pursuant to Section 14 above) shall
be made that would materially and adversely affect the rights of any Optionee or
holder of Stock Purchase Rights under any outstanding grant, without his or her
consent. In addition, to the extent necessary and desirable to comply with the
Applicable Laws, the Company shall obtain stockholder approval of any Plan
amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall materially and adversely affect Options or Stock Purchase
Rights already granted,
<PAGE>
unless mutually agreed otherwise between the Optionee or holder of the Stock
Purchase Rights and the Administrator, which agreement must be in writing and
signed by the Optionee or holder and the Company.
17. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the Applicable Laws, with such compliance determined
by the Company in consultation with its legal counsel. As a condition to the
exercise of an Option or Stock Purchase Right, the Company may require the
person exercising such Option or Stock Purchase Right to represent and warrant
at the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is required
by law.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
Option Agreements and Restricted Stock Purchase Agreements, respectively, in
such form(s) as the Administrator shall from time to time approve.
20. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted. Such
stockholder approval shall be obtained in the manner and to the degree required
under the Applicable Laws.
21. Information and Documents to Optionees and Purchasers. Prior to the
-----------------------------------------------------
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information.
<PAGE>
EXHIBIT 10.3
CERENT CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Cerent Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Cerent Corporation, a Delaware corporation.
-------
(e) "Compensation" means all regular straight time gross earnings and
------------
shall not include commissions or payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
-------------
participant pursuant to the Plan.
(h) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "Designated Subsidiaries" means the Subsidiaries which have been
-----------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if
<PAGE>
the issuance of options to such Subsidiary's Employees pursuant to the Plan
would not cause the Company to incur adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Offering Date" means the first business day of each Offering
-------------
Period of the Plan.
(m) "Offering Period" means a period of twenty-four (24) months
---------------
commencing on May 1 and November 1 of each year, except for the first Offering
Period as set forth in Section 4(a).
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this Employee Stock Purchase Plan.
----
(p) "Purchase Date" means the last day of each Purchase Period of the
-------------
Plan.
(q) "Purchase Period" means a period of six (6) months within an
---------------
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(r) "Purchase Price" means with respect to a Purchase Period an amount
--------------
equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a
Share of Common Stock on the Offering Date or on the Purchase Date, whichever is
lower; provided, however, that in the event (i) of any increase in the number of
Shares available for issuance under the Plan (including without limitation an
automatic increase pursuant to Section 13(a) below or as a result of a
stockholder-approved amendment to the Plan), and (ii) all or a portion of such
additional Shares are to be issued with respect to one or more Offering Periods
that are underway at the time of such increase ("Additional Shares"), and (iii)
-----------------
the Fair Market Value of a Share of Common Stock on the date of such increase
(the "Approval Date Fair Market Value") is higher than the Fair Market Value on
-------------------------------
the Offering Date for any such Offering Period, then in such instance the
Purchase Price with respect to Additional Shares shall be 85% of the Approval
Date Fair Market Value or the Fair Market Value of a Share of Common Stock on
the Purchase Date, whichever is lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance
-----
with Section 19 of the Plan.
-2-
<PAGE>
(t) "Subsidiary" means a corporation, domestic or foreign, of which
----------
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided however that eligible Employees
may not participate in more than one Offering Period at a time.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods and Purchase Periods.
-------------------------------------
(a) Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of twenty-four (24) months' duration, with new Offering
Periods commencing on or about May 1 and November 1 of each year (or at such
other time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the beginning of the effective date of the
Registration Statement on Form S-1 for the initial public offering of the
Company's Common Stock (the "IPO Date") and continue until October 31, 2001.
--------
The Plan shall continue until terminated in accordance with Section 19 hereof.
The Board of Directors of the Company shall have the power to change the
duration and/or the frequency of Offering Periods with respect to future
offerings without stockholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
----------------
consecutive purchase periods of six (6) months' duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
-------------
Purchase Period commencing on May 1 shall end on the next October 31. A
Purchase Period commencing on November 1 shall end on the next April 30. The
first Purchase Period shall commence on the IPO Date and shall end on April 30,
2000. The Board of Directors of the Company shall have the power to change the
duration and/or frequency of Purchase Periods with respect to future purchases
without
-3-
<PAGE>
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Purchase Period to be affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given Offering Period. The
subscription agreement shall set forth the percentage of the participant's
Compensation (subject to Section 6(a) below) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
10.
6. Method of Payment of Contributions.
----------------------------------
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than ten percent (10%) (or such greater percentage as the Board may
establish from time to time before an Offering Date, which percentage shall not
exceed twenty percent (20%)) of such participant's Compensation on each payday
during the Offering Period. All payroll deductions made by a participant shall
be credited to his or her account under the Plan. A participant may not make
any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 10, or, on one occasion only during the Offering Period
may increase and on one occasion only during the Offering Period may decrease
the rate of his or her Contributions with respect to the Offering Period by
completing and filing with the Company a new subscription agreement authorizing
a change in the payroll deduction rate. The change in rate shall be effective
as of the beginning of the next calendar month following the date of filing of
the new subscription agreement, if the agreement is filed at least ten (10)
business days prior to such date and, if not, as of the beginning of the next
succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased by the Company to 0% at any time during a
Purchase Period. Payroll deductions shall re-commence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10.
-4-
<PAGE>
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however that the maximum number of
Shares an Employee may purchase during each Purchase Period shall be 2,000
Shares (after giving effect to the Company's three-for-one stock split effected
in July 1999 and subject to further adjustment pursuant to Section 19 below),
and provided further that such purchase shall be subject to the limitations set
forth in Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
-----------------
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such date, on the immediately preceding trading date), as reported
in The Wall Street Journal. For purposes of the Offering Date under the first
-----------------------
Offering Period under the Plan, the Fair Market Value of a share of the Common
Stock of the Company shall be the Price to Public as set forth in the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424 under the Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
--------
Offering Period, the Company shall arrange the delivery to each participant, as
appropriate, of a certificate representing the Shares purchased upon exercise of
his or her option. Any payroll deductions accumulated in a participant's
account which are not sufficient to purchase a full Share shall be retained in
the participant's account for the subsequent Purchase Period or Offering Period,
subject to earlier withdrawal by the participant as provided in Section 10
below. Any other amounts left over in a participant's account after a Purchase
Date shall be returned to the participant.
-5-
<PAGE>
10. Voluntary Withdrawal; Termination of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of Shares will be made during the Offering
Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. If the Fair Market Value of the Shares on any
--------------------
Purchase Date of an Offering Period is less than the Fair Market Value of the
Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period. Participants shall automatically be
withdrawn as of October 31, 1999 from the Offering Period beginning on the IPO
Date and re-enrolled in the Offering Period beginning on November 1, 1999 if the
Fair Market Value of the Shares on the IPO Date is greater than the Fair Market
Value of the Shares on October 31, 1999, unless a participant notifies the
Administrator prior to October 31, 1999 that he or she does not wish to be
withdrawn and re-enrolled.
12. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall be
500,000 Shares (after giving effect to the Company's three-for-one stock split
effected in July 1999), plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2001, 2002, 2003,
-6-
<PAGE>
2004 and 2005 equal to the lesser of (i) 500,000 Shares (after giving effect to
the Company's three-for-one stock split effected in July 1999), (ii) one percent
(1%) of the Shares outstanding on the last day of the immediately preceding
fiscal year, or (iii) such lesser number of Shares as is determined by the
Board. If the Board determines that, on a given Purchase Date, the number of
shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Offering Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Purchase Date, the Board may in
its sole discretion provide (x) that the Company shall make a pro rata
allocation of the Shares of Common Stock available for purchase on such Offering
Date or Purchase Date, as applicable, in as uniform a manner as shall be
practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Purchase Date, and continue all Offering Periods then in effect, or (y) that the
Company shall make a pro rata allocation of the shares available for purchase on
such Offering Date or Purchase Date, as applicable, in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Common Stock on
such Purchase Date, and terminate any or all Offering Periods then in effect
pursuant to Section 20 below. The Company may make pro rata allocation of the
Shares available on the Offering Date of any applicable Offering Period pursuant
to the preceding sentence, notwithstanding any authorization of additional
Shares for issuance under the Plan by the Company's stockholders subsequent to
such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant
-7-
<PAGE>
and in the absence of a beneficiary validly designated under the Plan who is
living at the time of such participant's death, the Company shall deliver such
Shares and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its discretion, may deliver such
Shares and/or cash to the spouse or to any one or more dependents or relatives
of the participant, or if no spouse, dependent or relative is known to the
Company, then to such other person as the Company may designate.
16. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
17. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders of
----------
the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the maximum number of shares of
--------
Common Stock which may be purchased by a participant in a Purchase Period, the
number of shares of Common Stock set forth in Section 13(a)(i) above, and the
price per Share of Common Stock covered by each option under the Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided however that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
-8-
<PAGE>
(b) Corporate Transactions. In the event of a dissolution or
----------------------
liquidation of the Company, any Purchase Period and Offering Period then in
progress will terminate immediately prior to the consummation of such action,
unless otherwise provided by the Board. In the event of a Corporate Transaction,
each option outstanding under the Plan shall be assumed or an equivalent option
shall be substituted by the successor corporation or a parent or Subsidiary of
such successor corporation. In the event that the successor corporation refuses
to assume or substitute for outstanding options, each Purchase Period and
Offering Period then in progress shall be shortened and a new Purchase Date
shall be set (the "New Purchase Date"), as of which date any Purchase Period and
-----------------
Offering Period then in progress will terminate. The New Purchase Date shall be
on or before the date of consummation of the transaction and the Board shall
notify each participant in writing, at least ten (10) days prior to the New
Purchase Date, that the Purchase Date for his or her option has been changed to
the New Purchase Date and that his or her option will be exercised automatically
on the New Purchase Date, unless prior to such date he or she has withdrawn from
the Offering Period as provided in Section 10. For purposes of this Section 19,
an option granted under the Plan shall be deemed to be assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
a Corporate Transaction, each holder of an option under the Plan would be
entitled to receive upon exercise of the option the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to the transaction, the
holder of the number of Shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of Shares covered by
the option as provided for in this Section 19); provided however that if the
consideration received in the transaction is not solely common stock of the
successor corporation or its parent (as defined in Section 424(e) of the Code),
the Board may, with the consent of the successor corporation, provide for the
consideration to be received upon exercise of the option to be solely common
stock of the successor corporation or its parent equal in Fair Market Value to
the per Share consideration received by holders of Common Stock in the
transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
20. Amendment or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 19, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the stockholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse
-9-
<PAGE>
accounting charges as a result of a change after the effective date of the Plan
in the generally accepted accounting rules applicable to the Plan. Except as
provided in Section 19 and in this Section 20, no amendment to the Plan shall
make any change in any option previously granted which adversely affects the
rights of any participant. In addition, to the extent necessary to comply with
Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any
successor rule or provision or any applicable law or regulation), the Company
shall obtain stockholder approval in such a manner and to such a degree as so
required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the IPO Date. It shall continue in effect for a term of twenty (20) years
unless sooner terminated under Section 20.
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the
-10-
<PAGE>
Exchange Act shall comply with the applicable provisions of Rule 16b-3. This
Plan shall be deemed to contain, and such options shall contain, and the Shares
issued upon exercise thereof shall be subject to, such additional conditions and
restrictions as may be required by Rule 16b-3 to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan transactions.
-11-
<PAGE>
CERENT CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the Cerent
Corporation 1999 Employee Stock Purchase Plan (the "Plan") for the Offering
----
Period ______________, ____ to _______________, ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 10% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only with respect to any increase and one occasion only with respect to
any decrease during any Offering Period by completing and filing a new
Subscription Agreement with such increase or decrease taking effect as of the
beginning of the calendar month following the date of filing of the new
Subscription Agreement, if filed at least ten (10) business days prior to the
beginning of such month. Further, I may change the rate of deductions for future
Offering Periods by filing a new Subscription Agreement, and any such change
will be effective as of the beginning of the next Offering Period. In addition,
I acknowledge that, unless I discontinue my participation in the Plan as
provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "Cerent Corporation 1999 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
____________________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _____________________________________
(First) (Middle) (Last)
__________________ _____________________________________
(Relationship) (Address)
_____________________________________
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within 1 year after the Purchase
Date, I will be treated for federal income tax purposes as having received
ordinary compensation income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares on the Purchase Date over
the price which I paid for the shares, regardless of whether I disposed of the
shares at a price less than their fair market value at the Purchase Date. The
remainder of the gain or loss, if any, recognized on such disposition will be
treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any such disposition, and I will make adequate provision for federal,
- -----------------------------------------------------------------------------
state or other tax withholding obligations, if any, which arise upon the
- ------------------------------------------------------------------------
disposition of the Common Stock. The Company may, but will not be obligated to,
- -------------------------------
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
-2-
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:_________________________
SOCIAL SECURITY #:_________________
DATE:______________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
____________________________________
(Signature)
____________________________________
(Print name)
-3-
<PAGE>
CERENT CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the Cerent Corporation 1999 Employee Stock Purchase Plan (the "Plan") for the
----
Offering Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:___________________ _______________________________
Signature of Employee
_______________________________
Social Security Number
<PAGE>
EXHIBIT 10.4
CERENT CORPORATION
1999 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. Purposes of the Plan. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Cerent Corporation, a Delaware corporation.
-------
(e) "Continuous Status as a Director" means the absence of any
-------------------------------
interruption or termination of service as a Director.
(f) "Corporate Transaction" means a dissolution or liquidation of the
---------------------
Company, a sale of all or substantially all of the Company's assets, or a
merger, consolidation or other capital reorganization of the Company with or
into another corporation.
(g) "Director" means a member of the Board.
--------
(h) "Employee" means any person, including any officer or Director,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Option" means a stock option granted pursuant to the Plan. All
------
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means an Outside Director who receives an Option.
--------
(m) "Outside Director" means a Director who is not an Employee.
----------------
<PAGE>
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1999 Directors' Stock Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 500,000 Shares of Common Stock (after giving effect to the
Company's three-for-one stock split effected in July 1999) (the "Pool"). The
----
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by the
Company upon exercise of an Option in order to satisfy the exercise price for
such Option, or any withholding taxes due with respect to such exercise, shall
be treated as not issued and shall continue to be available under the Plan. If
Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
------------------------------------------------------
(a) Administrator. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director who becomes an Outside Director after
the effective date of this Plan shall be automatically granted an Option to
purchase 20,000 Shares (after giving effect to the Company's three-for-one stock
split effected in July 1999) (the "First Option") on the date on which such
------------
person first becomes an Outside Director, whether through election by the
stockholders of the Company or appointment by the Board to fill a vacancy.
-2-
<PAGE>
(iii) Each Outside Director shall thereafter be automatically
granted an Option to purchase 10,000 Shares (after giving effect to the
Company's three-for-one stock split effected in July 1999) (a "Subsequent
----------
Option") on the date of each Annual Meeting of the Company's stockholders
- ------
immediately following which such Outside Director is serving on the Board,
provided that, on such date, he or she shall have served on the Board for at
least six (6) months prior to the date of such Annual Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors receiving an
Option on the automatic grant date. Any further grants shall then be deferred
until such time, if any, as additional Shares become available for grant under
the Plan through action of the stockholders to increase the number of Shares
which may be issued under the Plan or through cancellation or expiration of
Options previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 17 hereof.
(vi) The terms of each First Option granted hereunder shall be
as follows:
(1) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the First Option, determined in
accordance with Section 8 hereof; and
(3) the First Option shall be fully vested and exercisable
in its entirety immediately upon grant.
(vii) The terms of each Subsequent Option granted hereunder
shall be as follows:
(1) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Subsequent Option, determined
in accordance with Section 8 hereof; and
-3-
<PAGE>
(3) the Subsequent Option shall be fully vested and
exercisable in its entirety immediately upon grant.
(c) Powers of the Board. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per Share of Options to be granted, which exercise price
shall be determined in accordance with Section 8 of the Plan; (iii) to interpret
the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
-----------------------------------
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct). If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever. In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating
-4-
<PAGE>
to the Company's initial public offering of securities. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 13 of
the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
-----------------
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National Market or listed on a stock exchange, the fair market value per
Share shall be the closing sales price on such system or exchange on the date of
grant of the Option (or, in the event that the Common Stock is not traded on
such date, on the immediately preceding trading date), as reported in The Wall
--------
Street Journal, or if there is a public market for the Common Stock but the
- --------------
Common Stock is not traded on the Nasdaq National Market or listed on a stock
exchange, the fair market value per Share shall be the mean of the bid and asked
prices of the Common Stock in the over-the-counter market on the date of grant,
as reported in The Wall Street Journal (or, if not so reported, as otherwise
------------------------
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") System).
(c) Form of Consideration. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided however that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 below has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the
-5-
<PAGE>
issuance (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. A share certificate for the number
of Shares so acquired shall be issued to the Optionee as soon as practicable
after exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. If an Outside
----------------------------------------------
Director ceases to serve as a Director, he or she may, but only within ninety
(90) days after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. Notwithstanding the foregoing, in no event
may the Option be exercised after its term set forth in Section 7 has expired.
To the extent that such Outside Director was not entitled to exercise an Option
at the date of such termination, or does not exercise such Option (to the extent
he or she was entitled to exercise) within the time specified above, the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee:
-----------------
(i) (A) During the term of the Option who is, at the time of his or
her death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, or (B) three (3)
months after the termination of Continuous Status as a Director, the Option may
be exercised, at any time within twelve (12) months following the date of death,
by the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of death or the date of termination, as
applicable. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
an Optionee was not entitled to exercise the Option at the date of death or
termination or if he or she does not exercise such Option (to the extent he or
she was
-6-
<PAGE>
entitled to exercise) within the time specified above, the Option shall
terminate and the Shares underlying the unexercised portion of the Option shall
revert to the Plan.
10. Nontransferability of Options. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders
----------
of the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii) and
(iii) above, and the number of Shares of Common Stock which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock (including any such change in the number of Shares of Common
Stock effected in connection with a change in domicile of the Company) or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
(b) Corporate Transactions. In the event of a Corporate Transaction,
----------------------
each outstanding Option shall be assumed or an equivalent option shall be
substituted by the successor corporation or a Parent or Subsidiary of such
successor corporation, unless the successor corporation does not agree to assume
the outstanding Options or to substitute equivalent options, in which case the
Options shall terminate upon the consummation of the transaction.
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Corporate Transaction, each Optionee would be entitled
to receive upon exercise of an Option the same number and kind of shares of
stock or the same amount of property, cash or securities as the Optionee would
have been entitled to receive upon the occurrence of such transaction if the
Optionee had been, immediately prior to such transaction, the holder of the
number of Shares of Common Stock covered by the Option at such time (after
giving effect to any adjustments in the number of Shares covered by the Option
as provided for in this Section 11); provided
-7-
<PAGE>
however that if such consideration received in the transaction was not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon exercise of the Option to be solely common stock of the
successor corporation or its Parent equal to the Fair Market Value of the per
Share consideration received by holders of Common Stock in the transaction.
(c) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the administration
of stock option plans under applicable U.S. state corporate laws, U.S. federal
and applicable state securities laws, the Code, any stock exchange or Nasdaq
rules or regulations to which the Company may be subject and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time (the "Applicable Laws"). Such compliance shall be determined by the
---------------
Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares
-8-
<PAGE>
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.
-9-
<PAGE>
CERENT CORPORATION
1999 DIRECTORS' STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
((Optionee))
You have been granted an option to purchase Common Stock of Cerent
Corporation (the "Company") as follows:
-------
Date of Grant ((GrantDate))
Vesting Commencement Date ((VestingStartDate))
Exercise Price per Share ((ExercisePrice))
Total Number of Shares Granted ((SharesGranted))
Total Exercise Price ((TotalExercisePrice))
Expiration Date ((ExpirDate))
Vesting Schedule This Option is fully vested and may be
exercised, in whole or in part, at any
time after the Date of Grant and prior
to its expiration as set forth below and
in the Stock Option Agreement.
Termination Period This Option may be exercised for 90 days
after termination of Optionee's
Continuous Status as a Director, or such
longer period as may be applicable upon
death or Disability of Optionee as
provided in the Plan, but in no event
later than the Expiration Date as
provided above.
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 1999 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: CERENT CORPORATION
___________________________________ By:________________________________
((Optionee))
Title:_____________________________
-2-
<PAGE>
CERENT CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
1. Grant of Option. The Board of Directors of the Company hereby grants
---------------
to the Optionee named in the Notice of Stock Option Grant (the "Optionee")
--------
attached to this Agreement an option (the "Option") to purchase a number of
------
Shares, as set forth in the Notice of Stock Option Grant, at the exercise price
per share set forth in the Notice of Stock Option Grant (the "Exercise Price"'),
--------------
subject to the terms and conditions of the 1999 Directors' Stock Option Plan
(the "Plan"), which is incorporated herein by reference. Capitalized terms not
----
defined herein shall have the meanings ascribed to such terms in the Plan. In
the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Nonstatutory Stock Option Agreement, the terms and
conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Stock Option Grant
and the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement. In the event of Optionee's death, disability or other termination of
Optionee's service as a Director, the exercisability of the Option is governed
by the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
--------- ---------------
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
----------------
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment
of the aggregate Exercise Price as to all Exercised Shares. This Option shall
be deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
<PAGE>
(c) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan. The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.
6. Tax Consequences. Set forth below is a brief summary of certain
----------------
federal and California tax consequences relating to this Option under the law in
effect as of the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR
HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. Since this Option does not qualify as an
---------------------
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal and California income tax liability upon exercise. The Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the fair market value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price.
(b) Disposition of Shares. If the Optionee holds the Option Shares
---------------------
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes. Long-term capital gain will be taxed for federal income tax and
alternative minimum tax purposes at a maximum rate of 20% if the Shares are held
more than one year after exercise.
-2-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Nonstatutory Stock Option Agreement.
Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Nonstatutory Stock Option Agreement and fully understands all
provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan and
Nonstatutory Stock Option Agreement.
CERENT CORPORATION
___________________________________ By:_____________________________________
((Optionee))
Title:__________________________________
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Nonstatutory Stock Option Agreement. In
consideration of the Company's granting his or her spouse the right to purchase
Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement,
the undersigned hereby agrees to be irrevocably bound by the terms and
conditions of the Plan and this Nonstatutory Stock Option Agreement and further
agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the
undersigned with respect to any amendment or exercise of rights under the Plan
or this Nonstatutory Stock Option Agreement.
________________________________________
Spouse of Optionee
-3-
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Cerent Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase __________ shares of Cerent Corporation
Common Stock, under and pursuant to the Company's 1999 Directors' Stock Option
Plan and the Nonstatutory Stock Option Agreement dated _______________, as
follows:
Grant Number: __________________________________
Date of Purchase: __________________________________
Number of Shares: __________________________________
Purchase Price: __________________________________
Method of Payment of
Purchase Price: __________________________________
Social Security No.: __________________________________
The shares should be issued as follows:
Name: __________________________________
Address: __________________________________
__________________________________
__________________________________
Signed: __________________________________
Date: __________________________________
<PAGE>
EXHIBIT 10.5
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (the "Agreement") is made as of
---------
___________________, by and between Cerent Corporation, a Delaware corporation
(the "Company"), and _______________________ (the "Indemnitee").
-------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee 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,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, or, with respect to any criminal action or proceeding, that Indemnitee
had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee 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, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section 1(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. Any advances to be made under this
Agreement shall be paid by the Company to Indemnitee within twenty (20) days
following delivery of a written request therefor by Indemnitee to the Company.
-2-
<PAGE>
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company and shall be given in accordance with the provisions of
Section 12(d) below. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than forty-five (45) days
after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or Bylaws providing for indemnification, is not
paid in full by the Company within forty-five (45) days after a written request
for payment thereof has first been received by the Company, Indemnitee may, but
need not, at any time thereafter bring an action against the Company to recover
the unpaid amount of the claim and, subject to Section 11 of this Agreement,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
connection with any action, suit or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the Company to indemnify Indemnitee for the
amount claimed, but the burden of proving such defense shall be on the Company
and Indemnitee shall be entitled to receive interim payments of expenses
pursuant to Section 3(a) unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination that indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by
-3-
<PAGE>
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same proceeding, provided that (i) Indemnitee
shall have the right to employ counsel in any such proceeding at Indemnitee's
expense; and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense or (C) the Company shall not, in
fact, have employed counsel to assume the defense of such proceeding, then the
fees and expenses of Indemnitee's counsel shall be at the expense of the
Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
-4-
<PAGE>
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
---
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the SEC to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a
-5-
<PAGE>
right to indemnification under this Agreement or any other statute or law or
otherwise as required under Section 145 of the Delaware General Corporation Law,
but such indemnification or advancement of expenses may be provided by the
Company in specific cases if the Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
-6-
<PAGE>
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
-7-
<PAGE>
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
to effectively bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
Cerent Corporation
By: __________________________
Title: ________________________
Address: 1450 North McDowell Blvd.
Petaluma, CA 94954-6515
AGREED TO AND ACCEPTED:
_____________________________
(Signature)
Address: ____________________
____________________
-9-
<PAGE>
EXHIBIT 10.6
CERENT CORPORATION
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
------------------------------------------------
This Amended and Restated Investors' Rights Agreement (the "Agreement") is
---------
made as of July 20, 1999, by and among Cerent Corporation, a Delaware
corporation (the "Company"), the investors listed on Exhibit A hereto, each of
------- ---------
which is herein referred to as an "Investor," and RVS Holding Company, Ajaib
--------
Bhadare, Jay Sethuram and Sudhindar Balakrishna, each of whom is herein referred
to as a "Founder," and collectively, as the "Founders."
------- --------
RECITALS
--------
In connection with a financing, the Company desires to issue and sell a
promissory note convertible into Common Stock, or, in the absence of an initial
public offering, convertible Preferred Stock, to MSD Portfolio L.P.--
Investments, DBV Investments, L.P., Susan L. Dell Separate Property Trust,
Michael S. Dell Personal Income Trust (the "MSD Notes") pursuant to a
---------
Convertible Note Purchase greement dated July 20, 1999. In connection with a
commercial partnership agreement dated April 20, 1999, the Company previously
issued a Common Stock warrant to Williams Communications ("Williams Warrant").
----------------
The Company and certain prior Investors have entered into a Series E Preferred
Stock Purchase Agreement dated November 24, 1998 (the "Series E Purchase
-----------------
Agreement," and together with the Series D Purchase Agreement, the Series C
- ---------
Purchase Agreement and the Series B Purchase Agreement (defined below), (the
"Purchase Agreements")) pursuant to which the Company sold to such Investors and
-------------------
such Investors purchased from the Company shares of the Company's Series E
Preferred Stock. The Company and certain prior Investors also have entered into
a Series D Preferred Stock Purchase Agreement dated July 10, 1998 ("Series D
--------
Purchase Agreement"), Series C Preferred Stock and Warrant Purchase Agreement
- ------------------
dated August 15, 1997 (the "Series C Purchase Agreement"), and a Common Stock,
---------------------------
Series B Preferred Stock and Warrant Purchase Agreement (the "Series B Purchase
-----------------
Agreement") dated April 15, 1997, pursuant to which the Company sold to such
- ---------
Investors shares of the Company's Series C Preferred Stock, Common Stock, Series
B Preferred Stock, warrants to purchase shares of the Company's Series B
Preferred Stock and warrants to purchase shares of the Company's Series C
Preferred Stock (the "Series B Warrants," "Series C Warrants," and together the
----------------- -----------------
"Warrants"). The Company and RVS Holding Company have entered into a Series A
--------
Preferred Stock Purchase Agreement dated March 28, 1997 pursuant to which the
Company sold Series A Preferred Stock to RVS Holding Company in exchange for
certain assets. The Company and each of the Founders, except RVS Holding
Company, have also entered into Common Stock Purchase Agreements dated March 28,
1997. A condition to the Investors' obligations under the Series E Purchase
Agreement is that the Company, the Founders and the Investors enter into this
Agreement in order to provide the Investors with (i) certain rights to register
shares of the Company's Common Stock purchased pursuant to the Purchase
Agreements or issuable upon conversion of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock held by
the Investors, and (ii) certain rights to receive or inspect information
pertaining to the Company. The Company
-1-
<PAGE>
and the Founders each desires to issue warrants to induce Williams, and future
similarly situation commercial partners, to purchase products from the Company
pursuant to respective commercial agreements by agreeing to the terms and
conditions set forth herein.
AGREEMENT
---------
The parties hereby agree as follows:
1. Registration Rights. The Company and the Investors covenant and
-------------------
agree as follows:
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The terms "register," "registered," and "registration"
-------- ---------- ------------
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "Act"), and the declaration or ordering of effectiveness of such
---
registration statement or document;
(b) The term "Registrable Securities" means (i) the shares
----------------------
of Common Stock purchased pursuant to the Purchase Agreements (ii) the shares of
Common Stock issuable or issued upon conversion of the Series B Preferred Stock,
the Series C Preferred Stock, the Series D Preferred Stock and the Series E
Preferred Stock purchased pursuant to the Purchase Agreements, (iii) the shares
of Common Stock issuable upon conversion of the MSD Notes (or upon the
conversion stock issuable upon conversion of the Preferred Stock issuable upon
conversion of the MSD Notes, if converted into Preferred Stock), (iv) the shares
of Common Stock issuable or issued upon conversion of the Series B Preferred
Stock and Series C Preferred Stock purchased upon exercise of the Warrants (v)
shares of Common Stock issuable or issued upon exercise of rights under
Warrants, or issuable upon conversion of Preferred Stock which is issuable upon
the exercise of Preferred Stock Warrants, to purchase Common Stock or Preferred
Stock issued by the Company concurrently herewith or after the date hereof to
providers, purchasers or licensees of products or technologies (or rights
thereto) of the Company, if such issuance is approved by the Board of Directors
of the Company, which providers, purchasers or licensees have executed a
counterpart signature page hereto and agreed to be bound by the terms hereof
(such shares of Common Stock under subsections (i), (ii), (iii), (iv) and (v)
above are collectively referred to hereinafter as the "Stock"), (vi) any other
-----
shares of Common Stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Stock, and (vii) the shares of Common Stock issued to the
Founders, including Common Stock issuable or issued upon conversion of the
Series A Preferred Stock (the "Founders' Stock"), provided, however, that, for
--------------- -------- -------
the purposes of Sections 1.2 and 1.12, the Founders' Stock shall not be deemed
Registrable Securities and the Founders shall not be deemed Holders, and
provided, further, that the foregoing definition shall exclude in all cases any
- -------- -------
Registrable Securities sold by a person in a transaction in which such person's
rights under this Agreement are not assigned. Notwithstanding the foregoing,
shares of Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public
-2-
<PAGE>
securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Act under Section 4(1)
thereof so that all transfer restrictions, and restrictive legends with respect
thereto, if any, are removed upon the consummation of such sale;
(c) The number of shares of "Registrable Securities then
---------------------------
outstanding" shall be determined by the number of shares of Common Stock
- -----------
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
------
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof;
(e) The term "Form S-3" means such form under the Act as in
--------
effect on the date hereof or any successor form under the Act; and
(f) The term "SEC" means the Securities and Exchange
---
Commission.
1.2 Investors' Request for Registration.
-----------------------------------
(a) If the Company shall receive at any time after the
earlier of (i) August 15, 2002, or (ii) six (6) months after the effective date
of the first registration statement for a public offering of securities of the
Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or an SEC Rule 145 transaction), a written request from
the Holders of a majority of the Registrable Securities then outstanding that
the Company file a registration statement under the Act covering the
registration of at least thirty percent (30%) of the Registrable Securities then
outstanding, then the Company shall, within ten (10) days of the receipt
thereof, give written notice of such request to all Holders and shall, subject
to the limitations of subsection 1.2(b), use its best efforts to effect as soon
as practicable, and in any event within sixty (60) days of the receipt of such
request, the registration under the Act of all Registrable Securities which the
Holders request to be registered within twenty (20) days of the mailing of such
notice by the Company in accordance with Section 3.5.
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
--------------------
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 1.2 and the
Company shall include such information in the written notice referred to in
subsection 1.2(a). The underwriter will be selected by a majority in interest of
the Initiating Holders and shall be reasonably acceptable to the Company. In
such event, the right of any Holder to include his Registrable Securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as
-3-
<PAGE>
provided in subsection 1.4(e)) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
-------- -------
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2, a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than 120 days after receipt of the request of the
Initiating Holders; provided, however, that the Company may not utilize this
-------- -------
right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to
effect, or to take any action to effect, any registration pursuant to this
Section 1.2:
(i) After the Company has effected two (2)
registrations pursuant to this Section 1.2 and such registrations have been
declared or ordered effective;
(ii) During the period starting with the date sixty
(60) days prior to the Company's good faith estimate of the date of filing of,
and ending on a date one hundred eighty (180) days after the effective date of,
a registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iii) If the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.12 below.
1.3 Company Registration. If (but without any obligation to do
--------------------
so) the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock under the Act in connection with the public offering of such securities
solely for cash (other than a registration relating solely to the sale of
securities to participants in a Company stock plan or a transaction covered by
Rule 145 under the Act, a registration in which the only stock being registered
is Common Stock issuable upon conversion of debt securities which are also being
registered, or any registration on any form which does not include substantially
the same information as would be required to be
-4-
<PAGE>
included in a registration statement covering the sale of the Registrable
Securities), the Company shall, at such time, promptly give each Holder written
notice of such registration. Upon the written request of each Holder given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 3.5, the Company shall, subject to the provisions of
Section 1.8, cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
1.4 Obligations of the Company. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty (120) days;
provided, however, that such 120 day period shall be extended for a period of
- -------- -------
time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter. The Company
shall not be required to file, cause to become effective or maintain the
effectiveness of any registration statement that contemplates a distribution of
securities on a delayed or continuous basis pursuant to Rule 415 under the Act.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement for up to one hundred twenty (120) days.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
--------
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus
-5-
<PAGE>
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing, and at the request of any such Holder,
prepare and furnish a reasonable number of copies of a supplement or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to purchasers of such shares, such prospectus shall not include an
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
such obligation to continue for one hundred twenty (120) days.
(g) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(i) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.5 Furnish Information. It shall be a condition precedent to
-------------------
the obligations of the Company to take any action pursuant to this Section 1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in subsection
1.2(a) and 1.12(b)(2), whichever is applicable.
-6-
<PAGE>
1.6 Expenses of Demand Registration. All expenses other than
-------------------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
-------- -------
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses),
unless the Holders of a majority of the Registrable Securities agree to forfeit
their right to one demand registration pursuant to Section 1.2; provided
further, however, that if at the time of such withdrawal, the Holders have
learned of a material adverse change in the condition or business of the Company
from that known to the Holders at the time of their request and have withdrawn
the request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not be required to pay any
of such expenses and shall retain their rights pursuant to Section 1.2.
1.7 Expenses of Company Registration. The Company shall bear and
--------------------------------
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing, and
qualification fees, printers' and accounting fees relating or apportionable
thereto and the reasonable fees and disbursements of one counsel for the selling
Holders selected by them with the approval of the Company, which approval shall
not be unreasonably withheld, but excluding underwriting discounts and
commissions relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder, provided that the number of shares of Registrable
Securities to be included in such underwriting shall not be reduced unless all
other securities held by persons other than the Holders or the Company are first
entirely excluded from the underwriting, and provided further that the number of
shares of Registrable Securities held by the Holders to be included in such
underwriting shall not be reduced unless all Registrable Securities held by the
Founders are first entirely excluded
-7-
<PAGE>
from the underwriting), but in no event shall the amount of securities of the
Holders included in the offering be reduced below thirty percent (30%) of the
total amount of securities included in such offering, unless such offering is
the initial public offering of the Company's securities, in which case such
amount may be reduced to zero percent (0%). For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder which is a
holder of Registrable Securities and which is a partnership or corporation, the
partners, retired partners and stockholders of such holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
-------
stockholder," and any pro-rata reduction with respect to such "selling
- ----------
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to
---------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), against any losses, claims, damages, or liabilities (joint
------------
or several) to which they may become subject under the Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
---------
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Act, the Exchange Act or any state securities
law; and the Company will pay to each such Holder, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.10(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
-8-
<PAGE>
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person intended
to be indemnified pursuant to this subsection 1.10(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
1.10(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided, that,
in no event shall any indemnity under this subsection 1.10(b) exceed the net
proceeds from the offering received by such Holder, except in the case of
willful fraud by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
-------- -------
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one
-9-
<PAGE>
hand and of the indemnified party on the other in connection with the statements
or omissions that resulted in such loss, liability, claim, damage, or expense as
well as any other relevant equitable considerations; provided, that, in no event
--------
shall any contribution by a Holder under this Subsection 1.10(d) exceed the net
proceeds from the offering received by such Holder, except in the case of
willful fraud by such Holder. The relative fault of the indemnifying party and
of the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public so long as the
Company remains subject to the periodic reporting requirements under Sections 13
or 15(d) of the Exchange Act;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the first registration statement filed by the Company for the offering
of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the Exchange Act (at
any time after it has become subject to such reporting requirements), or that it
-10-
<PAGE>
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 Form S-3 Registration. After its initial public offering,
---------------------
the Company shall use its best efforts to qualify for registration on Form S-3
or any comparable or successor form or forms. In case the Company shall receive
from any Holder or Holders of not less than thirty percent (30%) of the
Registrable Securities then outstanding a written request or requests that the
Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within twenty (20) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance, pursuant to this Section
1.12: (1) if Form S-3 is not available for such offering by the Holders; (2) if
the Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) having an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$500,000; (3) if the Company shall furnish to the Holders a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such Form S-3 Registration to be effected at
such time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than ninety (90)
days after receipt of the request of the Holder or Holders under this Section
1.12; provided, however, that the Company shall not utilize this right more than
once in any twelve month period; (4) if the Company has completed an initial
public offering of its Common Stock within the 180 day period preceding the date
of such request; (5) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected two registrations on Form
S-3 for the Holders pursuant to this Section 1.12; or (6) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All
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<PAGE>
expenses incurred in connection with a registration requested pursuant to this
Section 1.12, including (without limitation) all registration, filing,
qualification, printers' and accounting fees and the reasonable fees and
disbursements of one special counsel for the selling Holder or Holders and
counsel for the Company, but excluding any underwriters' discounts or
commissions associated with Registrable Securities, shall be borne by the
Company. Registrations effected pursuant to this Section 1.12 shall not be
counted as demands for registration or registrations effected pursuant to
Sections 1.2 or 1.3, respectively.
1.13 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of at least 50,000 shares of such securities (as adjusted for stock
splits, stock dividends, recapitalizations and the like), provided the Company
is, within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; provided that the
transferee or assignee agrees in writing to be bound by all obligations under
this Agreement; and provided, further, that such assignment shall be effective
only if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Act.
Notwithstanding anything to the contrary provided herein, rights to cause the
Company to register Registrable Securities may be assigned by a Holder to any
partner, retired partner (including spouses and ancestors, lineal descendants
and siblings of such partners or spouses who acquire Registrable Securities by
gift, will or intestate succession) or affiliate of such Holder, without regard
to the number of shares of Registrable Securities transferred to such partner,
retired partner, or affiliate; provided that all assignees and transferees who
would not qualify individually for assignment of registration rights shall have
a single attorney-in-fact for the purpose of exercising any rights, receiving
notices or taking any action under Section 1.
1.14 "Market Stand-Off" Agreement. Each Holder hereby agrees
---------------------------
that, during the period of duration (up to, but not exceeding, 180 days)
specified by the Company and an underwriter of Common Stock or other securities
of the Company, following the date of the final prospectus distributed in
connection with a registration statement of the Company filed under the Act, it
shall not, to the extent requested by the Company and such underwriter, directly
or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose of (other than to donees who agree to be similarly bound) any
securities of the Company held by it at any time during such period except
Common Stock purchased in the public offering and Common Stock purchased in an
open market transaction; provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) all officers and directors of the Company, all one-
percent securityholders, and all other persons with registration rights (whether
or not pursuant to this Agreement) enter into similar agreements.
-12-
<PAGE>
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.14.
Notwithstanding the foregoing, the obligations described in this
Section 1.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to an SEC Rule 145 transaction
on Form S-4 or similar forms which may be promulgated in the future.
1.15 Termination of Registration Rights. No Holder shall be
----------------------------------
entitled to exercise any right provided for in this Section 1 after the earlier
of (i) five (5) years following the consummation of the sale of securities
pursuant to a registration statement filed by the Company under the Act in
connection with the initial firm commitment underwritten offering of its
securities to the general public, or (ii) such time as Rule 144 or another
similar exemption under the Act is available for the sale of all of such
Holder's shares during a three (3)-month period without registration.
2. Covenants of the Company.
------------------------
2.1 Delivery of Financial Statements.
--------------------------------
(a) The Company shall deliver to each Investor, and
transferees thereof, holding at least 50,000 shares of Registrable Securities
(as adjusted for stock splits, stock dividends, recapitalizations and the like):
(i) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
stockholder's equity as of the end of such year, and a statement of cash flows
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles ("GAAP"),
----
and audited and certified by an independent public accounting firm of nationally
recognized standing selected by the Company;
(ii) as soon as practicable, but in any event within
thirty (30) days after the end of each of the first three (3) quarters of each
fiscal year of the Company, an unaudited profit or loss statement, a statement
of cash flows for such fiscal quarter and an unaudited balance sheet as of the
end of such fiscal quarter;
(b) The Company shall deliver to each Investor, and
transferees thereof, holding at least 50,000 shares of Registrable Securities
(as adjusted for stock splits, stock dividends, recapitalizations and the like):
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<PAGE>
(i) within thirty (30) days of the end of each month,
an unaudited income statement and a statement of cash flows and balance sheet
for and as of the end of such month, in reasonable detail, commencing after the
third month following the effective date of the Purchase Agreement;
(ii) as soon as practicable, but in any event thirty
(30) days prior to the end of each fiscal year, a budget for the next fiscal
year, prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company.
(c) The Company shall deliver to each Investor, with
respect to the financial statements called for in subsections (a)(ii) and (b)(i)
of this Section 2.1, an instrument executed by the Chief Financial Officer or
President of the Company and certifying that such financials were prepared in
accordance with GAAP consistently applied with prior practice for earlier
periods (with the exception of footnotes that may be required by GAAP) and
fairly present the financial condition of the Company and its results of
operation for the period specified, subject to year-end audit adjustment,
provided that the foregoing shall not restrict the right of the Company to
change its accounting principles consistent with GAAP, if the Board of Directors
determines that it is in the best interest of the Company to do so; and
(d) such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as any such
Investor or any assignee of any such Investor may from time to time reasonably
request, provided, however, that the Company shall not be obligated under this
subsection (d) or any other subsection of Section 2.1 to provide information
which it deems in good faith to be a trade secret or similar confidential
information.
2.2 Inspection. The Company shall permit each Investor, and
----------
transferees thereof, holding at least 100,000 shares of Registrable Securities
(as adjusted for stock splits, stock dividends and the like), at such Investor's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Investor; provided, however, that the Company shall not be obligated pursuant to
this Section 2.2 to provide access to any information which it reasonably
considers to be a trade secret or similar confidential information. The
inspection rights referred to in this Section 2.2 may be assigned (but only with
all related obligations) by a Holder to a transferee or assignee of at least
100,000 shares of such securities (as adjusted for stock splits, stock
dividends, recapitalizations and the like), provided the Company is, within a
reasonable time after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned; and provided, further, that
such assignment shall be effective only if immediately following such transfer
the further disposition of such securities by the transferee or assignee is
restricted under the Act.
-14-
<PAGE>
2.3 Termination of Information and Inspection Covenants. The
---------------------------------------------------
covenants set forth in Sections 2.1 and 2.2 shall terminate as to Investors and
be of no further force or effect when the first sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
firm commitment underwritten offering of its securities to the general public is
consummated or when the Company first becomes subject to the periodic reporting
requirements of Sections 13 or 15(d) of the Exchange Act, whichever event shall
first occur.
2.4 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this Section 2.4, the Company hereby grants to each Major Investor
(as hereinafter defined) a right of first offer with respect to future sales by
the Company of its Shares (as hereinafter defined). For purposes of this
Section 2.4, a "Major Investor" shall mean any person who holds at least 50,000
--------------
shares of the Company's Preferred Stock (or the Common Stock issued upon
conversion thereof) (as adjusted for stock splits, stock dividends,
recapitalizations and the like). For purposes of this Section 2.4, Major
Investor includes any general partners and affiliates of a Major Investor. A
Major Investor who chooses to exercise the right of first offer may designate as
purchasers under such right itself or its partners or affiliates in such
proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), the Company shall first make an offering of such
------
Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Major Investors stating (i) its bona fide intention to offer
------
such Shares, (ii) the number of such Shares to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Shares.
(b) Within 15 calendar days after delivery of the Notice,
the Major Investor may elect to purchase or obtain, at the price and on the
terms specified in the Notice, up to that portion of such Shares which equals
the proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Major Investor bears to the total number of shares
of Common Stock then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities). The Company shall promptly, in writing,
inform each Major Investor that purchases all the shares available to it (each,
a "Fully-Exercising Investor") of any other Major Investor's failure to do
-------------------------
likewise. During the ten (10)-day period commencing after receipt of such
information, each Fully-Exercising Investor shall be entitled to obtain that
portion of the Shares for which Major Investors were entitled to subscribe but
which were not subscribed for by the Major Investors that is equal to the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Fully-Exercising Investor bears to the total
number of shares of Common Stock then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities).
-15-
<PAGE>
(c) The Company may, during the 45-day period following the
expiration of the period provided in subsection 2.4(b) hereof, offer the
remaining unsubscribed portion of the Shares to any person or persons at a price
not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period, or if such agreement is not consummated
within 60 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such Shares shall not be offered unless first reoffered
to the Major Investors in accordance herewith.
(d) The right of first offer in this Section 2.4 shall not
be applicable (i) to the issuance or sale of Common Stock (or options therefor)
to employees, consultants and directors of the Company, pursuant to plans or
agreements approved by the Board of Directors for the primary purpose of
soliciting or retaining their services, or (ii) to or after consummation of the
sale of securities pursuant to a registration statement filed by the Company
under the Act in connection with the initial firm commitment underwritten
offering of its securities to the general public in which the Preferred Stock
will automatically convert into Common Stock, or (iii) to the issuance of
securities pursuant to the conversion or exercise of convertible or exercisable
securities, or (iv) to the issuance of securities in connection with a bona fide
business acquisition of or by the Company, whether by merger, consolidation,
sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of
securities to financial institutions or lessors in connection with commercial
credit arrangements, equipment financings, or similar transactions approved by
the Board of Directors, or (vi) to the issuance of warrants to purchase Common
Stock or Preferred Stock issued concurrently herewith or after the date hereof
to providers, purchasers or licensees of products or technologies (or rights
thereto) of the Company.
2.5 Certain Covenants Relating to SBA Matters. For so long as at
-----------------------------------------
least 50,000 shares of the Company's stock are held by an SBIC Investor (as
defined below), the Company shall keep the following covenants:
(a) Use of Proceeds. The proceeds from the issuance and
---------------
sale of the Series E Preferred Stock pursuant to the Series E Purchase Agreement
(the "Proceeds") shall be used by the Company for its growth, modernization or
--------
expansion. The Company shall provide each Investor which is a licensed Small
Business Investment Company (a "SBIC Investor") and the Small Business
-------------
Administration (the "SBA") reasonable access to the Company's books and records
---
for the purpose of confirming the use of Proceeds.
(b) Business Activity. For a period of one year following
-----------------
the Closing under the Series D Purchase Agreement and the Series E Purchase
Agreement, the Company shall not change the nature of its business activity if
such change would render the Company ineligible as provided in 13 C.F.R. Section
107.720.
(c) Compliance. The Company will at all times comply with
----------
the non-discrimination requirements of 13 C.F.R. Parts 112, 113 and 117.
-16-
<PAGE>
(d) Information for SBIC Investor. Within 45 days after the
-----------------------------
end of each fiscal year and at such other times as an SBIC Investor may
reasonably request, the Company shall deliver to such SBIC Investor a written
assessment, in the form and substance satisfactory to such SBIC Investor, of the
economic impact of such SBIC Investor's financing specifying the full-time
equivalent jobs created or retained in connection with such investment, and the
impact of the financing on the Company's business in terms of profits and on
taxes paid by the Company and its employees. Upon request, the Company agrees to
promptly provide each SBIC Investor with sufficient information to permit such
Investor to comply with their obligations under the Small Business Investment
Act of 1958, as amended, and the regulations promulgated thereunder and related
thereto; provided, however, each SBIC Investor agrees that it will protect any
-------- -------
information which the Company labels as confidential to the extent permitted by
law. Any submission of any financial information under this Section shall
include a certificate of the Company's President, Chief Executive Officer,
Treasurer or Chief Financial Officer.
2.6 Qualified Small Business Stock. For so long as any shares of
------------------------------
the Stock are held by an Investor (or a transferee in whose hands such shares
the Stock are eligible to qualify as "qualified small business stock") as
defined in Section 1202(c) of the Internal Revenue Code of 1982, as amended (the
"Code"), the Company will use reasonable efforts to comply with the reporting
----
and recordkeeping requirements of Section 1202 of the Code, any regulations
promulgated thereunder and any similar state laws and regulations, and agrees
not to repurchase any stock of the Company if such repurchase would constitute a
"significant redemption" within the meaning of Section 1202(c)(3)(B) of the Code
with respect to the Stock.
2.7 Voting Agreement. The Company covenants that each Purchaser
----------------
who purchases Series E Preferred Stock after the initial Closing as defined in
Section 1.2 of the Series E Purchase Agreement will, as a condition to their
purchase, become a party to the Amended and Restated Voting Agreement dated
November 24, 1998 between the Company and the individual entities described
therein.
3. Miscellaneous.
-------------
3.1 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any of the Preferred Stock or any Common Stock issued upon
conversion thereof). Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
3.2 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of California, without giving effect to principles of
conflicts of laws.
-17-
<PAGE>
3.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 Notices. Unless otherwise provided, any notice required or
-------
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address as set forth below or on
Exhibit A hereto or as subsequently modified by written notice.
- ---------
3.6 Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.7 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding, not including the
Founders' Stock; provided that if such amendment has the effect of affecting the
--------
Founders' Stock (i) in a manner different than securities issued to the
Investors and (ii) in a manner adverse to the interests of the holders of the
Founders' Stock, then such amendment shall require the consent of the holder or
holders of a majority of the Founders' Stock. Any amendment or waiver effected
in accordance with this paragraph shall be binding upon each holder of any
Registrable Securities then outstanding, each future holder of all such
Registrable Securities, and the Company.
3.8 Severability. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(x) such provision shall be excluded from this Agreement, (y) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (z) the
balance of the Agreement shall be enforceable in accordance with its terms.
3.9 Aggregation of Stock. All shares of the Stock or Registrable
--------------------
Securities held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
[Signature Page Follows]
-18-
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
-------------------------------------
Title: Chief Executive Officer
----------------------------------
FOUNDERS:
RVS HOLDING COMPANY
By: /s/ Rajvir Singh
-------------------------------------
Rajvir Singh, President
/s/ Ajaib Bhadare
- ----------------------------------------
AJAIB BHADARE
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
------------------------------------
Title: Chief Executive Officer
---------------------------------
INVESTOR:
NORWEST VENTURE PARTNERS VI, LP
By: Itasca VC Partners VI, LLP
its General Partner
/s/ Promod Haque
------------------------------------
By: Promod Haque, General Partner
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
--------------------------------------
Title: Chief Executive Officer
-----------------------------------
INVESTOR:
NORWEST VENTURE PARTNERS VI, LP
By: Itasca VC Partners VI, LLP
its General Partner
/s/ Promod Haque
-----------------------------
By: Promod Haque,
General Partner
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
--------------------------------------
INVESTOR:
INTEGRAL CAPITAL PARTNERS III,
L.P.
By: Integral Capital Management
III, L.P.
its General Partner
By: /s/ Pamela K. Hagenah
----------------------------
Pamela K. Hagenah
a General Partner
INTEGRAL CAPITAL PARTNERS
INTERNATIONAL III, L.P.
By: Integral Capital Management
III, L.P.
its Investment General
Partner
By: /s/ Pamela K. Hagenah
----------------------------
Pamela K. Hagenah
a General Partner
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
ADVANCED FIBRE COMMUNICATIONS,
INC.
By: /s/ Donald Green
---------------------------
Title: Chief Executive Officer
-------------------------
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
KLEINER PERKINS CAUFIELD &
BYERS VIII, L.P.
By: KPCB VIII Associates,
Its General Partner
By: /s/ Vinod Khosla
----------------------------
Title:_________________________
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates,
Its General Partner
By: /s/ Vinod Khosla
----------------------------
Title:_________________________
KPCB INFORMATION SCIENCES
ZAIBATSU FUND II, L.P.
By: KPCB VII Associates,
Its General Partner
By: /s/ Vinod Khosla
----------------------------
Title:_________________________
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
UTILITY COMPETITIVE ADVANTAGE
FUND, L.L.C
By: ARETE COMPETITIVE ADVANTAGE
PARTNERS, L.L.C.,
Managing Member
By: ARETE VENTURES, L.L.C.,
Managing Member
By: /s/ William T. Heflin
----------------------------
William T. Heflin,
Managing Director
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
TELESOFT PARTNERS IA, L.P.
By: TeleSoft IA-GP, Inc.,
General Partner
By: /s/ Arjun Gupta
----------------------------
Arjun Gupta
President and Chairman
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
CISCO SYSTEMS, INC.
By: /s/ John Chambers
----------------------------
Print Name: John T. Chambers
--------------------
Title: CEO and President
--------------------------
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
WILLIAMS COMMUNICATIONS, INC.,
D/B/A WILLIAMS NETWORKS
By: /s/ Williams Communications,
Inc.
----------------------------
Print Name:____________________
Title:_________________________
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
----------------------------------------
Title: Chief Executive Officer
-------------------------------------
INVESTOR:
MSD Portfolio L.P. -- Investments
By: /s/ MSD Portfolio L.P. --
---------------------------
Investments
---------------------------
Print Name:____________________
Title:_________________________
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
---------------------------
Title: Chief Executive Officer
------------------------
INVESTOR:
DBV INVESTMENTS, L.P.
By: /s/ DBV Investments, L.P.
---------------------------
Print Name: __________________
Title: _______________________
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
---------------------------
Title: Chief Executive Officer
------------------------
INVESTOR:
SUSAN L. DELL SEPARATE PROPERTY
TRUST
By: /s/ Susan L. Dell Separate Property Trust
-----------------------------------------
Print Name:____________________________
Title: ________________________________
<PAGE>
The parties have executed this Amended and Restated Investors' Rights
Agreement as of the date first above written.
COMPANY:
CERENT CORPORATION
By: /s/ Carl Russo
-------------------------------
Title: Chief Executive Officer
----------------------------
INVESTOR:
MICHAEL S. DELL PERSONAL INCOME
TRUST
By: /s/ Michael S. Dell Personal
-------------------------------
Income Trust
------------
Print Name: ______________________
Title: ___________________________
<PAGE>
EXHIBIT A
---------
INVESTORS
<TABLE>
<CAPTION>
Series E
Preferred Stock
---------------
Aggregate
Name and Address No. of Shares Price Per Purchase
of Purchaser to be Purchased Share Price
<S> <C> <C> <C>
Norwest Venture Partners VI, LP 436,868 $6.50 $ 2,839,642
245 Lytton Avenue, Ste. 250
Palo Alto, CA 94301
Attn: Promod Haque
Advanced Fibre Communications, Inc. 211,226 6.50 $ 1,372,969
1 Willow Brook Court
Petaluma, CA 94954
Attn: Donald Green
Kleiner Perkins Caufield & Byers VIII, L.P. 184,320 6.50 $ 1,198,080
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Vinod Khosla
KPCB VIII Founders Fund, L.P. 10,680 6.50 $ 69,420
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Vinod Khosla
KPCB Information Sciences Zaibatsu Fund II, 5,000 6.50 $ 32,500
L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Vinod Khosla
Integral Capital Partners III, L.P. 127,644 6.50 $ 829,686
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Pamela Hagenah
Integral Capital Partners International III, 29,410 6.50 $ 119,165
L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
Attn: Pamela Hagenah
Telesoft Partners 550,000 6.50 $ 3,575,000
222 Sutter Street
8th Floor
San Francisco, CA 94108
Attn: Arjun Gupta
</TABLE>
<PAGE>
Series E
Preferred Stock
---------------
<TABLE>
<CAPTION>
Aggregate
Name and Address No. of Shares Price Per Purchase
of Purchaser to be Purchased Share Price
<S> <C> <C> <C>
Utility Competitive Advantage Fund, L.L.C. 350,000 6.50 $ 2,275,000
Arete Ventures, L.L.C.
Two Wisconsin Circle
Suite 620
Chevy Chase, MD 20815
Attn: William T. Heflin
Cisco Systems, Inc. 2,000,000 6.50 $ 13,000,000
c/o Anna A. Ruiz
Brobeck Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303-0913
TOTALS 3,905,148 $ 25,383,462
</TABLE>
<PAGE>
COMMERCIAL WARRANTS
<TABLE>
<CAPTION>
Commercial Partner Number
of Issued Warrant
Shares
(Class)
<S> <C>
Williams Communications, d/b/a Williams 100,000
Networks (Common)
TOTALS
</TABLE>
<PAGE>
CONVERTIBLE NOTE SHARES
<TABLE>
<CAPTION>
Investor Amount of Note
<S> <C>
MSD Porfolio L.P. -- Investments, DBV $30,000,000
Investments, L.P. Susan L. Dell Separate
Property Trust, Michael S. Dell Personal
Income Trust
TOTALS
</TABLE>
<PAGE>
EXHIBIT 10.7
PROMISSORY NOTE
---------------
$1,242,644 Petaluma, California
May 7, 1999
For value received, the undersigned promises to pay Cerent Corporation, a
Delaware corporation (the "Company"), at its principal office the principal sum
-------
of $1,242,644 with interest from the date hereof at a rate of 5.22% per annum,
compounded annually, on the unpaid balance of such principal sum. Such
principal and interest shall be due and payable according to the terms set forth
in the Security Agreement attached hereto.
All principal and interest shall be due and payable upon the earlier to
occur of the following: (i) May 7, 2004 or (ii) promptly upon the sale of shares
of the Company's capital stock forming the security interest under the Security
Agreement; provided, however, that for purposes of this clause (ii) the only
amounts due hereunder at such time shall be equal to the net proceeds resulting
from such sale and any excess amount owed hereunder shall remain outstanding.
Principal and interest are payable in lawful money of the United States of
America, and any amounts paid shall be first applied to interest and thereafter
to principal. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT
INTEREST OR PENALTY.
Should suit be commenced to collect any sums due under this Note, such sum
as the Court may deem reasonable shall be added hereto as attorneys' fees. The
undersigned hereby waives presentment for payment, protest, notice of protest,
and notice of nonpayment of this Note. The undersigned maker may not assign
this Note without the Company's prior written consent. The Company may assign
this Note at any time and shall give the undersigned prompt notice of any such
assignment.
This Note, which is full recourse, is secured by a pledge of certain shares
of Series E Preferred Stock, of any Common Stock from conversion thereof, of the
Company and is subject to the terms of a Security Agreement between the
undersigned and the Company of even date herewith.
/s/ Carl Russo
--------------------------------------------------
Carl Russo
<PAGE>
SECURITY AGREEMENT
------------------
This Security Agreement is made as of May 7, 1999 by and between Cerent
Corporation, a Delaware corporation ("Pledgee"), and Carl Russo ("Pledgor").
------- -------
RECITALS
--------
Pledgee has loaned to Pledgor, and Pledgor has borrowed from Pledgee, an
aggregate of $1,242,644 which loan is or shall be evidenced by a promissory
note (the "Note") and is to be secured by up to an aggregate of 191,176 shares
----
of Pledgee's Series E Preferred Stock, or any Common Stock from conversion
thereof, (as adjusted for subsequent stock splits, reverse stock splits and
recapitalization) held or hereafter acquired by Pledgee (the "Shares").
------
AGREEMENT
---------
In consideration of the foregoing, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties to this
Agreement agree as follows:
1. Creation and Description of Security Interest; Transferability; Escrow.
----------------------------------------------------------------------
(a) In consideration of the loan to Pledgor, Pledgor, pursuant to the
Commercial Code of the State of California, hereby pledges the Shares (sometimes
referred to in this Agreement as the "Collateral") represented by the
----------
certificates delivered herewith, duly endorsed in blank or with executed stock
powers, to the Secretary of Pledgee (the "Pledgeholder"), who shall hold said
------------
certificates subject to the terms and conditions of this Security Agreement.
(b) The pledged stock (together with an executed blank stock
assignment for use in transferring all or a portion of the Shares to Pledgee if,
as and when required pursuant to this Security Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor.
(c) Except as required to enable Pledgee to exercise its rights as a
secured party or to allow Pledgor to repay all or part of the amounts
outstanding under the Note, none of the Shares pledged under this Section 1 may
be sold, transferred, pledged, hypothecated or otherwise disposed of by Pledgor.
(d) To ensure the ability of Pledgee to exercise its rights as a
secured party hereunder, Pledgor shall, upon execution of this Agreement,
deliver and deposit with the Secretary of Pledgee, or such other person
designated by Pledgee, the share certificates representing the Shares, together
with a stock power, duly endorsed in blank, in the form attached hereto as
Exhibit B-1. The Shares and stock power(s) shall be held by Pledgee in escrow,
- -----------
until such time as the Note shall have been paid in full. As a further
inducement to
<PAGE>
Pledgee to loan to Pledgor the funds represented by the Note, the spouse of
Pledgor, if any, shall execute and deliver to Pledgee a Consent of Spouse in the
form attached hereto as Exhibit B-2.
-----------
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum of
-----------------------
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
(b) Encumbrances. All Shares now or hereafter pledged under this
------------
Agreement are and shall be free of all other encumbrances, defenses and liens,
and Pledgor will not further encumber the Shares without the prior written
consent of Pledgee.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge any
-----------------
stock dividend, reclassification, readjustment or other changes declared or made
in the capital structure of Pledgee, all new, substituted and additional shares
or other securities issued by reason of any such change shall be delivered to
and held by the Pledgeholder under the terms of this Security Agreement in the
same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgee held by Pledgor as a result thereof.
5. Warrants and Rights. In the event that, during the term of this
-------------------
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Shares, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
-------
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants contained in this
Security Agreement for a period of 10 days after written notice thereof from
Pledgee.
<PAGE>
7. Remedies in the Event of Default. In the case of an event of default,
--------------------------------
as set forth above, Pledgee shall have the right to accelerate payment of the
Note upon notice to Pledgor, and shall thereafter be entitled to pursue any or
all of its remedies under applicable law, including, without limitation, (a)
offsetting from Pledgor's salary, bonuses, vacation pay or other amounts due to
Pledgor from the Pledgee, any amount due and payable by Pledgor under the Note,
and/or (b) proceeding against the Collateral in accordance with the California
Commercial Code.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The pledge of Shares shall continue until the payment of all
----
indebtedness secured hereby, at which time the remaining pledged stock shall be
promptly delivered to Pledgor.
10. Insolvency. ledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against Pledgor, or if a receiver is appointed
for the property of Pledgor, or if Pledgor makes an assignment for the benefit
of creditors, the entire amount unpaid on the Note shall become immediately due
and payable, and Pledgee may proceed as provided in the case of default.
11 Pledgeholder Liability. In the absence of willful or gross negligence,
----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.
12. Miscellaneous.
-------------
(a) Successors and Assigns. The terms and conditions of this
----------------------
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
(b) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(c) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS) or confirmed facsimile, or forty-eight (48) hours after being
deposited in the U.S. mail as certified or registered mail with
<PAGE>
postage prepaid, if such notice is addressed to the party to be notified at such
party's address or facsimile number as set forth below, or as subsequently
modified by written notice.
(d) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(e) Advice of Legal Counsel. Each party acknowledges and represents
-----------------------
that, in executing this Agreement, it has had the opportunity to seek advice as
to its legal rights from legal counsel and that the person signing on its behalf
has read and understood all of the terms and provisions of this Agreement. This
Agreement shall not be construed against any party by reason of the drafting or
preparation thereof.
[Signature Page Follows]
<PAGE>
The parties hereto have executed this Security Agreement as of the day and
year first above written.
CARL RUSSO
/s/ Carl Russo
----------------------------------
(Signature)
Address: 1450 N. McDowell Blvd
Petaluma, CA 94954
CERENT CORPORATION
By: /s/ Richard T. Roney
---------------------------------------
Title: Vice President - Operations
------------------------------------
Address: 1450 N. McDowell Blvd
Petaluma, CA 94954
<PAGE>
EXHIBIT B-1
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------
FOR VALUE RECEIVED I hereby sell, assign and transfer unto Cerent
Corporation, a Delaware Corporation, (the "Company") 191,176 shares of the
Company's Series E Preferred Stock, or any Common Stock from conversion thereof,
standing in my name on the books of said corporation and represented by
Certificate No(s). _______________ herewith and do hereby irrevocably constitute
and ____________ to transfer said stock on the books of the within-named
corporation with full power of substitution in the premises.
Dated: May 7, 1999
Signature:
/s/ Carl Russo
-----------------------------------------------
Carl Russo
This Assignment Separate from Certificate was executed in conjunction with the
terms of a Security Agreement between the above assignor and the Company dated
May 7, 1999.
<PAGE>
EXHIBIT 10.8
PROMISSORY NOTE
---------------
$_______ California
____________, ____
For value received, the undersigned promises to pay Cerent Corporation, a
Delaware corporation (the "Company"), at its principal office the principal sum
-------
of $______ with interest from the date hereof at a rate of ____% per annum,
compounded semiannually, on the unpaid balance of such principal sum. Such
principal and interest shall be due and payable on ____________.
If the undersigned's employment or consulting relationship with the Company
is terminated prior to payment in full of this Note, this Note shall be
immediately due and payable.
Principal and interest are payable in lawful money of the United States of
America. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT INTEREST
OR PENALTY.
Should suit be commenced to collect any sums due under this Note, such sum
as the Court may deem reasonable shall be added hereto as attorneys' fees. The
makers and endorsers have severally waived presentment for payment, protest,
notice of protest, and notice of nonpayment of this Note.
This Note, which is full recourse, is secured by a pledge of certain shares
of Common Stock of the Company and is subject to the terms of a Pledge and
Security Agreement between the undersigned and the Company of even date
herewith.
-------------------------
Signature
<PAGE>
PLEDGE AND SECURITY AGREEMENT
-----------------------------
This Pledge and Security Agreement (the "Agreement") is entered into this
---------
____ day of _________, ____ by and between Cerent Corporation, a Delaware
corporation (the "Company") and ________________ ("Purchaser").
------- ---------
RECITALS
--------
In connection with Purchaser's exercise of an option to purchase certain
shares of the Company's Common Stock (the "Shares") pursuant to an Option
------
Agreement dated ____________, ____ between Purchaser and the Company, Purchaser
is delivering a promissory note of even date herewith (the "Note") in full or
----
partial payment of the exercise price for the Shares. The company requires that
the Note be secured by a pledge of the Shares on the terms set forth below.
AGREEMENT
---------
In consideration of the Company's acceptance of the Note as full or partial
payment of the exercise price of the Shares, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. The Note shall become payable in full upon the voluntary or involuntary
termination or cessation of employment of Purchaser with the Company, for any
reason, with or without cause (including death or disability).
2. Purchaser shall deliver to the Secretary of the Company, or his or her
designee (hereinafter referred to as the "Pledge Holder"), all certificates
-------------
representing the Shares, together with an Assignment Separate from Certificate
in the form attached to this Agreement as Attachment A executed by Purchaser and
------------
by Purchaser's spouse (if required for transfer), in blank, for use in
transferring all or a portion of the Shares to the Company if, as and when
required pursuant to this Agreement. In addition, if Purchaser is married,
Purchaser's spouse shall execute the signature page attached to this Agreement.
3. As security for the payment of the Note and any renewal, extension or
modification of the Note, Purchaser hereby grants to the Company a security
interest in and pledges with and delivers to the Company Purchaser's Shares
(sometimes referred to herein as the "Collateral").
----------
4. In the event that Purchaser prepays all or a portion of the Note, in
accordance with the provisions thereof, Purchaser intends, unless written notice
to the contrary is delivered to the Pledge Holder, that the Shares represented
by the portion of the Note so repaid, including annual interest thereon, shall
continue to be so held by the Pledge Holder, to serve as independent collateral
for the outstanding portion of the Note for the purpose of
<PAGE>
commencing the holding period set forth in Rule 144(d) promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
--------------
5. In the event of any foreclosure of the security interest created by
this Agreement, the Company may sell the Shares at a private sale or may
repurchase the Shares itself. The parties agree that, prior to the establishment
of a public market for the Shares of the Company, the securities laws affecting
sale of the Shares make a public sale of the Shares commercially unreasonable.
The parties further agree that the repurchasing of such Shares by the Company,
or by any person to whom the Company may have assigned its rights under this
Agreement, is commercially reasonable if made at a price determined by the Board
of Directors in its discretion, fairly exercised, representing what would be the
fair market value of the Shares reduced by any limitation on transferability,
whether due to the size of the block of shares or the restrictions of applicable
securities laws.
6. In the event of default in payment when due of any indebtedness under
the Note, the Company may elect then, or at any time thereafter, to exercise all
rights available to a secured party under the California Commercial Code
including the right to sell the Collateral at a private or public sale or
repurchase the Shares as provided above. The proceeds of any sale shall be
applied in the following order:
(a) To the extent necessary, proceeds shall be used to pay all
reasonable expenses of the Company in enforcing this Agreement and the Note,
including, without limitation, reasonable attorney's fees and legal expenses
incurred by the Company.
(b) To the extent necessary, proceeds shall be used to satisfy any
remaining indebtedness under Purchaser's Note.
(c) Any remaining proceeds shall be delivered to Purchaser.
7. Upon full payment by Purchaser of all amounts due under the Note,
Pledge Holder shall deliver to Purchaser all Shares in Pledge Holder's
possession belonging to Purchaser, and Pledge Holder shall thereupon be
discharged of all further obligations under this Agreement; provided, however,
-------- -------
that Pledge Holder shall nevertheless retain the Shares an escrow agent if at
the time of full payment by Purchaser said shares are still subject to a
Repurchase Option in favor of the Company.
<PAGE>
The parties have executed this Pledge and Security Agreement as of the date
first set forth above.
COMPANY:
CERENT CORPORATION
By:
------------------------------------------
Name: ________________________________________
(print)
Title:________________________________________
PURCHASER:
----------------------------------------------
(Signature)
______________________________________________
(Print Name)
Address: _____________________________________
______________________________________________
----------------------------------------------
Spouse of Purchaser
<PAGE>
ATTACHMENT A
------------
ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------
FOR VALUE RECEIVED and pursuant to that certain Pledge and Security
Agreement between the undersigned ("Purchaser") and Cerent Corporation (the
--------
"Company") dated _______________, ____ (the "Agreement"), Purchaser hereby
- -------- ---------
sells, assigns and transfers unto the Company _________________________________
(________) shares of the Common Stock of the Company, standing in Purchaser's
name on the books of the Company and represented by Certificate No. ____, and
does hereby irrevocably constitute and appoint _________________________________
to transfer said stock on the books of the Company with full power of
substitution in the premises. This assignment may only be used as authorized by
the agreement.
Dated: ____________
Signature:
---------------------------------
Purchaser
---------------------------------
Spouse of Purchaser (if applicable)
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to perfect the security interest of the
Company pursuant to the Agreement.
<PAGE>
EXHIBIT 10.9
PROMISSORY NOTE
---------------
$359,100 Petaluma, California
July 8, 1998
For value received, the undersigned promises to pay Cerent Corporation, a
Delaware corporation (the "Company"), at its principal office the principal sum
-------
of $359,100 with interest from the date hereof at a rate of 5.60% per annum,
compounded semiannually, on the unpaid balance of such principal sum. Such
principal and interest shall be due and payable on July 7, 2002.
If the undersigned's employment or consulting relationship with the Company
is terminated prior to payment in full of this Note, this Note shall be
immediately due and payable.
Principal and interest are payable in lawful money of the United States of
America. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT INTEREST
OR PENALTY.
Should suit be commenced to collect any sums due under this Note, such sum
as the Court may deem reasonable shall be added hereto as attorneys' fees. The
makers and endorsers have severally waived presentment for payment, protest,
notice of protest, and notice of nonpayment of this Note.
This Note, which is full recourse, is secured by a pledge of certain shares
of Common Stock of the Company and is subject to the terms of a Pledge and
Security Agreement between the undersigned and the Company of even date
herewith.
/s/ Carl Russo
----------------------
Signature
<PAGE>
EXHIBIT D
---------
PLEDGE AND SECURITY AGREEMENT
-----------------------------
This Pledge and Security Agreement (the "Agreement") is entered into this
---------
8th day of July, 1998 by and between Cerent Corporation, a Delaware
corporation (the "Company") and Carl Russo ("Purchaser").
------- ---------
RECITALS
--------
In connection with Purchaser's exercise of an option to purchase certain
shares of the Company's Common Stock (the "Shares") pursuant to an Option
------
Agreement dated July 8, 1998 between Purchaser and the Company, Purchaser
is delivering a promissory note of even date herewith (the "Note") in full or
----
partial payment of the exercise price for the Shares. The company requires that
the Note be secured by a pledge of the Shares on the terms set forth below.
AGREEMENT
---------
In consideration of the Company's acceptance of the Note as full or partial
payment of the exercise price of the Shares, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. The Note shall become payable in full upon the voluntary or involuntary
termination or cessation of employment of Purchaser with the Company, for any
reason, with or without cause (including death or disability).
2. Purchaser shall deliver to the Secretary of the Company, or his or her
designee (hereinafter referred to as the "Pledge Holder"), all certificates
-------------
representing the Shares, together with an Assignment Separate from Certificate
in the form attached to this Agreement as Attachment A executed by Purchaser and
------------
by Purchaser's spouse (if required for transfer), in blank, for use in
transferring all or a portion of the Shares to the Company if, as and when
required pursuant to this Agreement. In addition, if Purchaser is married,
Purchaser's spouse shall execute the signature page attached to this Agreement.
3. As security for the payment of the Note and any renewal, extension or
modification of the Note, Purchaser hereby grants to the Company a security
interest in and pledges with and delivers to the Company Purchaser's Shares
(sometimes referred to herein as the "Collateral").
----------
4. In the event that Purchaser prepays all or a portion of the Note, in
accordance with the provisions thereof, Purchaser intends, unless written notice
to the contrary is delivered to the Pledge Holder, that the Shares represented
by the portion of the Note so repaid, including annual interest thereon, shall
continue to be so held by the Pledge Holder, to serve as independent collateral
for the outstanding portion of the Note for the purpose of
<PAGE>
commencing the holding period set forth in Rule 144(d) promulgated under the
Securities Act of 1933, as amended (the "Securities Act").
--------------
5. In the event of any foreclosure of the security interest created by
this Agreement, the Company may sell the Shares at a private sale or may
repurchase the Shares itself. The parties agree that, prior to the establishment
of a public market for the Shares of the Company, the securities laws affecting
sale of the Shares make a public sale of the Shares commercially unreasonable.
The parties further agree that the repurchasing of such Shares by the Company,
or by any person to whom the Company may have assigned its rights under this
Agreement, is commercially reasonable if made at a price determined by the Board
of Directors in its discretion, fairly exercised, representing what would be the
fair market value of the Shares reduced by any limitation on transferability,
whether due to the size of the block of shares or the restrictions of applicable
securities laws.
6. In the event of default in payment when due of any indebtedness under
the Note, the Company may elect then, or at any time thereafter, to exercise all
rights available to a secured party under the California Commercial Code
including the right to sell the Collateral at a private or public sale or
repurchase the Shares as provided above. The proceeds of any sale shall be
applied in the following order:
(a) To the extent necessary, proceeds shall be used to pay all
reasonable expenses of the Company in enforcing this Agreement and the Note,
including, without limitation, reasonable attorney's fees and legal expenses
incurred by the Company.
(b) To the extent necessary, proceeds shall be used to satisfy any
remaining indebtedness under Purchaser's Note.
(c) Any remaining proceeds shall be delivered to Purchaser.
7. Upon full payment by Purchaser of all amounts due under the Note,
Pledge Holder shall deliver to Purchaser all Shares in Pledge Holder's
possession belonging to Purchaser, and Pledge Holder shall thereupon be
discharged of all further obligations under this Agreement; provided, however,
-------- -------
that Pledge Holder shall nevertheless retain the Shares an escrow agent if at
the time of full payment by Purchaser said shares are still subject to a
Repurchase Option in favor of the Company.
<PAGE>
The parties have executed this Pledge and Security Agreement as of the date
first set forth above.
COMPANY:
CERENT CORPORATION
By: /s/ Michael Hatfield
----------------------------------------------
Name:_____________________________________________
(print)
Title:___________________________________________
PURCHASER:
/s/ Carl Russo
--------------------------------------------------
(Signature)
__________________________________________________
(Print Name)
Address:__________________________________________
__________________________________________________
__________________________________________________
Spouse of Purchaser
<PAGE>
ATTACHMENT A
------------
ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------
FOR VALUE RECEIVED and pursuant to that certain Pledge and Security
Agreement between the undersigned ("Purchaser") and Cerent Corporation (the
---------
"Company") dated _______________, ____ (the "Agreement"), Purchaser hereby
------- ---------
sells, assigns and transfers unto the Company _________________________________
(________) shares of the Common Stock of the Company, standing in Purchaser's
name on the books of the Company and represented by Certificate No. ____, and
does hereby irrevocably constitute and appoint
________________________________________________ to transfer said stock on the
books of the Company with full power of substitution in the premises. THIS
ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT.
Dated: ____________
Signature:
/s/ Carl Russo
---------------------------------
Purchaser
___________________________________
Spouse of Purchaser (if applicable)
Instruction: Please do not fill in any blanks other than the signature line. The
purpose of this assignment is to perfect the security interest of the Company
pursuant to the Agreement.
<PAGE>
EXHIBIT 10.13
REDWOOD BUSINESS PARK
FULL SERVICE LEASE
THIS LEASE, dated April 22, 1998, is made and entered into by and between G
& W/Copley Redwood Business Park, L.P., a limited partnership ("Landlord"), and
Fiberlane Communications, a Delaware corporation ("Tenant").
1. Premises.
--------
Landlord leases to Tenant, and Tenant hereby leases from Landlord for the
term of this Lease ("Term") and at the rent and upon the conditions set forth
below, the Premises described in the Basic Lease Information and identified on
the floor plan attached hereto as Exhibit A. The Premises are located within the
Building described in the Basic Lease Information, and constitute part of the
Project described in the Basic Lease Information and as shown in Exhibit A-1
attached hereto, at the Redwood Business Park, located in Petaluma, California.
All areas and facilities outside the Buildings and within the exterior
boundaries of the Project that are provided and designated by Landlord from time
to time for the general nonexclusive use and convenience of the tenants of the
Project shall be known as "Common Areas".
2. Term.
----
(a) The Term shall commence upon the date ("Commencement Date") which
is the earlier of: (i) substantial completion of the Premises, as the term
"substantial completion" is defined in the Work Letter Agreement, attached
hereto as Exhibit B; or (ii) the date substantial completion would have occurred
but for Tenant Delays (as the term is defined in the Work Letter Agreement). The
Estimated Commencement Date is set forth in the Basic Lease Information, which
date may be postponed due to a delay in delivering the Premises as provided in
Paragraph 2(b) below. A "Lease Year" is a period of twelve (12) consecutive
calendar months. A "Lease Month" is a calendar month. The initial Term of this
Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(2) If the Commencement Date of this Lease occurs on other than
the first calendar day of a calendar month, the Term shall be for a period of
Lease Years and Months as specified in the Basic Lease Information, plus the
number of days remaining in the calendar month in which the Commencement Date
occurs, unless terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the
Premises are not substantially completed (in accordance with the Work Letter
Agreement) on or within six (6) months after the Estimated Commencement Date,
then Tenant may, at Tenant's option, by notice in writing to Landlord within ten
(10) days thereafter, cancel this Lease, in which event, (i) this Lease shall be
deemed null and void and have no further force or effect, (ii) all security or
other deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. Rent.
----
(a) For purposes of this Lease, the term "Rent" shall mean the Base Rent,
Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced Base Rent set forth in the Basic Lease
Information. Tenant shall pay to Landlord the Base Rent specified in the Basic
Lease Information, payable on or before the first day of each and every
successive calendar month following the Commencement Date. If the Term commences
on other than the first day of a calendar month, the first payment of Base Rent
shall be appropriately prorated, on the basis of a 30-day month. Tenant's
payment of any Advanced Base Rent (excluding that portion attributable to last
month's rent, if any) shall be credited against Tenant's obligation to pay Base
Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money required
to be paid to Landlord by Tenant under this Lease in addition to monthly Base
Rent, whether or not the same be designated "additional rent." If such amounts
are not paid at the time provided in this Lease, they shall nevertheless be
collectable as additional rent with the next installment of monthly Base Rent
thereafter falling due, but nothing herein contained shall be deemed to suspend
or delay the payment of any amount of money at the time the same becomes due and
payable hereunder, or limit any other remedy of Landlord.
<PAGE>
(c) Tenant acknowledges that late payment by Tenant to Landlord of Rent
after the expiration of any applicable grace period will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any trust deed covering the Premises. Accordingly, if
any installment of Rent or any other sums due from Tenant shall not be received
by Landlord when due, Tenant shall pay to Landlord a late charge equal to six
percent (6%) of such overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear interest
from the date due until paid at the rate of ten percent (10%) per annum. Payment
of interest shall not excuse or cure any default hereunder by Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made to
Landlord without deduction or offset, in lawful money of the United States of
America at Landlord's address for notices hereunder, or to such other person or
at such other place as Landlord may from time to time designate in writing to
Tenant.
4. Taxes and Operating Expenses.
----------------------------
(a) For each calendar year during the Term after the year specified in
the Basic Lease Information as the Base Year, Tenant shall pay its percentage
share, as specified in the Basic Lease Information, of the increase in Property
Taxes over Base Property Taxes, and its percentage share of the increase in
Operating Expenses for such calendar year over Base Operating Expenses.
(1) "Property Taxes" shall mean all real property taxes, bonds and
assessments and governmentally imposed fees or charges (and any tax levied
wholly or partly in lieu thereof) levied, assessed, confirmed, imposed or which
have become a lien against the Building (which for the purposes of defining
"Property Taxes" shall include the tax parcel of which the Building is a part)
and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all costs of
management, operation, maintenance and repair of the Building and Common Areas,
including, without limitation, property management expenses, maintenance and
repair materials, supplies and equipment; (B) all costs of water, power,
electricity, refuse collection, parking lot sweeping, landscaping, and other
services relating to the Common Areas; (C) all costs of alterations or
improvements to the Building or Common Areas made to achieve compliance with
federal, state and local law including, without limitation, the Americans with
Disabilities Act (42 U.S.C. Section 12101 et seq.), which costs will be
amortized over the useful life of each alteration or improvement; (D) all costs
of public liability and casualty insurance maintained by Landlord with respect
to the Building and Common Areas; (E) all costs incurred by Landlord for making
any capital improvements, structural repairs or modifications to the Building or
Common Areas or making any improvements or modifications to reduce the operating
expenses, which costs will be amortized over the useful life of each capital
improvement, structural repair or modification; (F) all costs of maintaining
machinery, equipment and directional signage or other markers; and (G) the share
allocable to the Building of dues and assessments payable under any reciprocal
easement or common area maintenance agreements or declarations or by any owners'
associations affecting the Building. That portion of the Operating Expenses
relating to the property management expenses for the Building and Common Areas
which shall be charged to Tenant shall be four percent (4%) of both Tenant's
annual Base Rent and the subtotal of Tenant's share of Operating Expenses of the
Building. In the event that Landlord calculates the Operating Expenses based
upon the Project instead of the Building, then the term "Project" shall be
substituted in the place of all references to the term "Building" in this
paragraph.
(3) "Base Property Taxes" shall mean those Property Taxes incurred by
Landlord during the calendar year specified as Base Year in the Basic Lease
Information.
(4) "Base Operating Expenses" shall mean those Operating Expenses
incurred by Landlord during the calendar year specified as Base Year in the
Basic Lease Information.
(b) The Property Taxes to be paid by Tenant shall be determined by
multiplying the increase in Property Taxes over Base Property Taxes by Tenant's
Percentage Share of Property Taxes (which percentage is determined by
multiplying 100% by a fraction, the numerator of which is the rentable area of
the Premises and the denominator of which is the total rentable area of all
improvements located within the tax parcel of which the Premises are a part).
Landlord may cause the Common Areas of the Project to be separately assessed
from other areas and buildings of the Project. In such case, Tenant's Percentage
Share of Property Taxes attributable to the Common Areas shall be determined by
the ratio that the total rentable square feet in the Premises bears to the total
number of square feet of rentable area which is included in the property subject
to the assessment.
<PAGE>
(c) Operating Expenses for each calendar year shall be adjusted to equal
Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied. When
the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses to
be paid by Tenant shall be determined by multiplying the increase in Operating
Expenses over Base Operating Expenses, as adjusted above, by Tenant's Percentage
Share of Operating Expenses (which percentage is determined by multiplying 100%
by a fraction, the numerator of which is the rentable area of the Premises and
the denominator of which is the total rentable area located within the Building,
if the Operating Expenses are calculated for the Building, or within the
Project, if the Operating Expenses are calculated for the Project).
(d) Commencing as of the second year of the Lease through the remainder
of the Term and any extensions thereof, Tenant shall pay to Landlord each month
at the same time and in the same manner as monthly Base Rent one-twelfth
(1/12th) of Landlord's estimate of the increase in Property Taxes and one-
twelfth (1/12th) of Landlord's estimate of the increase in Operating Expenses
payable by Tenant for the then-current calendar year. Such monthly amount may be
adjusted by Landlord at any time on the basis of Landlord's experience and
reasonably anticipated costs. Within one hundred twenty (120) days after the
close of each calendar year, or as soon after such 120-day period as
practicable, Landlord shall deliver to Tenant a statement in reasonable detail
of the actual amount of Property Taxes and Operating Expenses payable by Tenant
in accordance with this Paragraph 4 for such calendar year. Tenant may request
further information if desired. Landlord's failure to provide such statement to
Tenant within the 120-day period shall not act as a waiver and shall not excuse
Tenant or Landlord from making the adjustments to reflect actual costs as
provided herein. If on the basis of such statement Tenant owes an amount that is
less than the estimated payments for such calendar year previously made by
Tenant, Landlord shall credit such excess to Tenant against future additional
rent due under this Paragraph 4. If on the basis of such statement Tenant owes
an amount that is more than the estimated payments for such calendar year
previously made by Tenant, Tenant shall pay the deficiency to Landlord within
fifteen (15) days after delivery of the statement. The obligations of Landlord
and Tenant under this Paragraph 4(d) with respect to the reconciliation between
the estimated and actual amounts of Property Taxes and Operating Expenses
payable by Tenant for the last year of the Term shall survive the termination of
the Lease. When the final determination is made of the actual amounts of
Property Taxes and Operating Expenses payable by Tenant for the year in which
this Lease terminates, Tenant shall immediately pay any increase due over the
estimated payments and, conversely, any overpayment made by Tenant shall be
immediately reimbursed to Tenant by Landlord.
5. Other Taxes.
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In addition to Tenant's obligations under Paragraph 4 above, Tenant shall
pay or reimburse Landlord for (i) any taxes upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or leasehold improvements
made in or to the Premises at Tenant's expense, (ii) for taxes, if any, measured
by or reasonably attributable to tenant improvements paid for by Tenant, and
(iii) for any taxes, assessments, fees, or charges imposed by any public
authority or private community maintenance association upon or by reason of the
development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. Use.
---
6.1 Prohibited Uses.
---------------
(a) The Premises shall be used and occupied by Tenant solely for the
use set forth in the Basic Lease Information. Tenant shall, at Tenant's expense,
comply promptly with all applicable federal, state and local laws, regulations,
ordinances, rules, orders, and requirements in effect during the Term relating
to the condition, use or occupancy of the Premises. Tenant shall not use or
permit the use of the Premises in any manner that will tend to create waste or a
nuisance, or that unreasonably disturbs other tenants of the Building or
Project, nor shall Tenant place or maintain any signs, antennas, awnings,
lighting or plumbing fixtures, loudspeakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which consent may be withheld in Landlord's sole
discretion. Tenant shall not use any corridors, sidewalks, stairs, elevators, or
other areas outside of the Premises for storage or any purpose other than access
to the Premises. Tenant shall not use, keep, or permit to be used or kept on the
Premises any foul or noxious gas or substance, nor shall Tenant do or permit to
be done anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3 (b) below).
<PAGE>
(b) Tenant shall not attach any signage to or on any part of the
outside of the Premises, the Building or the Project, or in the halls, lobbies,
windows or elevator banks of the Building without Landlord's prior written
consent, which consent may be withheld in Landlord's sole discretion. Any
signage so permitted shall be subject to prior approval of and conformance with
the requirements of the design review committee of the Project and the design
review agency of the city. At Tenant's expense, Tenant shall (i) maintain all
permitted signage, and (ii) upon the expiration or termination of this Lease,
remove such signage and repair any damage caused by their removal. If Tenant
fails to do so, Landlord may maintain, repair or remove such signage without
notice to Tenant and at Tenant's expense, the cost of which shall be payable by
Tenant as additional rent in accordance with Paragraph 14(b)(2) below.
6.2 Suitability. Tenant acknowledges that neither Landlord nor any
-----------
agent of Landlord has made any representation or warranty with respect to the
Premises or the Building or with respect to the suitability or fitness of either
for the conduct of Tenant's business or for any other purpose. Nor has Landlord
agreed to undertake any modification, alteration or improvement to the Premises
except as provided in this Lease. Tenant acknowledges that the Premises are
located in a 100-year flood zone and that the finished floor elevations of the
Building are designed to be at least two (2) feet above the federal government's
estimate of the 100-year flood level at the time of initial construction.
6.3 Use of Common Areas.
-------------------
(a) Landlord gives Tenant and its authorized employees, agents,
customers, representatives, and invitees the nonexclusive right to use the
Common Areas, with others who are entitled to use the Common Areas, subject to
Landlord's rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control and
management of Landlord and Landlord shall have the right to establish, modify,
amend, and enforce reasonable rules and regulations with respect to the Common
Areas. Tenant acknowledges receipt of a copy of the current rules and
regulations, attached hereto as Exhibit C, and agrees that they may, from time
to time, be modified or amended by Landlord in a commercially reasonable manner
(the "Rules"). Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord shall have the right to close temporarily any portion of
the Common Areas for the purpose of discouraging use by parties who are not
tenants or customers of tenants; to use portions of the Common Areas while
engaged in making additional improvements or repairs or alterations to the
Property; to use or permit the use of the Common Areas by others to whom
Landlord may grant or have granted such rights; and to do and perform such acts
in, to, and with respect to, the Common Areas as in the use of good business
judgment Landlord shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or reduce
the Common Areas, provided the Project meets the parking requirement under
Paragraph 6.5 below.
(e) Tenant shall cooperate with Landlord and other tenants in the
Project in recycling waste paper, cardboard, or such other materials identified
under any trash recycling program that may be established in order to reduce
trash collection costs.
6.4 Environmental Matters.
---------------------
(a) (1) The term "Hazardous Materials" as used herein means any
petroleum products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals,
compounds, materials, mixtures or substances that are now or hereafter defined
or listed in, or otherwise classified as a "hazardous substance" "hazardous
material" "hazardous waste", "extremely hazardous waste", "infectious waste"
"toxic substance", "toxic pollutant" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant to
any federal, state or local environmental law, regulation, ordinance,
resolution, order or decree relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, release,
disposal or transportation of the same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial cleaning
materials which in common business practice are customarily and lawfully used,
stored and disposed of in small quantities, and except for those Hazardous
Materials listed on Exhibit D attached hereto, Tenant shall not use,
manufacture, store, release, dispose or transport any Hazardous Materials in,
on, under or about the Premises, the Building or the Project without giving
prior written notice to Landlord and obtaining Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Subject to
Landlord's prior written consent, Hazardous Materials may be added to Exhibit D
on an annual review basis; any such amendments to Exhibit D shall be signed by
each party and attached hereto. Tenant shall at its own expense procure,
maintain in effect, and comply with all conditions of
<PAGE>
any and all permits, licenses, and other governmental and regulatory approvals
required in connection with Tenant's generation, use, storage, disposal and
transportation of Hazardous Materials. Except as discharged into the sanitary
sewer in strict accordance and conformity with all applicable Hazardous
Materials Laws, Tenant shall cause any and all Hazardous Materials removed from
the Premises to be removed and transported solely by duly licensed haulers to
duly licensed facilities for final disposal of such materials and wastes.
Regardless whether permitted under the Hazardous Materials Laws, Tenant shall
not maintain in, on, under, or about the Premises, the Building or the Project
any above or below ground storage tanks, clarifiers, or sumps, nor shall any
wells for the monitoring of ground water, soils, or subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of:
(a) any enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Law; (b)
any claim made or threatened by any person or entity against Tenant or the
Premises relating to damage, contribution, cost, recovery, compensation, loss or
injury, resulting from or claimed to result from any Hazardous Materials; and
(c) any reports, information, inquiries or demands made, ordered, or received by
or on behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably acceptable
to Landlord), protect, and hold Landlord, and each of Landlord's partners,
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, damages, fines, penalties, forfeitures, losses, cleanup and
remediation costs or expenses (including attorneys' fees) or death of or injury
to any person or damage to any property whatsoever, arising from or caused in
whole or in part, directly or indirectly, by (i) Tenant's use, analysis,
generation, manufacture, storage, release, disposal, or transportation of
Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or (ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
(c) Landlord shall have the right to enter the Premises during
regular business hours upon reasonable prior notice at all times for the
purposes of ascertaining compliance by Tenant with all applicable Hazardous
Materials Laws, provided, however, that in the instance of an emergency
Landlord's entry onto the Premises shall not be restricted to regular business
hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this Lease
for the release or discharge of Hazardous Materials by Tenant, Tenant's
employees, agents, contractors, or invitees on the Premises, Building or Project
or in violation of law or in deviation from prescribed procedures in Tenant's
use or storage of Hazardous Materials. If Tenant fails to comply with any of the
provisions under this Paragraph 6.4, Landlord shall have the right (but not the
obligation) to remove or otherwise cleanup any Hazardous Materials from the
Premises, the Building or the Project. In such case, the costs of any Hazardous
Materials investigation, removal or other cleanup (including, without
limitation, transportation, storage, disposal and attorneys' fees and costs)
will be additional rent due under this Lease, whether or not a court has ordered
the cleanup, and will become due and payable on demand by Landlord.
6.5 Parking. Landlord grants to Tenant and Tenant's customers,
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suppliers, employees and invitees a nonexclusive license to use unassigned and
unreserved parking spaces in the Common Areas for the use of motor vehicles
during the Term subject to rights reserved to Landlord as specified in this
Paragraph 6.5. Landlord reserves the right to grant similar nonexclusive and
unassigned and unreserved use to other tenants; to promulgate rules and
regulations relating to the use of the Common Areas including parking by tenants
and employees of tenants; to make changes in the parking layout from time to
time; and to do and perform any other acts in and to these areas and
improvements as Landlord determines to be advisable. Tenant agrees not to
overburden the parking facilities and to abide by and conform with the rules and
regulations and to cause its employees and agents to abide by and conform to the
rules and regulations. Upon request, Tenant shall provide Landlord with license
plate numbers of all vehicles driven by its employees and to cause Tenant's
employees to park only in spaces specifically designated for tenant parking.
Landlord shall have the unqualified right to rearrange or reduce the number of
parking spaces; provided, however, the ratio of the number of parking spaces
available to Tenant will be no less than four (4) spaces per 1,000 usable square
feet of the Premises.
<PAGE>
7. Services.
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(a) Landlord shall furnish the Premises with electricity for lighting
and the operation of office machines, heat and air conditioning, lighting
replacement for building standard fixtures, restroom supplies, window washing
with reasonable frequency, and daily janitor service on normal business days.
Landlord shall not be in default hereunder or be liable for any damages directly
or indirectly resulting from, nor shall there be any Rent abatement by reason of
(i) the installation, use or interruption of use of any equipment in connection
with the furnishing of any of the foregoing services, (ii) failure to furnish or
delay in furnishing any such services, or (iii) the limitation, curtailment,
rationing or restrictions on use of water, electricity, gas or any other form of
energy serving the Premises, unless the damage or injury is caused by Landlord's
sole negligence or willful misconduct. Tenant shall reimburse Landlord for the
cost of providing heat and air conditioning in excess of that required for
normal office use or during other than usual business hours and the cost of
providing power for other than normal desk-top office equipment, collectable as
additional rent with the next installment of monthly Base Rent thereafter
falling due. Tenant shall reimburse Landlord for the cost of providing heat and
air conditioning, lighting, and electricity in excess of that required for
normal office use or during other than usual business hours, e.g., 8 a.m. to 7
p.m., Monday through Friday, collectable at the rate of $20.00 per hour. This
rate may be increased by Landlord, however, if the utility providing the power
increases its rates to Landlord or if Landlord, in its reasonable discretion,
determines that Tenant's power use is excessive when compared to normal office
use by a similar tenant in similar space.
8. Maintenance, Repairs and Alterations.
------------------------------------
(a) Tenant shall, at Tenant's expense, maintain every part of the
Premises in good order, condition and repair, including without limitation, (i)
all interior surfaces, ceilings, walls, door frames, window frames, floors,
carpets, draperies, window coverings and fixtures, (ii) all windows, doors,
locks and closing devices, entrances, plate glass, and signs, (iii) all plumbing
and sewage pipes, fixtures and fittings, (iv) all phone lines, electrical
wiring, equipment, switches, outlets, and lightbulbs, (v) any fire detection,
fire sprinkler or extinguisher equipment, (vi) all of Tenant's personal
property, improvements and alterations, and (vii) all other fixtures and special
items installed by or for the benefit of, or at the expense of Tenant. All
repairs or replacements required of Tenant shall be promptly made with new
materials of like kind and quality, and subject to Landlord's prior written
approval where any such repair or replacement work exceeds $200.00.
(b) Landlord shall, at Landlord's expense, keep in good condition and
repair the foundation, roof structure (excluding the roof membrane), exterior
walls and other structural parts of the Building not the obligation of Tenant or
any other tenant in the Building. Landlord shall keep in good condition and
repair all non-structural parts of the Building not the obligation of Tenant or
any other tenant in the Building (including, without limitation, the roof
membrane, lobby and elevators), and such expense shall be included in the
calculation of Operating Expenses payable by tenants within the Building. Tenant
expressly waives the benefits of any statute, including Civil Code Sections 1941
and 1942, which would afford Tenant the right to make repairs at Landlord's
expense or to terminate this Lease due to Landlord's failure to keep the
Building in good order, condition and repair. Landlord shall have no liability
to Tenant for any damage, inconvenience, or interference with the use of the
Premises by Tenant as the result of Landlord performing any such maintenance and
repair work.
(c) In the event Tenant fails to perform Tenant's obligations under this
Paragraph 8, Landlord may, but shall not be required to, give Tenant notice to
do such acts as are reasonably required to so maintain the Premises. If Tenant
shall fail to commence such work and diligently prosecute it to completion, then
Landlord shall have the right (but not the obligation) to do such acts and
expend such funds at the expense of Tenant as are reasonably required to perform
such work. Any amounts so expended by Landlord will be additional rent due under
this Lease, and such amounts will become due and payable on demand by Landlord.
Landlord shall have no liability to Tenant for any such damages, inconvenience,
or interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises in good condition and repair, only ordinary wear
and tear excepted. Tenant, at its sole cost and expense, agrees to repair any
damages to the Premises caused by or in connection with the removal of any
articles of personal property, business or trade fixtures, signs, machinery,
equipment, cabinetwork, furniture, moveable partitions, or permanent
improvements or additions, including without limitation thereto, repairing the
floor and patching and painting the walls where required by Landlord, to
Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against any
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including without limitation, any claims made by any succeeding tenant
resulting from such delay.
(e) Tenant shall not make any alterations, improvements, or additions in,
on, or about the Premises without Landlord's prior written consent, except that
Tenant may make alterations, improvements, or additions without Landlord's prior
written consent where (i) the reasonably estimated cost does not exceed $2,500,
and (ii) such alterations, improvements, or additions do not affect or involve
the structural integrity, roof membrane, exterior areas, building systems, or
water-tight nature
<PAGE>
of the Premises, the Building or the Project. In requesting Landlord's consent,
Tenant shall, at Tenant's sole cost, submit to Landlord complete drawings and
specifications describing such work and the identity of the proposed contractor
at least ten (10) business days prior to the commencement of any work.
With respect to any alterations, improvements or additions made
to the Premises by Tenant:
(1) Before commencing any work relating to alterations,
additions, or improvements affecting the Premises, Tenant shall notify Landlord
of the expected date of commencement thereof and of the anticipated cost
thereof. Landlord shall then have the right at any time and from time to time to
post and maintain on the Premises such notices as Landlord reasonably deems
necessary to protect the Premises and Landlord from mechanics' liens or any
other liens.
(2) Tenant shall pay when due all claims for labor or materials
furnished to Tenant for use in the Premises. Tenant shall not permit any
mechanics' liens or any other liens to be levied against the Premises for any
labor or materials furnished to Tenant in connection with work performed on the
Premises by or at the direction of Tenant. Tenant shall indemnify, hold harmless
and defend Landlord (by counsel reasonably satisfactory to Landlord) from any
liens and encumbrances arising out of any work performed or materials furnished
by, or at the direction of Tenant. In the event that Tenant shall not, within
twenty (20) days following the imposition of any such lien, cause such lien to
be released of record by payment or posting of a proper bond, Landlord shall
have, in addition to all other remedies provided herein by law, the right, but
not the obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All such
sums paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the rate of ten percent (10%) per annum.
(3) All alterations, improvements or additions in or about the
Premises performed by or on behalf of Tenant shall be done in a first-class,
workmanlike manner, shall not unreasonably lessen the value of leasehold
improvements in the Premises, and shall be completed in compliance with all
applicable laws, ordinances, regulations and orders of any governmental
authority having jurisdiction thereover, as well as the requirements of insurers
of the Premises and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant
Tenant permission for alterations, improvements or additions which require,
because of application of Americans with Disabilities Act or other laws,
substantial improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration
of the Term, require that Tenant, at Tenant's expense, remove any such
alterations, improvements or additions prior to or upon the expiration of this
Lease, and restore the Premises to their condition prior to such alterations,
improvements or additions.
(7) Unless Landlord requires their removal, as set forth above,
all alterations, improvements, or additions made to the Premises shall become
the property of Landlord and remain upon and be surrendered with the Premises
upon the expiration of this Lease; provided, however, that Tenant's machinery,
equipment, and trade fixtures, other than any which may be affixed to the
Premises so that they cannot be removed without material damage to the Premises,
shall remain the property of Tenant and may be removed by Tenant subject to the
provisions of Paragraph 8(d) above.
9. Construction of Tenant Improvements.
-----------------------------------
Landlord shall be responsible for constructing the tenant improvements
("Tenant Improvements") in the Premises, as provided in the Work Letter
Agreement, attached hereto as Exhibit B.
10. Insurance and Indemnity.
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10.1 Insurance.
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(a) Tenant shall obtain and maintain during the Term
commercial general liability insurance with a combined single limit for personal
injury and property damage in an amount of not less than $2,000,000 (in a form,
with a deductible amount, and with carriers reasonably acceptable to Landlord)
and employer's liability and workers' compensation insurance as required by
<PAGE>
law. The insurance carrier shall be authorized to do business in the State of
California, with a policyholders and financial rating of at least A:IX Class
status as rated in the most recent edition of Best's Key-Rating guide. Tenant's
comprehensive general liability insurance policy shall be endorsed to provide
that (i) it may not be canceled or altered in such a manner as to adversely
affect the coverage afforded thereby without thirty (30) days prior written
notice to Landlord, (ii) Landlord is designated as an additional insured, (iii)
the insurer acknowledges acceptance of the mutual waiver of claims by Landlord
and Tenant pursuant to Paragraph 10.2(b) below, and (iv) such insurance is
primary with respect to Landlord and that any other insurance maintained by
Landlord is excess and noncontributing with such insurance. If, in the opinion
of Landlord's lender or in the commercially reasonable opinion of Landlord's
insurance adviser, the specified amounts of coverage are no longer adequate,
such coverage shall, within 30 days written notice to Tenant, be appropriately
increased. Prior to the commencement of the Term, Tenant shall deliver to
Landlord a duplicate of such policy or a certificate thereof to Landlord for
retention by it, with endorsements. At least thirty (30) days prior to the
expiration of such policy or any renewal or modification thereof, Tenant shall
deliver to Landlord a replacement or renewal binder, followed by a duplicate
policy or certificate within a reasonable time thereafter. If Tenant fails to
obtain such insurance or to furnish Landlord any such duplicate policy or
certificate as herein required, Landlord may, at its election, without notice to
Tenant and without any obligation to do so, procure and maintain such coverage
and Tenant shall reimburse Landlord on demand as additional rent for any premium
so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's
officers, directors, partners, employees, agents and representatives for loss or
damage to the extent that such loss or damage is insured against under any valid
and collectable insurance policy insuring Landlord or would have been insured
against but for any deductible amount under any such policy. Tenant waives all
claims against Landlord, and Landlord's officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns, for loss or damage
to the extent such loss or damage is insured against under any valid and
collectable insurance policy insuring Tenant or required to be maintained by
Tenant under this Lease, or would have been insured against but for any
deductible amount under any such policy. The insuring party shall, upon
obtaining the policies of insurance required under this Lease, give notice to
the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease. Tenant agrees that in the event of a
sale, assignment or transfer of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord and any subsequent
Landlord.
(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least one hundred percent
(100%) of their full replacement value. The proceeds from any such policy shall
be used by Tenant for the replacement of personal property and the restoration
of Tenant's improvements or alterations. Notwithstanding any other provisions of
the Lease, Landlord shall have no liability for damage to or destruction of
Tenant's personal property, regardless of whether the damage or destruction
results from the acts or omissions of Landlord.
(d) During the Term, Landlord shall keep the Building, and
improvements within which the Premises are located, insured against loss or
damage by (i) fire, with extended coverage and vandalism, malicious mischief and
special extended perils (all risk) endorsements or their equivalents, in amounts
not less than one hundred percent (100%) of the replacement cost of the Building
and structures insured, and (ii) flood, in the maximum amount provided for by
FEMA under its flood loss insurance program, with loss payable thereunder to
Landlord and to any authorized encumbrancer of Landlord (with standard mortgagee
loss payable clause) in accordance with their respective interests. Landlord may
maintain rent insurance, for the benefit of Landlord, equal to at least one
year's Base Rent hereunder. If the Lease is terminated as a result of damage by
fire, casualty or earthquake as set forth in this Paragraph 10, all insurance
proceeds shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of
the signing of this Lease, insure the Building for earthquake damage. Landlord
may, when Landlord deems the premiums to be reasonable, insure the Building
fully or partially for earthquake damage. If Landlord obtains earthquake or any
other type of insurance, unless such insurance coverage was carried during the
base year, the Base year Operating Expenses will be "grossed-up" to include what
such insurance coverage would have cost had it been carried during the base
year.
10.2 Indemnity.
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(a) Tenant waives all claims against Landlord for damage to any
property or injury to or death of any person in, on, or about the Premises, the
Building, or any other portion of the Project arising at any time and from any
cause, unless caused by the active negligence or willful misconduct of Landlord,
its agents, employees, or contractors. Tenant shall indemnify, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders,
<PAGE>
principals, agents, representatives, successors and assigns, from and against
all claims, costs, damages, actions, indebtedness and liabilities (except such
as may arise from the active negligence or willful misconduct of Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns) arising by reason of any death, bodily
injury, personal injury, property damage or any other injury or damage in
connection with (i) any condition or occurrence in or about or resulting from
any condition or occurrence in or about the Premises during the Term, or (ii)
any act or omission of Tenant, or Tenant's agents, representatives, officers,
directors, shareholders, partners, employees, successors and assigns, wherever
it occurs. The foregoing indemnity obligation of Tenant shall include reasonable
attorneys' fees, and all other reasonable costs and expenses incurred by
Landlord from the first notice that any claim or demand is to be made. The
provisions of this Paragraph 10.2 shall survive the termination or expiration of
this Lease with respect to any damage, injury, or death occurring prior to such
expiration or termination.
(b) Neither party shall be liable to the other for any
unauthorized or criminal entry of third parties into the Premises, Building,
Project, Common Areas, or parking facilities, or for any damage to person or
property, or loss of property in and about the Premises, Building, Project,
Common Areas, parking facilities and the approaches, entrances, streets,
sidewalks, stairs, elevators, restrooms, or corridors thereto, by or from any
unauthorized or criminal acts of third parties, regardless of any breakdown,
malfunction or insufficiency of any security measures, practices or equipment
provided by Landlord or Tenant. Tenant shall immediately notify Landlord in
writing of any breakdown or malfunction of any security measures, practices or
equipment provided by Landlord as to which Tenant has knowledge.
(c) Any diminution or interference with light, air or view by
any structure which may be erected on land adjacent to the Building or resulting
from any other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for
consequential damages, including injury to Tenant's business or any loss of
income therefrom.
(e) In the event that Landlord or any successor owner of the
Building sells or conveys the Building, then all liabilities and obligations of
Landlord or the successor owner under this Lease accruing after the sale or
conveyance shall terminate and become binding on the new owner, and Tenant shall
release Landlord from all liability under this Lease (including, without
limitation, the Security Deposit, as defined under Paragraph 16 below), except
for acts or omissions of Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a
corporation, limited liability company, trust, partnership, joint venture,
unincorporated association or other form of business entity, (i) the obligations
of Landlord shall not constitute personal obligations of the officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, or other principals, agents or representatives of such
business entity ("Member of Landlord"), and (ii) Tenant shall have recourse only
to the interest of such business entity in the Building of which the Premises
are a part for the satisfaction of such obligations and not against the assets
of such Member of Landlord other than to the extent of their respective
interests in the Building. In this regard, Tenant agrees that in the event of
any actual or alleged failure, breach or default by Landlord of its obligations
under this Lease, that (i) no Member of Landlord shall be sued or named as a
party in any suit or action (except as may be necessary to secure jurisdiction
of Landlord), (ii) no judgment will be taken against any Member of Landlord, and
any judgment taken against any Member of Landlord may be vacated and set aside
at any time without hearing, (iii) no writ of execution will ever be levied
against the assets of any Member of Landlord, and (iv) these agreements by
Tenant are enforceable both by Landlord and by any Member of Landlord.
11. Damage or Destruction.
---------------------
(a) Subject to the provisions of Paragraphs 11(b) and 11(c) below,
if, during the Term, the Premises are totally or partially destroyed from any
insured casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, and Landlord is unable
to get a variance to such laws to permit the commencement of restoration of the
Premises within the 90-day period, then either party may terminate this Lease by
giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
(b) Despite the provisions of Paragraph 11 (a) above, Landlord may
decide within ninety (90) days after such destruction to demolish the Building
rather than rebuild it, in which case this Lease will terminate as of the date
of the destruction. Landlord shall give Tenant written notice of its intention
within ninety (90) days after the destruction.
<PAGE>
(c) If any destruction occurs to the Premises during the last six (6)
months of the initial Term or during the last six (6) months of any extension
period, regardless of the nature and extent of the destruction, either, party
can elect to terminate this Lease within thirty (30) days after the destruction
occurs. If this Lease does not terminate pursuant to this Paragraph 11 (c), the
provisions of Paragraph 11(a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any
extent whatsoever, Landlord may within ninety (90) days following the date of
such damage: (i) commence to restore the Premises to substantially the same
condition as they were in immediately before the destruction and prosecute the
same diligently to completion, in which event this Lease shall continue in full
force and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which
materially interferes with Tenant's use of the Premises, if this Lease is not
terminated as above provided, there shall be an abatement or reduction of Base
Rent between the date of destruction and the date Landlord substantially
completes its reconstruction obligations, based upon the extent to which the
destruction materially interferes with Tenant's use of the Premises. All other
obligations of Tenant under this Lease shall remain in full force and effect.
Except for abatement of Base Rent, Tenant shall have no claim against Landlord
for any loss suffered by Tenant due to damage or destruction of the Premises or
any work of repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and
1933(4), and any successor statutes, are inapplicable with respect to any
destruction of the Premises, such sections providing that a lease terminates
upon the destruction of the Premises unless otherwise agreed between the parties
to the contrary.
12. Eminent Domain.
--------------
(a) If all or any part of the Premises shall be taken as a result of
the exercise of the power of eminent domain, this Lease shall terminate as to
the part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking
of the fee title shall belong to Landlord whether such compensation be awarded
or paid as compensation for diminution in value of the leasehold or of the fee
except: Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by Tenant herein, under
the terms of this Lease but which are required to be taken by the condemnor or
are so acquired by the condemnor; and (iii) all relocation assistance, moving
and relocation expenses to the extent (if any) provided by the condemning
authority directly to Tenant.
13. Assignment and Subletting.
-------------------------
(a) Tenant shall not assign, sublet or hypothecate this Lease or any
interest herein or sublet the Premises or any part thereof or permit the use of
the Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the foregoing
acts without Landlord's consent shall be void and shall, at the option of
Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment"
shall include, without limitation, any sale, transfer, or other disposition of
all or any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company:
(A) any dissolution, merger, consolidation, or other reorganization of Tenant;
or (B) a sale or other transfer of more than fifty percent (50%) of the value of
the assets of Tenant; or (C) if Tenant is a corporation with fewer
<PAGE>
than 500 shareholders, a sale or other transfer of a controlling percentage of
the capital stock of Tenant; or (D) if Tenant is a limited liability company, a
sale or other transfer of a controlling percentage of the interest in Tenant.
The phrase "controlling percentage" means the ownership of, and the right to
vote, stocks or interests possessing at least fifty percent (50%) of the total
combined voting power of the limited liability company or, in the case of a
corporation, of all classes of Tenant's stock issues, outstanding and permitted
to vote for the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty percent
(50%) of the beneficial interest of Tenant, or the dissolution of the trust;
(3) if Tenant is a partnership or joint venture, the withdrawal, or
the transfer of the interest, of any general partner or joint venturer or the
dissolution of the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any assignment
by a sublessee of its sublease shall be subject to Landlord's prior written
consent in the same manner as if Tenant were entering into a new sublease.
(d) Regardless of Landlord's consent, no subletting or assignment shall
release Tenant of Tenant's obligation, or alter the primary liability of Tenant
to pay the Rent and to perform all other obligations to be performed by Tenant
hereunder. The acceptance of Rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provisions hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
(e) In the event Tenant shall assign or sublet the Premises or request
the consent of Landlord to any assignment or subletting, then Tenant shall
reimburse Landlord for reasonable costs and attorneys' fees incurred in
connection therewith in an amount not to exceed $1,000.00.
14. Default by Tenant.
-----------------
(a) The following events shall constitute events of default under this
Lease:
(1) a failure by Tenant to pay any Rent or to deliver an estoppel
certificate (as provided in Paragraph 17 below) where such failure continues for
five (5) days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by Tenant to
defraud creditors, any assignment by Tenant for the benefit of creditors, or the
commencement of any proceedings of any kind by or against Tenant under any
provision of the Federal Bankruptcy Act or under any other insolvency,
bankruptcy or reorganization act unless, in the event any such proceedings are
involuntary, Tenant is discharged from the same within sixty (60) days
thereafter; the appointment of a receiver for a substantial part of the assets
of Tenant; or the levy upon this Lease or any estate of Tenant hereunder by any
attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given to
Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligation
hereunder, and any of them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants,
agreements or conditions of this Lease to be observed or performed by Tenant
(excluding any event of default under Paragraph 14(a)(1) above), where such
failure continues for thirty (30) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of the default is such that the
same cannot reasonably be cured within the 30-day period, Tenant shall not be
deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant, Landlord
may at any time thereafter, without limiting Landlord in the exercise of any
right or remedy at law or in equity which Landlord may have by reason of such
default or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and
<PAGE>
abandonment and recover the Rent and any other monetary charges as they become
due, without terminating Tenant's right to sublet or assign this Lease, subject
only to reasonable limitations as herein provided. During the period Tenant is
in default, Landlord shall have the right to do all acts necessary to preserve
and maintain the Premises as Landlord deems reasonable and necessary, including
removal of all persons and property from the Premises, and Landlord can enter
the Premises and relet them, or any part of them, to third parties for Tenant's
account. Tenant shall be liable immediately to Landlord for all costs Landlord
incurs in reletting the Premises, including, without limitation, brokers'
commissions, expenses of remodeling the Premises required by the reletting, and
like costs. Reletting can be for a period shorter or longer than the remaining
Term.
(2) Pay or perform such obligation due (but shall not be obligated to
do so), if Tenant fails to pay or perform any obligations when due under this
Lease within the time permitted for their payment or performance. In such case,
the costs incurred by Landlord in connection with the performance of any such
obligation will be additional rent due under this Lease and will become due and
payable on demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means, in
which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be entitled
to recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including, without limitation, the following: (A) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus (B) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such Rent loss that is proved could have been
reasonably avoided; plus (C) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that is proved could be reasonably avoided;
plus (D) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary, course of events would be likely to result
therefrom; plus (E) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such termination of Tenant's possessory interest in and to
the Premises, Tenant (and at Landlord's sole election, Tenant's sublessees)
shall no longer have any interest in the Premises, and Landlord shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises which Landlord in its sole discretion deems reasonable and necessary.
The "worth at the time of award" of the amounts referred to in subparagraphs (A)
and (B) above is computed by allowing interest at the maximum rate an individual
is permitted by law to charge. The worth at the time of award of the amount
referred to in subparagraph (C) above is computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to Landlord.
Unpaid installments of Rent and other unpaid monetary obligations of Tenant
under the terms of this Lease shall bear interest from the date due at the rate
of ten percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of the
Premises by reason of any default by Tenant hereunder, Tenant hereby waives any
right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover Rent as it becomes
due under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of
this Lease then, at Landlord's sole election: (i) Tenant shall not have the
right to exercise any available right, option or election under this Lease
("Tenant's Exercise Rights") if at such time Tenant is in default hereunder,
(ii) Tenant shall not have the right to consummate any transaction or event
triggered by the exercise of any of Tenant's Exercise Rights if at such time
Tenant is in default hereunder, and (iii) Landlord shall not be obligated to
give Tenant any required notices or information relating to the exercise of any
of Tenant's Exercise Rights hereunder.
15. Default by Landlord, Notice to Mortgagee.
----------------------------------------
Landlord shall not be in default unless Landlord, or the holder of any
mortgage, deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then
<PAGE>
Landlord shall not be in default if Landlord or the holder of any such mortgage,
deed of trust or ground lease commences performance within such 30-day period
and thereafter diligently prosecutes the same to completion. In no event shall
Tenant be entitled to terminate this Lease by reason of Landlord's default, and
Tenant's remedies shall be limited to an action for monetary damages at law.
16. Security Deposit.
----------------
On execution of this Lease, Tenant shall deposit with Landlord the sum
specified in the Basic Lease Information (the "Security Deposit"). The Security
Deposit shall be held by Landlord as security for the performance by Tenant of
all of the provisions of this Lease. If Tenant fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Lease, Landlord may use, apply, or retain all or any portion of the
Security Deposit for the payment of any Rent or other charge in default, or the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of the Security Deposit, then within ten (10) days after demand therefor Tenant
shall deposit cash with Landlord in an amount sufficient to restore the deposit
to the full amount thereof, and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep the Security
Deposit separate from its general accounts. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without payment of
interest for its use, to Tenant (or, at Landlord's option to the last assignee,
if any, of Tenant's interest hereunder) at the expiration of the Term, and after
Tenant has vacated the Premises. No trust relationship is created herein between
Landlord and Tenant with respect to the Security Deposit.
17. Estoppel Certificate.
--------------------
(a) Tenant shall within ten (10) days of notice from Landlord execute,
acknowledge and deliver to Landlord a statement certifying (i) that this Lease
is unmodified and in full force and effect (or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect), (ii) the amount of the Security Deposit, (iii) the date to
which the Rent has been paid, (iv) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any are claimed, and (v) such other matters as may reasonably
be requested by Landlord. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant, (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than one
month's Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such lender. All such financial
statements shall be received by Landlord in confidence and shall be used for the
purposes herein set forth.
18. Subordination.
-------------
This Lease, at Landlord's sole option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
<PAGE>
19. Attorneys' Fees.
---------------
In the event legal action is initiated by either party, the prevailing
party shall be entitled to recover all costs and expenses incurred in such
action, including, without limitation, reasonable attorneys' fees and costs,
including attorneys' fees incurred at trial and on appeal, if any.
20. Notices.
-------
All notices, consents, demands, and other communications from one party to
the other given pursuant to the terms of this Lease shall be in writing and
shall be personally delivered, delivered by courier service, sent via facsimile
(confirmation receipt required), or deposited in the United States mail,
certified or registered, postage prepaid, and addressed as follows: To Tenant at
the address specified in the Basic Lease Information or to such other place as
Tenant may from time to time designate in a notice to Landlord; to Landlord at
the address specified in the Basic Lease Information, or to such other place and
to such other parties as Landlord may from time to time designate in a notice to
Tenant. All notices shall be effective upon delivery or refusal of delivery.
21. General Provisions.
------------------
(a) This Lease shall be governed by and construed in accordance with the
internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information contains all agreements and understandings of the parties and
supersedes and cancels any and all prior or contemporaneous written or oral
agreements, instruments, understandings, and communications of the parties with
respect to the subject matter herein. This Lease, including the attached
Exhibits, Addenda, and Basic Lease Information, may be modified only in a
writing signed by each of the parties.
(d) No waiver of any provision hereof by either party shall be deemed by
the other party to be a waiver of any other provision, or of any subsequent
breach of the same provision. Landlord's or Tenant's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of Landlord's or
Tenant's consent to, or approval of, any subsequent act by the other party.
(e) If Tenant remains in possession, with the expressed consent of
Landlord, of all or any part of the Premises after the expiration of the Term,
such tenancy shall be from month to month only, and not a renewal hereof or an
extension for any further term, and in such case, Rent shall be payable in the
amount of the last month's Base Rent and all other charges under the Lease and
such month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be
required in the event of an emergency), Landlord and Landlord's representatives
and agents shall have the right to enter the Premises during regular business
hours for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the mutual
cancellation thereof or the termination of this Lease by Landlord as a result of
Tenant's default shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or partnership,
each individual executing this Lease on behalf of Tenant represents and warrants
that he is duly authorized to execute and deliver this Lease on behalf of the
corporation, company or partnership in accordance with, where applicable, a duly
adopted resolution of the board of directors of the corporation, the vote of the
members of the limited liability company or the vote of the partners within the
partnership, and that this Lease is binding upon the corporation, company or
partnership in accordance with its respective articles of incorporation and
bylaws, operating agreement or partnership agreement.
<PAGE>
(j) Time is expressly declared to be of the essence of this Lease and of
each and every covenant, term, condition, and provision hereof, except as to the
conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the obligations
imposed on Tenant shall be joint and several.
(l) The language in all parts of this Lease shall be in all cases
construed as a whole according to its fair meaning and not strictly for nor
against either Landlord or Tenant.
(m) As used in this Lease and whenever required by the context thereof,
each number, both singular and plural, shall include all numbers and in each
gender shall include all genders. Landlord and Tenant, as used in this Lease or
in any other instrument referred to in or made a part of this Lease, shall
likewise include both the singular and the plural, a corporation, limited
liability company, partnership, individual or person acting in any fiduciary
capacity as executor, administrator, trustee or in any other representative
capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part hereof.
22. Force Majeure.
-------------
Any delay in construction, repairs, or rebuilding any building, improvement
or other structure herein shall be excused and the time limit extended to the
extent that the delay is occasioned by reason of acts of God, labor troubles,
laws or regulations of general applicability, acts of Tenant or Tenant Delays
(as the term is defined in the Work Letter Agreement attached hereto as Exhibit
B), or other occurrences beyond the reasonable control of Landlord. Accordingly,
Landlord's obligation to perform shall be excused for the period of the delay
and the period for performance shall be extended for a period equal to the
period of such delay.
23. Broker's Fee.
------------
Each party represents that it has not had dealings with any real estate
broker, finder, or other person, with respect to this Lease in any manner,
except the brokerage firm(s) specified in the Basic Lease Information. Each
party shall hold harmless the other party from all damages resulting from any
claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the broker or finder
specified in the Basic Lease Information, with respect to this Lease in
accordance with the provisions of a separate commission contract.
24. Financial Statement.
-------------------
It is acknowledged by all parties hereto that the attached financial
declaration of Tenant is incorporated as a part of this Lease as Exhibit E, that
the information contained therein is true and correct in all material respects,
and that the accuracy of the information is a significant fact upon which
Landlord has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above.
TENANT: LANDLORD:
Fiberlane Communications G & W/Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: /s/ Michael Hatfield By: /s/ G& W Management Co.
-------------------------------- Its: Manager
Print Name: Michael Hatfield
------------------------
Its: CEO By: /s/ William C. White
-------------------------------- ---------------------------------
William C. White, President
G & W Management Co.
<PAGE>
ADDENDUM NO. 1
1. Base Rent:
<TABLE>
<S> <C> <C> <C>
Lease Year $/Sq.Ft. $/Sq.Ft. Total Monthly
15,000 5,985 Base Rent
- ------------------------------------------------------------------------------------------------------
1 (mos. 1-3) $1.50 $0.00 $22,500
- ------------------------------------------------------------------------------------------------------
1 (mos. 4-9) $1.60 $0.75 $28,489
- ------------------------------------------------------------------------------------------------------
1 (mos. 10 - 12) $1.65 $34,626
- ------------------------------------------------------------------------------------------------------
2 $1.70 $35,675
- ------------------------------------------------------------------------------------------------------
3 $1.75 $36,724
- ------------------------------------------------------------------------------------------------------
4 $1.80 $37,773
- ------------------------------------------------------------------------------------------------------
5 $1.85 $38,823
- ------------------------------------------------------------------------------------------------------
6 & 7 $1.85 plus CPI
Min. 3% Max. 5%
- ------------------------------------------------------------------------------------------------------
</TABLE>
At the start of the six lease year and each year of the term thereafter
there will be a rental adjustment based on the percentage increase in the
Consumer Price Index For All Urban Consumers, San Francisco-Oakland-San
Jose, All Items (1982-1984=100), as published by the U.S. Bureau of Labor
Statistics ("Index"). The "Beginning Index" shall be the Index published
most immediately preceding the last Base Rent adjustment. The "Adjustment
Index" shall be the Index published most immediately preceding the
Adjustment Date. The monthly Base Rent until the next Base Rent adjustment
shall be determined by multiplying the monthly Base Rent then currently
being paid by a fraction, the numerator of which is the Adjustment Index
and the denominator of which is the Beginning Index. However, in no event
will the monthly Base Rent be increased by an amount less than 3% per year
or more than 5% per year. If the 1982-1984 base of the Index is changed,
the new base shall be converted to the 1982-1984 base in accordance with
the U.S. Department of Labor's conversion factor, and the base as so
converted shall be used. If the U.S. Department of Labor ceases to publish
the Index, then the successor index designated by the U.S. Department of
Labor or, if no successor index is so designated, the most nearly
comparable index shall be used.
2. Temporary Expansion Premises:
Landlord shall provide Tenant temporary space of at least 4,000 - 5,000
s.f. of contiguous space at Redwood Business Park on a month to month basis
until occupancy of the premises at 1450 North McDowell Boulevard. Tenant
shall accept the premises in "as is" condition and the rent shall be
$.50/sf./month. Tenant's obligations and Landlord's exculpatory provisions
under the Lease shall apply to this temporary tenancy.
3. Option To Extend:
Tenant is given the option to extend the term on all the provisions
contained in this Lease, for one five (5) year period ("Extended Term")
following expiration of the initial Term, by giving written notice of
exercise of the option ("Option Notice") to Landlord at least six (6)
months before the expiration of the term. Provided that, if Tenant is in
default on the date of giving the Option Notice and any applicable cure
period has expired, the option notice shall be totally ineffective, or if
Tenant is in default on the date the Extended Term is to commence, the
Extended Term shall not commence and this Lease shall expire at the end of
the initial term.
<PAGE>
At the start of the first lease year of the Extended Term and each year of
the Extended Term thereafter there will be a rental adjustment based on the
percentage increase in the Consumer Price Index For All Urban Consumers,
San Francisco-Oakland-San Jose, All Items (1982-1984=100), as published by
the U.S. Bureau of Labor Statistics ("Index"). The "Beginning Index" shall
be the Index published most immediately preceding the last Base Rent
adjustment. The "Adjustment Index" shall be the Index published most
immediately preceding the Adjustment Date. The monthly Base Rent until the
next Base Rent adjustment shall be determined by multiplying the monthly
Base Rent then currently being charged by a fraction, the numerator of
which is the Adjustment Index and the denominator of which is the Beginning
Index. However, in no event will the monthly Base Rent be increased by an
amount less than 3% per year or more than 5% per year. If the 1982-1984
base of the Index is changed, the new base shall be converted to the 1982-
1984 base in accordance with the U.S. Department of Labor's conversion
factor, and the base as so converted shall be used. If the U.S. Department
of Labor ceases to publish the Index, then the successor index designated
by the U.S. Department of Labor or, if no successor index is so designated,
the most nearly comparable index shall be used.
Tenant shall have no other right to extend the term beyond the Extended
Term.
4. Right of Early Termination:
Tenant shall have the right to terminate the Lease effective as of the last
day of the sixtieth (60th) Lease Month, provided that on or before the
last day of the forty-eighth (48th) Lease Month, Tenant gives Landlord
written notice ("Preliminary Notice") that Tenant needs to have a total of
at least 40,000 rentable square feet ("Replacement Premises") under lease
by the sixty-eighth (68th) Lease Month.
(a) Such right of termination shall automatically expire and be null and
void if all of the following are satisfied within sixty (60) days
following Landlord's receipt of the Preliminary Notice:
(1) Landlord is able to commit to placing Tenant in such additional
space within the Redwood Business Park by the sixty-eighth (68th)
Lease Month, on a site selected by Landlord. The Replacement
Premises may be in different buildings, or on different floors as
long as such buildings or floors are adjacent and as long as they
are in increments of at least 20,000 square feet. The Replacement
Premises may include the existing Premises.
(2) Landlord and Tenant must enter into a binding new lease, with
respect to Tenant's entire 40,000 or more rentable square foot
space needs ("New Lease"). The New Lease shall have a term of at
least five (5) years. This Lease shall terminate as of the
commencement date of the New Lease. Landlord and Tenant shall
diligently and in good faith negotiate the terms of the New
Lease, such that, subject to subparagraph (a)(3) below and except
for a right of early termination, the terms and conditions of the
New Lease are substantially similar to those of the Lease.
(3) The monthly Base Rent per rentable square foot of the entire
40,000 or more rentable square feet of space ("New Lease Rent")
shall be calculated as follows:
(A) Within fifteen (15) days after a site has been designated
under paragraph (a)(1) above, Landlord and Tenant shall meet
to establish an agreed-upon New Lease Rent for each year of
the New Lease.
(B) If the parties cannot reach agreement on a New Lease Rent,
then, within five (5) days thereafter, Landlord and Tenant
shall appoint a mutually acceptable commercial appraiser or
broker to establish
<PAGE>
the New Lease Rent, based upon the "Prevailing Market Rate"
(as the term is defined below), within fifteen (15) days
after such person's appointment. In such case, the New Lease
Rent for the New Lease shall be calculated at ninety-five
percent (95%) of the Prevailing Market Rate. Any associated
costs of the appraiser or broker shall be split equally
between Landlord and Tenant.
(C) In any event, the New Lease Rent during each twelve (12)
month period of the New Lease shall not be less than the
Base Rent in effect immediately prior to the month preceding
the twelve (12) month period at issue (without regard to any
temporary abatement of Base Rent then or previously in
effect under the Lease).
(b) The "Prevailing Market Rate" shall mean the then-prevailing monthly
base rental rate per rentable square foot of lease space for similar
size spaces in similar quality buildings within the City of Petaluma,
with a duration comparable to the term of the New Lease, based on
recently consummated lease transactions.
(c) If all of the conditions set forth in paragraph (a) above are not
satisfied within the 60-day period, then Tenant may elect to terminate
the Lease, provided that Tenant gives Landlord written notice thereof
within ten (10) days after expiration of the 60-day period ("Final
Notice"). Tenant must accompany the Final Notice with a termination
payment, in cash, equal to five months Base Rent at the amount being
charged as Base Rent when the Final Notice is delivered. If Tenant
fails to satisfy any of the conditions set forth in this paragraph
(c), then Tenant's right of early termination shall automatically
expire and Tenant shall no longer have any option or right of early
termination.
(d) Tenant's right of early termination shall be personal to Tenant and
shall not be transferable with any assignment of the Lease or
subletting of the Premises. At Landlord's sole election, Tenant shall
be barred from delivering a Preliminary Notice or Final Notice if (i)
Tenant has not been in continuous occupancy (no sublessees, no
assignees in possession) of the Premises, or (ii) Tenant is currently
in default under any provision of the Lease.
5. Expansion Option:
Tenant shall have the right to expand into the balance of the Building (the
"Expansion Space") by providing notice (the "Expansion Notice") to Landlord
of its election to do so at any time prior to September 1, 1998.
(a) Following receipt of the Expansion Notice, Landlord and Tenant shall
have thirty (30) days in which to negotiate an amendment to this Lease
to incorporate the Expansion Space into the Premises, set a new Base
Rent for the Expansion Space, and set a new Term. The amendment shall
also include the following provisions:
(1) Landlord shall provide a roll-up door for the purpose of loading
and unloading trucks or delivery vehicles at a convenient
location in the Expansion Space;
(2) The early termination right of Tenant set forth in paragraph 4
above shall be deemed waived;
(3) Tenant shall provide for its own power (gas and electricity) for
the entire Premises; in consideration, the Base Rent on the
existing Premises shall be reduced fifteen cents (15c) per
rentable square foot per month; the Base Rent negotiated on the
Expansion Space will already reflect that Tenant is providing and
paying for this utility; and
<PAGE>
(4) Landlord shall have until February 1, 1999 to deliver occupancy
of the Expansion Space, but Tenant may occupy sooner if Landlord
notifies Tenant that the Expansion Space will be ready before
that time.
(b) If the Expansion Notice is not timely given, then Tenant shall vacate,
upon fifteen (15) days notice from Landlord, the lobby and corridor
space (the "Reception Area") which is shown as shaded area on Exhibit
B-2. Until such notice is given by Landlord, Tenant has the exclusive
right to occupy the Reception Area without any additional charge for
Base Rent. Following the notice by Landlord and vacation by Tenant,
the Reception Area and adjacent restrooms shall become Common Area for
the Building and its other tenants. The cost of changing the Reception
Area into Common Area shall be included as part of the Tenant
Improvement Allowance or, if the Tenant Improvement Allowance is
insufficient, shall be paid for by Tenant, in cash, upon completion.
6. Right Of First Offer:
If Tenant has not previously exercised its Expansion Option under paragraph
5 above, then upon expiration of the Expansion Option, Tenant shall have a
right of first offer with respect to the Expansion Space or any portion of
it ("Right of First Offer"). Pursuant to Tenant's Right of First Offer,
after September 1, 1998 and during the remaining term of the Lease Landlord
shall first offer Tenant the Expansion Space or portion of it pursuant to
such terms as Landlord may request prior to marketing the lease space to
third parties ("First Offer Notice"). Tenant may exercise its Right of
First Offer upon the terms described in the First Offer Notice by: (1)
providing Landlord with written thereof within ten (10) days after
Landlord's delivery to Tenant of the First Offer Notice; and (2) executing
a lease agreement pursuant to the terms set forth in the First Offer Notice
within thirty (30) days after Landlord's delivery to Tenant of the First
Offer Notice. If Tenant does not comply with either of the preceding
preconditions, then Landlord shall be relieved of Landlord's obligation to
lease the Expansion Space to Tenant and the provisions of this paragraph 6
shall not apply to Landlord unless Landlord has not leased the Expansion
Space within twelve (12) months after the latest First Offer Notice. Tenant
acknowledges that its Right of First Offer shall be subordinate to any pre-
existing third party lease or extension rights on the Expansion Space.
Tenant's Right of First Offer shall be personal to Tenant and shall not be
transferable with any assignment of the Lease or subletting of the
Premises.
7. Assignment and Subletting:
Tenant shall have the right to assign and/or sublet the Premises upon
Landlord's prior written consent. Such written consent shall not be
unreasonably withheld.
8. Building Signage:
Tenant shall be allowed to install, at their sole cost and expense, signage
on the building fascia in accordance with the Redwood Business Park Sign
Guidelines.
<PAGE>
[FLOOR PLAN APPEARS HERE]
Exhibit A
Floor Plan
<PAGE>
[SITE PLAN APPEARS HERE]
Exhibit A-1
Site Plan
<PAGE>
EXHIBIT B
---------
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT supplements that certain Lease dated April 22,
--------
1998 ("Lease"), executed by G & W/Copley Redwood Business Park, L.P., a limited
- ----
partnership, as Landlord, and Fiberlane Communications, a Delaware corporation
as Tenant. All capitalized terms not otherwise defined herein shall have the
same meaning as those capitalized terms contained in the Lease.
1. Landlord shall be responsible for constructing within the Premises the
tenant improvements ("Tenant Improvements") described in the preliminary space
plan attached hereto as Exhibit B-1 ("Preliminary Space Plan"). The Tenant
Improvements for the Premises will be more particularly described in the plans
and construction drawings ("Construction Drawings") as approved below. Any
additional work ("Tenant Extra Improvements") required under the approved
Construction Drawings shall be at Tenant's expense.
2. Landlord and Tenant shall diligently finalize the Preliminary Space
Plan for construction of the Tenant Improvements and Tenant Extra Improvements
so that, within thirty (30) days after execution of the Lease, Landlord can
provide Tenant with the Construction Drawings. The Construction Drawings shall
indicate the specific requirements of Tenant's lease space, outlining in detail
interior partitions, floor coverings, a reflected ceiling plan, plumbing
fixtures, and electrical plans (setting forth the electrical requirements of
Tenant), all in conformity with the Preliminary Space Plan. The Construction
Drawings shall include full energy calculations as required by the State of
California and the city agencies.
3. Within three (3) days after receipt of the Construction Drawings,
Tenant shall approve the drawings and/or request changes or modifications
thereto. Any such request for changes or modifications shall be subject to
Landlord's approval and, thereafter, the Construction Drawings shall be
resubmitted for Tenant's approval in accordance with the preceding sentence.
Tenant acknowledges that the Construction Drawings are subject to the approval
of the appropriate government authorities. It shall be Tenant's responsibility
to ensure that the design and function of the Tenant Improvements and Tenant
Extra Improvements are suitable for Tenant's business and needs. The
improvements shall be constructed in accordance with current building standards,
laws, regulations, ordinances and codes. Landlord shall not be required to
install any Tenant Improvements or Tenant Extra Improvements which do not
conform to the Construction Drawings.
4. Landlord shall furnish and install the units and quantities of Tenant
Improvements as set forth on Exhibit B-1. The Tenant Improvements to be paid by
Landlord shall not exceed Four Hundred Seventy-six Thousand Nine Hundred Fifty
Dollars ($476,950) ($25.00 per usable square foot) of lease space within the
Premises and shall include:
(a) The costs of the Preliminary Space Plan (including one revision
thereto) and final Construction Drawings and engineering costs associated with
completion of the State of California energy utilization calculations under
Title 24 legislation; and
(b) The costs of obtaining building permits and other necessary
authorizations from the city, county and the State of California.
Any additional units, quantities or costs of the Tenant Improvements
required in accordance with the approved Construction Drawings shall be deemed
Tenant Extra Improvements and shall be paid for by Tenant at the unit cost set
forth in a summary of unit costs to be provided by Landlord.
<PAGE>
5. In no event shall the Tenant Improvements payable by Landlord include
(i) the costs of procuring or installing any trade fixtures, equipment,
furniture, furnishings, telephone or computer equipment or wiring or other
personal property ("Personal Property"), or (ii) any Change Orders (as the term
is defined in Paragraph 6 below). Such items shall be paid by Tenant.
6. Following Tenant's approval of the Construction Drawings, Tenant may
request changes or modifications thereto ("Change Order"), however, the cost of
any Change Order(s) shall be borne by Tenant. If Tenant shall request any Change
Order, then Landlord shall promptly give Tenant a written estimate of (a) the
cost of engineering and design services to prepare the Change Order, (b) the
cost of work to be performed pursuant to the Change Order, and (c) the time
delay expected because of such requested Change Order. Within three (3) days
after Tenant's receipt of the written estimate, Tenant shall notify Landlord in
writing whether it approves the written estimate. If Tenant approves the written
estimate, then Tenant shall accompany its approval with a check made payable to
Landlord in the amount of the estimated cost of the Change Order. Upon
Landlord's completion of the Change Order and submission of the final cost
thereof to Tenant, Tenant shall promptly pay to Landlord any additional amounts
incurred in excess of the written estimate. If such written authorization and
check are not received by Landlord, then Landlord shall not be obligated to
commence work on the Premises and Tenant shall be chargeable for any delay in
the completion of the Premises in accordance with Paragraph 7 below.
7. If the Commencement Date of the Lease has not occurred on or before the
Estimated Commencement Date, and if the cause of the delay in the occurrence of
the Commencement Date is attributable to Tenant, then the Lease shall begin on
the date the Commencement Date otherwise would have occurred but for the Tenant
delays. Delays attributable to Tenant ("Tenant Delays") shall include, without
limitation, those caused by (a) delays by Tenant in approving the Construction
Drawings and costs, (b) Tenant's request for special materials not available
when needed for construction in accordance with the construction schedule, (c)
Change Orders, and (d) interference with Landlord's work caused by Tenant or
Tenant's agents. All costs and expenses occasioned by a Tenant Delay, including,
without limitation, increases in labor or materials, shall be borne by Tenant.
8. Tenant may, with Landlord's written consent, enter the Premises prior
to the Commencement Date solely for the purpose of installing its Personal
Property as long as such entry will not interfere with the orderly construction
and completion of the Premises ("Tenant's Work"). Tenant shall notify Landlord
of its desired time(s) of entry and shall submit for Landlord's written approval
the scope of the Tenant's Work to be performed and the name(s) of the
contractor(s) who will perform such work. Tenant agrees to indemnify, defend and
hold harmless Landlord, any mortgagee, ground lessor or beneficiary of a deed of
trust encumbering, secured by or affecting the Premises or the Building, from
and against any and all claims, actions, losses, liabilities, damages, costs or
expenses (including, without limitation, reasonable attorneys' fees and claims
for worker's compensation) of any nature whatsoever, arising out of or in
connection with the Tenant's Work (including, without limitation, claims for
breach of warranty, personal injury or property damage).
9. During the course of construction, at Tenant's expense, Tenant shall
obtain or maintain public liability and worker's compensation insurance, in
amounts acceptable to Landlord, and which name Landlord and Tenant as parties
insured from and against any and all liability for death of or injury to person
or damage to property caused in or about or by reason of the construction of the
Tenant's Work.
10. Upon substantial completion of the Premises in accordance with the
Construction Drawings, Tenant agrees to accept the Premises in the condition
which it may then be and waives any right or claim against Landlord for any
cause directly or indirectly arising out of the condition of the Premises,
appurtenances thereto, improvements thereon, and equipment therein. Tenant shall
hold harmless Landlord from and against any liability or damage as provided
under Paragraph 10.2 of the Lease. Landlord shall not be liable for any latent
or patent defects therein, except that Landlord warrants the Premises against
latent defects for a period of one (1) year from the date of substantial
completion.
<PAGE>
11. Tenant releases Landlord from any claim whatsoever for damages against
Landlord for any delay in the date on which the Premises shall be ready for
occupancy by Tenant.
12. The Premises shall be deemed "substantially completed" as of the date
that all of the following conditions are satisfied:
(a) The Tenant Improvements have been substantially completed in
accordance with the approved Construction Drawings (except for those punch list
items referenced in Paragraph 12 below), such that Tenant can reasonably conduct
business within the Premises; and
(b) A certificate of occupancy and/or finalized building permit has
been issued for the Premises.
(c) All base building facilities shall be in good operating order and
shall comply and conform with the design specifications furnished by Tenant; the
base building includes the following items: restrooms, a first floor lobby and
elevator cabs, HVAC units on the roof which are distributed to each floor,
sprinkler systems which are distributed around each floor (but with no drop
heads), electrical equipment in the first floor electrical room and electrical
panels on each floor, and a card-key security system for access to all Building
common area exterior doors.
13. Tenant shall immediately prior to occupancy inspect the Premises and
compile and furnish Landlord with an initial punch list of any missing or
deficient Tenant Improvements. Within the first thirty (30) days after delivery
of the Premises, Tenant shall make a final punch list and submit this list to
Landlord. Landlord shall use its best efforts to complete the corrective work in
a prompt, good and workman-like manner. Punch list corrections shall not delay
the Commencement Date, nor shall a delay in making corrections be grounds for a
delay or reduction in any rent payments due Landlord.
14. All floor area calculations are from the center line of the partitions
and the outside line of the exterior and hall walls. No deduction is allowed for
the columns, sprinkler risers, roof drains, or air conditioning units serving
Tenant and located within the Premises.
15. Landlord shall select the manufacturer and vendor of all building
materials and equipment with respect to the Tenant Improvements and Tenant Extra
Improvements to be constructed hereunder.
TENANT LANDLORD:
Fiberlane Communications G & W/Copley Redwood Business Park,
L.P.
a Delaware corporation a limited partnership
By: /s/ Michael Hatfield By: G & W Management Co.
----------------------------------
Its: Manager
Print Name: /s/ Michael Hatfield
---------------------------
Its: CEO By: /s/ William C. White
-------------------------------- -------------------------------
William C. White, President
G & W Management Co.
<PAGE>
PLEASE SEE ATTACHED
EXHIBIT B-1
SPACE PLAN
<PAGE>
[FLOOR PLAN APPEARS HERE]
EXHIBIT B-2
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks,
passages, building entries, lobbies, corridors, stairways, and elevators of the
Building shall not be obstructed by Tenant, or Tenant's agents or employees, or
used for rely purpose other than ingress and egress to and from the Premises.
Tenant or Tenant's agents or employees shall not loiter on the lawn areas or
other common areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out
of the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of
Landlord constitute a hazard to or damage to the Building or the Building's
equipment, shall be moved into the Premises without Landlord's prior written
approval, but such consent or approval shall not be unreasonably withheld,
conditioned or delayed. Landlord and Tenant shall mutually agree to the location
of such articles in the Premises. All damage done to the Property, Building or
Premises by putting in, taking out or maintaining extra heavy equipment shall be
repaired at the expense of Tenant.
(c) Landlord reserves the right to close and keep locked any and all
entrances and exits of the Building and Property and gates or doors closing the
parking areas thereof during such hours as Landlord may deem advisable for the
adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord shall
have the right to remove all non permitted signs and furniture, without notice
to Tenant.
3. Tenant shall not employ any person or persons other than the janitor
or cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of Tenant or Tenant's agents or
employees, shall be paid for by Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings
or premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should
<PAGE>
sound mitigation measures be required due to sounds originating in the Premises,
the costs of such measures shall be paid for by Tenant.
7. Bicycles or other vehicles, other than wheel chairs, shall not be
permitted in the offices, halls, corridors and lobbies in the Building nor shall
any obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be placed over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not burn any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers, agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler,
or other machinery or carry on any mechanical business, other than such
mechanical business which normally is identified with general use in the
Premises. Explosives or other articles of an extra hazardous nature shall not be
brought into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in
areas designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint
or in any way deface the common area walls, exterior walls, roof, foundations,
bearing walls, or pillars without the prior written consent of Landlord. The
expense of repairing any breakage, stoppage or damage resulting from a violation
of this rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective
unless expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around
their facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or
any further or modified rules and regulations from time to time issued by
Landlord, and the lease provisions, the lease provisions shall govern and
control.
18. Landlord reserves the right at any time to change or rescind any one
or more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant or
to any other person for the non-observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
<PAGE>
EXHIBIT D
Materials Quantities
- --------- ----------
Tenant agrees that:
(a) None of the above materials will be used, held or stored on or about
the Premises in quantities of greater than one (1) gallon each, or twenty (20)
pounds each in the case of non-liquid materials; provided, however, that used or
excess materials may be stored together in a fifty-five (55) gallon drum while
awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be stored in
fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under or about
the Premises or Redwood Business Park. Instead, such materials shall be
transported off-site, no less often than every one hundred eighty (180) days, by
a duly licensed hazardous materials transporter. While waiting for transport
off-site for disposal, used or excess materials shall be stored in a safe
location on the Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page 1 to this Exhibit D, regardless of whether
they are water-soluable, shall be flushed down any sanitary sewer drains on or
about the Premises or Redwood Business Park.
<PAGE>
Exhibit E
Fiberlane Communications, Inc.
Balance Sheet - February 1998
(in US$)
<TABLE>
<CAPTION> --------------
Actual
--------------
ASSETS
<S> <C>
Current Assets
Cash & Cash Equivalents 3,557,689
Other Current Assets 54,121
--------------
Total Current Assets 3,661,810
--------------
Property, Plant & Equipment 5,067,346
Accumulated Depreciation (873,874)
--------------
Net Property, Paint & Equipment 4,193,471
--------------
--------------
TOTAL ASSETS 7,805,282
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
--------------
Current Liabilities
Accounts Payable 674,109
Accrued Liabilities 127,746
Note Payable -
--------------
Total Current Liabilities 801,855
--------------
--------------
Long Term Liabilities
Capital Lease 2,446,521
Term Line 2,654,804
--------------
Total Long Term Liabilities 5,101,325
--------------
--------------
Total Liabilities 5,903,180
--------------
Equity
--------------
Common Stock 1,247,157
Preferred Stock 10,776,996
Warrants 1,078
Notes Receivable (316,196)
Retained Earnings (9,806,932)
--------------
--------------
Total Equity 1,902,102
--------------
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 7,805,281
--------------
</TABLE>
<PAGE>
AMENDMENT #1 TO
OFFICE LEASE AGREEMENT
This Amendment #1 to Office Lease Agreement is made this 21/st/ day of
January 1999, between G & W/Copley Redwood Business Park, L.P., a California
limited partnership, ("Landlord") and Cerent Corporation, a Delaware Corporation
and successor to Fiberlane Communications, a Delaware corporation ("Tenant").
Recitals
A. Landlord and Tenant entered into an Office Lease Agreement and Addendum
No. 1 dated April 23, 1998 ("the Lease") concerning 20,985 rentable square feet
of space located at 1450 North McDowell Boulevard, Petaluma, California ("the
Premises").
B. Tenant now desires to expand its Premises into the balance of the
building, provide for improvements, adjust the rent accordingly, cancel any
lease termination clauses, and change to a modified full service lease, as
hereinbelow provided.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree as follows:
1. The Premises shall be increased by 20,985 rentable s.f. at 1450 North
McDowell Boulevard as shown on the floor plan attached to this Amendment as
Exhibit A and incorporated by reference, ("Expansion Space") to bring the total
square footage of the Premises to 41,970 rentable square feet.
2. The lease term for the Expansion Space shall commence upon substantial
completion of the tenant improvements relating to the Expansion Space estimated
to be March 15, 1999, subject to reasonable delay due to circumstances beyond
Landlord's reasonable control. The term of the Lease shall increase so there are
Eight Years remaining on the term for the Premises (including the Expansion
Space).
3. Landlord shall construct the tenant improvements for the Expansion
Space and for the 1st Floor Space as outlined on Exhibits A & B (Floor Plans)
and Exhibit C (HVAC Scope of Work) on a turn-key basis, including space
planning, architectural and working drawings, and
1
<PAGE>
permit costs; provided however, Tenant shall be responsible for payment of the
following Tenant Improvement costs:
(a) Tenant shall pay $30,000 to Landlord upon the commencement date of
the Expansion Space; and
(b) Tenant shall pay to Landlord $104,925 amortized over a period of
Eight Years, at an interest rate of Ten and 1/2 Percent (10.5%) per annum,
which cost is $1,620 per month. This payment is due on the first day of each
month following the commencement of the Expansion Space through the end of the
eight year term, at which time the entire balance will be paid in full. The
monthly installments to be paid by Tenant hereunder shall be deemed "additional
rent" due under this Lease and shall be paid by Tenant in addition to Tenant's
monthly Base Rent.
Any costs associated with any Tenant changes or additions to Exhibits A, B,
and C shall be the responsibility of Tenant. Any such additional tenant
improvements shall be subject to the general provisions of the Work Letter
Agreement (Exhibit B) and shall be processed as if they were Change Orders as
outlined in Paragraph 6 of the Work Letter Agreement.
4. Upon completion of the Expansion Space all gas and electrical costs for
the building shall be transferred into Tenant's name and Tenant shall be
responsible for all such costs.
5. The base rental rate for the Expansion Space shall be as follows:
<TABLE>
<CAPTION>
Lease Year Rent s.f./Mo. Amortized Monthly
(20,985 s.f) T.I.'s Base Rent
--------------------------------------------------------------------------------
<S> <C> <C> <C>
1 $1.55 $1,620 $34,147
--------------------------------------------------------------------------------
2 $1.60 $1,620 $35,196
--------------------------------------------------------------------------------
3 $1.65 $1,620 $36,246
--------------------------------------------------------------------------------
4 $1.70 $1,620 $37,295
--------------------------------------------------------------------------------
5 $1.75 $1,620 $38,344
--------------------------------------------------------------------------------
6, 7 & 8 $1.75 plus CPI plus $1,620
Min. 3% - Max 5%
</TABLE>
2
<PAGE>
At the start of the sixth lease year and each year of the term
thereafter there will be a rental adjustment based on the percentage increase in
the Consumer Price Index For All Urban Consumers, San Francisco-Oakland-San
Jose, All Items (1982-1984=100), as published by the U.S. Bureau of Labor
Statistics ("Index"). The "Beginning Index" shall be the Index published most
immediately preceding the last Base Rent adjustment. The "Adjustment Index"
shall be the Index published most immediately preceding the Adjustment Date. The
monthly Base Rent until the next Base Rent adjustment shall be determined by
multiplying the monthly Base Rent then currently being paid by a fraction, the
numerator of which is the Adjustment Index and the denominator of which is the
Beginning Index. However, in no event will the monthly Base Rent be increased by
an amount less than 3% per year or more than 5% per year. If the 1982-1984 base
of the Index is changed, the new base shall be converted to the 1982-1984 base
in accordance with the U.S. Department of Labor's conversion factor, and the
base as so converted shall be used. If the U.S. Department of Labor ceases to
publish the Index, then the successor index designated by the U.S. Department of
Labor or, if no successor index is so designated, the most nearly comparable
index shall be used.
6. Upon the assumption of the gas and electrical costs by Tenant, the Rent
for the existing premises shall be discounted by $0.15/s.f. per month for the
remainder of the term. The Base Year Expenses under Paragraph 4 of the Lease
shall be adjusted to reflect the deletion of the gas and electrical costs. In
addition, rent for the existing premises during the extended term shall continue
to increase per the CPI as outlined in Paragraph 1 of the Addendum to the Lease
dated April 22, 1998.
7. Upon the execution of this Lease Amendment #1, Tenant's right to
terminate the lease as provided in Paragraph 4 of addendum No. 1 to Redwood
Business Park Full Service Lease dated April 22, 1998, shall be null and void.
8. The security deposit for the Premises shall be increased by $32,527
upon execution of this Amendment for a total security deposit of $55,027.
3
<PAGE>
9. The Expansion Space shall become part of the Premises and except as
otherwise provided in this Amendment to the contrary, each and every term,
condition, and covenant of the Lease shall remain in full force and effect.
Executed on the date above first mentioned at Petaluma, California.
LANDLORD TENANT
G & W/Copley Redwood Business Park, L.P., Cerent Corporation
a California limited partnership a Delaware corporation
By: G & W Management Co., Managing Agent By: /s/ Carl E. Russo
---------------------
Print Name: Carl E. Russo
-------------
By: /s/ William C. White Its: President and CEO
------------------------------------- -------------------
William C. White, President
4
<PAGE>
[GRAPHIC APPEARS HERE]
Front Entrance Elevation
<PAGE>
[GRAPHIC APPEARS HERE]
Front Right of Building Elevation
<PAGE>
EXHIBIT C
HVAC Scope of Work
[LETTERHEAD OF CAL-AIR INC. APPEARS HERE]
- --------------------------------------------------------------------------------
January 7, 1999
To: Vila Construction
Attn: George Vila
Re: Cerent Expansion
1450 No. McDowell
Dear George;
We are pleased to provide our proposal for the HVAC system for this project. Our
scope of work shall include the following installation:
Second floor raise existing ducting
To accommodate higher ceiling, raise approximately 360' of previously installed
rectangular ductwork to 10'-6" AFF and remove approximately 30' of return
ducting.
Second floor tenant improvement
Furnish-install (15) VAV (temperature control zone boxes, each with hot water
heating coil, supply-return registers, insulated ducting, hot water heating
piping, start-up of existing roof HVAC unit and balancing of system.
Our second floor T.I, quote includes a VAV control box for the large conference
room and VAV for each (4) small conference rooms.
First floor tenant improvement:
Furnish-install new VAV control box for new large conference room and CTAC room,
roof exhaust fan with registers and ducting in each new toilet room, shower, and
gym, add (8) new supply registers with related ducting, relocate existing
supply/return registers to accommodate now floor plan, reinstall existing
registers in areas with new ceiling grid and relocate (19) wall thermostats.
Per my conversation with Michael Palmer, the CTAC room does not require 24 hour
HVAC and the Lab does not have additional heat producing equipment which would
require additional HVAC.
Quotes include all material, sales tax, labor, and engineered mechanical drawing
required for permit.
<PAGE>
[LETTERHEAD OF CERENT APPEARS HERE]
January. 20, 1999
Ms. Nancy J. Huff
1318 Redwood Way
Suite 140
Petaluma, CA 94954
Dear Nancy:
Enclosed are two signed copies of the Lease Amendment, Exhibits A, B & C. and a
check for $32,527 representing the increased security deposit. We appreciate
your flexibility in structuring this lease and the cost concession made relative
to the expense of the bathroom/gym.
As you stated in our meeting on January 13, 1999, G&W's record of meeting
deadlines is excellent. Therefore, we are accepting the terms of the lease with
the following addition applied:
If G & W fails to substantially complete the "Expansion Space" such that
Cerent cannot begin occupancy by April 15, 1999, G & W agrees to pay Cerent a
penalty for late occupancy structured as follows:
- $1,000 per day for the first 10 business days of delay (subject to force
majure)
- $2,000 per day for the second 10 business days of delay
- $3,000 per day for all days thereafter
Also, as previously agreed with Bill White, we are going to pursue the signage
for our Corporate Logo as represented on the attached page.
If this proposed addition is unacceptable, then we do not accept the Lease
Amendment as proposed.
If this proposed addition to the Lease Amendment is acceptable, please
acknowledge by depositing the security deposit check for $32,527 and returning
a signed copy of this letter to my attention.
Best regards,
/s/ Carl Russo
Carl Russo Accepted: /s/ William C. White
---------------------------
President and CEO G & W/Redwood Assoc.
<PAGE>
REDWOOD BUSINESS PARK
FULL SERVICE LEASE
BASIC LEASE INFORMATION
<TABLE>
<S> <C> <C> <C>
1. Date April 22, 1998
------------------------------------------------------------------------------------------------------------
2. Landlord G & W/Copley Redwood Business Park, L.P., a limited partnership
------------------------------------------------------------------------------------------------------------
3. Tenant Fiberlane Communications, a Delaware corporation
------------------------------------------------------------------------------------------------------------
4. Premises REFERENCE
------------------------------------------------------------------------------------
a. Project Redwood Business Park Paragraph 1
b. Building 1450 N. McDowell Blvd.
c. Address 1450 N. McDowell Blvd.
d. Assessor's Parcel # 047-550-017
e. Suite N/A
f. Usable Sq. Ft. 19,078
g. Rentable Sq. Ft 20,985
------------------------------------------------------------------------------------
5. Term Paragraph 2
------------------------------------------------------------------------------------
a. Estimated Commencement Date June 15, 1998
b. Length of Term 7 years
------------------------------------------------------------------------------------
6. Base Rent Paragraph 3
------------------------------------------------------------------------------------
a. Monthly Base Rent See Addendum
b. Advanced Base Rent $22,500
(Paid Upon Lease Execution)
c. Adjustment Date of Monthly Base Rent Month 4
------------------------------------------------------------------------------------
7. Property Taxes and Operating Expenses Paragraph 4
------------------------------------------------------------------------------------
a. Base Year - Calendar Year of: 1999
b. Premises v. Building Sq. Ft. Ratio 20985/41970=50%
c. Premises v. Project Sq. Ft. Ratio N/A
------------------------------------------------------------------------------------------------------------
8. Security Deposit $22,500 Paragraph 16
------------------------------------------------------------------------------------
9. Tenant Improvements Turn key up $25.00/Sq.Ft. Exhibit B
------------------------------------------------------------------------------------
10. Use General office and research Paragraph 6
------------------------------------------------------------------------------------
11. Tenant's Address for Notices Paragraph 20
------------------------------------------------------------------------------------
1450 N. McDowell Blvd.
Petaluma, CA 94954
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------
12. Landlord's Address for Notices Paragraph 20
------------------------------------------------------------------------------------
G & W/Copley Redwood Business Park, L.P.
c/o G&W Management Co.
P.O. Box 808030
Petaluma, CA 94975-8030
1318 Redwood Way, Suite 140
Petaluma, CA 94954
With a Copy to:
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
13. Real Estate Brokers Paragraph 23
------------------------------------------------------------------------------------
Keegan & Coppin
</TABLE>
- --------------------------------------------------------------------------------
EXHIBITS AND ADDENDUM
- --------------------------------------------------------------------------------
Addendum No. 1
Exhibit A: Diagram of Premises
Exhibit A-1: Diagram of the Project
Exhibit B: Work Letter Agreement
Exhibit B-1: Space Plan
Exhibit B-2: T.I. Reversion
Exhibit C: Rules and Regulations
Exhibit D: Hazardous Materials List
Exhibit E: Tenant's Financial Statement
<PAGE>
Exhibit 10.14
REDWOOD BUSINESS PARK
NET LEASE
BASIC LEASE INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
1. Date March 30, 1999
---------------------------------------------------------------------------------------------------------------------
2. Landlord G & W/Copley Redwood Business Park, L.P.
---------------------------------------------------------------------------------------------------------------------
3. Tenant Cerent Corporation, a Delaware corporation
---------------------------------------------------------------------------------------------------------------------
4. Premises REFERENCE
-----------------------------------------------------------------------------------------------
a. Project Redwood Business Park Paragraph 1
b. Building 1455 N. McDowell Blvd.
c. Address 1455 N. McDowell Blvd.
d. Assessor's Parcel # 047-550-005
e. Suite E
f. Usable Sq. Ft. 4,728
g. Rentable Sq. Ft 4,728
----------------------------------------------------------------------------------------------
5. Term Paragraph 2
----------------------------------------------------------------------------------------------
a. Estimated Commencement Date April 1, 1999
b. Length of Term 3 mos.
-----------------------------------------------------------------------------------------------
6. Base Rent Paragraph 3
----------------------------------------------------------------------------------------------
a. Monthly Base Rent $2,837
b. Advanced Base Rent $2,837
(Paid Upon Lease Execution)
c. Adjustment Date of Monthly Base Rent
----------------------------------------------------------------------------------------------
7. Property Taxes and Operating Expenses Paragraph 4
----------------------------------------------------------------------------------------------
a. Initial Monthly Allocation per rentable Sq.Ft. $0.21
b. Premises v. Building Sq. Ft. Ratio 4,728/34,129=13.85%
c. Premises v. Project Sq. Ft. Ratio 4,728/76,580=6.17%
----------------------------------------------------------------------------------------------
8. Security Deposit $ 1,000 Paragraph 16
----------------------------------------------------------------------------------------------
9. Tenant Improvements N/A Exhibit B
----------------------------------------------------------------------------------------------
10. Use Storage Paragraph 6
----------------------------------------------------------------------------------------------
11. Tenant's Address for Notices Paragraph 20
----------------------------------------------------------------------------------------------
Cerent Corporation
1450 N. McDowell Blvd.
Petaluma, CA 94954
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------------------------
12. Landlord's Address for Notices Paragraph 20
----------------------------------------------------------------------------------------------
G & W/Copley Redwood Business Park, L.P.
c/o G&W Management Co.
P.O. Box 808030
Petaluma, CA 94975-8030
1318 Redwood Way, Suite 140
Petaluma, CA 94954
With a Copy to:
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
13. Real Estate Brokers Paragraph 23
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
EXHIBITS AND ADDENDUM
----------------------------------------------------------------------------------------------
Exhibit A: Diagram of Premises
Exhibit A-1: Diagram of the Project
Exhibit C: Rules and Regulations
Exhibit D: Hazardous Materials List
Exhibit E: Tenant's Financial Statement
</TABLE>
<PAGE>
REDWOOD BUSINESS PARK
NET LEASE
THIS LEASE, dated March 30, 1999 is made and entered into by and between G
& W/Copley Redwood Business Park, L.P. ("Landlord"), and Cerent Corporation, a
Delaware corporation ("Tenant").
1. Premises.
--------
Landlord leases to Tenant, and Tenant hereby leases from Landlord for
the term of this Lease ("Term") and at the rent and upon the conditions set
forth below, the Premises described in the Basic Lease Information and
identified on the floor plan attached hereto as Exhibit A. The Premises are
located within the Building described in the Basic Lease Information, and
constitute part of the Project described in the Basic Lease Information and as
shown in Exhibit A-1 attached hereto, at the Redwood Business Park, located in
Petaluma, California. All areas and facilities outside the Buildings and within
the exterior boundaries of the Project that are provided and designated by
Landlord from time to time for the general nonexclusive use and convenience of
the tenants of the Project shall be known as "Common Areas".
2. Term.
----
(a) The Term shall commence April 1, 1999 A "Lease Year" is a period
of twelve (12) consecutive calendar months. A "Lease Month" is a calendar month.
The initial Term of this Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(2) If the Commencement Date of this Lease occurs on other than
the first calendar day of a calendar month, the Term shall be for a period of
Lease Years and Months as specified in the Basic Lease Information, plus the
number of days remaining in the calendar month in which the Commencement Date
occurs, unless terminated sooner as provided in this Lease.
3. Rent.
----
(a) For purposes of this Lease, the term "Rent" shall mean the Base
Rent, Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced Base Rent set forth in the Basic Lease
Information. Tenant shall pay to Landlord the Base Rent specified in the Basic
Lease Information, payable on or before the first day of each and every
successive calendar month following the Commencement Date. If the Term commences
on other than the first day of a calendar month, the first payment of Base Rent
shall be appropriately prorated, on the basis of' a 30-day month. Tenant's
payment of any Advanced Base Rent (excluding that portion attributable to last
month's rent, if any) shall be credited against Tenant's obligation to pay Base
Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money
required to be paid to Landlord by Tenant under this Lease in addition to
monthly Base Rent, whether or not the same be designated "additional rent." If
such amounts are not paid at the time provided in this Lease, they shall
nevertheless be collectable as additional rent with the next installment of
<PAGE>
monthly Base Rent thereafter falling due, but nothing herein contained shall be
deemed to suspend or delay the payment of any amount of money at the time the
same becomes due and payable hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of
Rent after the expiration of any applicable grace period will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any trust deed covering the Premises. Accordingly, if
any installment of Rent or any other sums due from Tenant shall not be received
by Landlord when due, Tenant shall pay to Landlord a late charge equal to six
percent (6%) of such overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until paid at the rate of ten percent (10%) per
annum. Payment of interest shall not excuse or cure any default hereunder by
Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made
to Landlord without deduction or offset, in lawful money of the United States of
America at Landlord's address for notices hereunder, or to such other person or
at such other place as Landlord may from time to time designate in writing to
Tenant.
4. Taxes and Operating Expenses.
----------------------------
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's
Percentage Share of Property Taxes (according to the percentage set forth in the
Basic Lease Information) relating to those Property Taxes (as the term is
defined under Paragraph 4(a)(1) below) which are assessed during the Term, and
(ii) Tenant's Percentage Share of Operating Expenses (according to the
percentage set forth in the Basic Lease Information) relating to those Operating
Expenses (as the term is defined under Paragraph 4(a)(2) below) which are paid
or incurred by Landlord during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds
and assessments and governmentally imposed fees or charges (and any tax levied
wholly or partly in lieu thereof) levied, assessed, confirmed, imposed or which
have become a lien against the Building (which for the purposes of defining
"Property Taxes" shall include the tax parcel of which the Building is a part)
and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all costs
of management, operation, maintenance and repair of the Building and Common
Areas, including, without limitation, property management expenses, maintenance
and repair materials, supplies and equipment; (B) all costs of water, power,
electricity, refuse collection, parking lot sweeping, landscaping, and other
services relating to the Common Areas; (C) all costs of alterations or
improvements to the Building or Common Areas made to achieve compliance with
federal, state and local law including, without limitation, the Americans with
Disabilities Act (42 U.S.C. Section 12101 et seq.), which costs will be
amortized over the useful life of each alteration or improvement; (D) all costs
of public liability and casualty insurance maintained by Landlord with respect
to the Building and Common Areas; (E) all costs incurred by Landlord for making
any capital improvements, structural repairs or modifications to the Building or
Common Areas or making any improvements or modifications to reduce the operating
expenses, which costs will be amortized over the useful life of each capital
improvement, structural repair or modification; (F) all costs of maintaining
machinery, equipment and directional signage or other markers; and G) the share
allocable to the Building of dues and assessments payable under any reciprocal
easement or common area maintenance agreements or declarations or by any owners'
associations affecting the Building. That portion of the Operating Expenses
relating to the property management expenses for the Building and Common Areas
which shall be charged to Tenant shall be four percent (4%) of both Tenant's
annual Base Rent and the subtotal of Tenant's share of Operating Expenses of the
Building. In the event that Landlord calculates the Operating Expenses based
upon the Project instead of the Building, as indicated on the Basic Lease
Information, then the term "Project" shall be substituted in the place of all
references to the term "Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by
multiplying the total amount of the Property Taxes by Tenant's Percentage Share
of Property Taxes (which percentage is determined by multiplying 100% by a
fraction, the numerator of which is the rentable area of the Premises and the
denominator of which is the total rentable area of all
<PAGE>
improvements located within the tax parcel of which the Premises are a part).
Landlord may cause the Common Areas of the Project to be separately assessed
from other areas and buildings of the Project. In such case, Tenant's Percentage
Share of Property Taxes attributable to the Common Areas shall be determined by
the ratio that the total rentable square feet in the Premises bears to the total
number of square feet of rentable area which is included in the property subject
to the assessment.
(c) Operating Expenses for each calendar year shall be adjusted to
equal Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied. When
the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses to
be paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in
the same manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate
of the amount of Property Taxes and one-twelfth (1/12th) of Landlord's estimate
of Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within one hundred twenty (120) days after the close of each calendar year, or
as soon after such 120-day period as practicable, Landlord shall deliver to
Tenant a statement in reasonable detail of the actual amount of Property Taxes
and Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on the basis of
such statement Tenant owes an amount that is less than the estimated payments
for such calendar year previously made by Tenant, Landlord shall credit such
excess to Tenant against future additional rent due under this Paragraph 4. If
on the basis of such statement Tenant owes an amount that is more than the
estimated payments for such calendar year previously made by Tenant, Tenant
shall pay the deficiency to Landlord within fifteen (15) days after delivery of
the statement. The obligations of Landlord and Tenant under this Paragraph 4(d)
with respect to the reconciliation between the estimated and actual amounts of
Property Taxes and Operating Expenses payable by Tenant for the last year of the
Term shall survive the termination of the Lease. When the final determination is
made of the actual amounts of Property Taxes and Operating Expenses payable by
Tenant for the year in which this Lease terminates, Tenant shall immediately pay
any increase due over the estimated payments and, conversely, any overpayment
made by Tenant shall be immediately reimbursed to Tenant by Landlord.
5. Other Taxes.
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In addition to Tenant's obligations under Paragraph 4 above, Tenant
shall pay or reimburse Landlord for (i) any taxes upon, measured by or
reasonably attributable to the cost or value of Tenant's equipment, furniture,
fixtures, and other personal property located in the Premises or leasehold
improvements made in or to the Premises at Tenant's expense, (ii) for taxes, if
any, measured by or reasonably attributable to tenant improvements paid for by
Tenant, and (iii) for any taxes, assessments, fees, or charges imposed by any
public authority or private community maintenance association upon or by reason
of the development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. Use.
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6.1 Prohibited Uses.
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(a) The Premises shall be used and occupied by Tenant
solely for the use set forth in the Basic Lease Information. Tenant shall, at
Tenant's expense, comply promptly with all applicable federal, state and local
laws, regulations, ordinances, rules, orders, and requirements in effect during
the Term relating to the condition, use or occupancy of the Premises. Tenant
shall not use or permit the use of the Premises in any manner that will tend to
create waste or a nuisance, or that unreasonably disturbs other tenants of the
Building or Project, nor shall Tenant place or maintain any signs, antennas,
awnings, lighting or plumbing fixtures, loudspeakers, exterior decoration or
similar devises on or visible from the exterior of the Premises, without
Landlord's prior written consent, which may be withheld in Landlord's sole
discretion. Tenant shall not use any corridors, sidewalks, stairs, elevators, or
other areas outside
<PAGE>
of the Premises for storage or any purpose other than access to the Premises.
Tenant shall not use, keep, or permit to be used or kept on the Premises any
foul or noxious gas or substance, nor shall Tenant do or permit to be done
anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the
outside of the Premises, the Building or the Project, or in the halls, lobbies,
windows or elevator banks of the Building without Landlord's prior written
consent, which consent may be withheld in Landlord's sole discretion. Any
signage so permitted shall be subject to prior approval of and conformance with
the requirements of the design review committee of the Project and the design
review agency of the city. At Tenant's expense, Tenant shall (i) maintain all
permitted signage, and (ii) upon the expiration or termination of this Lease,
remove such signage and repair any damage caused by their removal. If Tenant
fails to do so, Landlord may maintain, repair or remove such signage without
notice to Tenant and at Tenant's expense, the cost of which shall be payable by
Tenant as additional rent in accordance with Paragraph 14(b)(2) below.
6.2 Suitability. Tenant acknowledges that neither Landlord nor any
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agent of Landlord has made any representation or warranty with respect to the
Premises or the Building or with respect to the suitability or fitness of either
for the conduct of Tenant's business or for any other purpose. Nor has Landlord
agreed to undertake any modification, alteration or improvement to the Premises
except as provided in this Lease. Tenant acknowledges that the Premises are
located in a 100-year flood zone and that the finished floor elevations of the
Building are designed to be at least one (1) foot above the federal government's
estimate of the 100-year flood level at the time of initial construction.
6.3 Use of Common Areas.
-------------------
(a) Landlord gives Tenant and its authorized employees, agents,
customers, representatives, and invitees the nonexclusive right to use the
Common Areas, with others who are entitled to use the Common Areas, subject to
Landlord's rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control
and management of Landlord and Landlord shall have the right to establish,
modify, amend, and enforce reasonable rules and regulations with respect to the
Common Areas. Tenant acknowledges receipt of a copy of the current rules and
regulations, attached hereto as Exhibit C, and agrees that they may, from time
to time, be modified or amended by Landlord in a commercially reasonable manner
(the "Rules"). Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord shall have the right to close temporarily any
portion of the Common Areas for the purpose of discouraging use by parties who
are not tenants or customers of tenants; to use portions of the Common Areas
while engaged in making additional improvements or repairs or alterations to the
Property; to use or permit the use of the Common Areas by others to whom
Landlord may grant or have granted such rights; and to do and perform such acts
in, to, and with respect to, the Common Areas as in the use of good business
judgment Landlord shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or
reduce the Common Areas, provided the Project meets the parking requirement
under Paragraph 6.5 below.
(e) Tenant shall cooperate with Landlord and other tenants in
the Project in recycling waste paper, cardboard, or such other materials
identified under any trash recycling program that may be established in order to
reduce trash collection costs.
6.4 Environmental Matters.
---------------------
(a) (1) The term "Hazardous Materials" as used herein means any
petroleum products, asbestos, polychlorinated biphenyls, P.C.B.'s, chemicals,
compounds, materials, mixtures or substances that are now or hereafter defined
or listed in, or otherwise classified as a "hazardous substance", "hazardous
material", "hazardous waste", "extremely hazardous waste", "infectious waste",
"toxic substance", "toxic pollutant" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such
<PAGE>
as ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant
to any federal, state or local environmental law, regulation, ordinance,
resolution, order or decree relating to industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, release,
disposal or transportation of the same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial
cleaning materials which in common business practice are customarily and
lawfully used, stored and disposed of in small quantities, and except for those
Hazardous Materials listed on Exhibit D attached hereto, Tenant shall not use,
manufacture, store, release, dispose or transport any Hazardous Materials in,
on, under or about the Premises, the Building or the Project without giving
prior written notice to Landlord and obtaining Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Subject to
Landlord's prior written consent, Hazardous Materials may be added to Exhibit D
on an annual review basis; any such amendments to Exhibit D shall be signed by
each party and attached hereto. Tenant shall at its own expense procure,
maintain in effect, and comply with all conditions of any and all permits,
licenses, and other governmental and regulatory approvals required in connection
with Tenant's generation, use, storage, disposal and transportation of Hazardous
Materials. Except as discharged into the sanitary sewer in strict accordance and
conformity with all applicable Hazardous Materials Laws, Tenant shall cause any
and all Hazardous Materials removed from the Premises to be removed and
transported solely by duly licensed haulers to duly licensed facilities for
final disposal of such materials and wastes. Regardless whether permitted under
the Hazardous Materials Laws, Tenant shall not maintain in, on, under, or about
the Premises, the Building or the Project any above or below ground storage
tanks, clarifiers, or sumps, nor shall any wells for the monitoring of ground
water, soils, or subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of:
(a) any enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Law; (b)
any claim made or threatened by any person or entity against Tenant or the
Premises relating to damage, contribution, cost, recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials; and (c)
any reports, information, inquiries or demands made, ordered, or received by or
on behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord), protect, and hold Landlord, and each of Landlord's
partners, officers, directors, partners, employees, affiliates, joint venturers,
members, trustees, owners, shareholders, principals, agents, representatives,
attorneys, successors and assigns, free and harmless from and against any and
all claims, liabilities, damages, fines, penalties, forfeitures, losses, cleanup
and remediation costs or expenses (including attorneys' fees) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by (i) Tenant's use,
analysis, generation, manufacture, storage, release, disposal, or transportation
of Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or (ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
(c) Landlord shall have the right to enter the Premises during regular
business hours upon reasonable prior notice at all times for the purposes of
ascertaining compliance by Tenant with all applicable Hazardous Materials Laws,
provided, however, that in the instance of an emergency Landlord's entry onto
the Premises shall not be restricted to regular business hours nor shall notice
be required.
(d) Landlord shall have the option to declare a default of this Lease
for the release or discharge of Hazardous Materials by Tenant, Tenant's
employees, agents, contractors, or invitees on the Premises, Building or Project
or in violation of law or in deviation from prescribed procedures in Tenant's
use or storage of Hazardous Materials. If Tenant fails to comply with any of the
provisions under this Paragraph 6.4, Landlord shall have the right (but not the
obligation) to remove or otherwise cleanup any Hazardous Materials from the
Premises, the Building or the Project. In such case, the costs of any Hazardous
Materials investigation, removal or other cleanup (including, without
limitation, transportation, storage, disposal and attorneys' fees and costs)
will be additional rent due under this Lease, whether or not a court has ordered
the cleanup, and will become due and payable on demand by Landlord.
<PAGE>
6.5 Parking. Landlord grants to Tenant and Tenant's customers,
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suppliers, employees and invitees a nonexclusive license to use unassigned and
unreserved parking spaces in the Common Areas for the use of motor vehicles
during the Term subject to rights reserved to Landlord as specified in this
Paragraph 6.5. Landlord reserves the right to grant similar nonexclusive and
unassigned and unreserved use to other tenants; to promulgate rules and
regulations relating to the use of the Common Areas including parking by tenants
and employees of tenants; to make changes in the parking layout from time to
time; and to do and perform any other acts in and to these areas and
improvements as Landlord determines to be advisable. Tenant agrees not to
overburden the parking facilities and to abide by and conform with the rules and
regulations and to cause its employees and agents to abide by and conform to the
roles and regulations, Upon request, Tenant shall provide Landlord with license
plate numbers of all vehicles driven by its employees and to cause Tenant's
employees to park only in spaces specifically designated for tenant parking.
Landlord shall have the unqualified right to rearrange or reduce the number of
parking spaces; provided, however, the ratio of the number of parking spaces
available to Tenant will be no less than three point five (3.5) spaces per 1,000
usable square feet of the Premises.
7. Services.
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(a) Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, telephone, retiree collection, and other utility-type services finished
to Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any
damages or personal injuries to any person directly or indirectly resulting
from, nor shall there be any Rent abatement by reason of, any intemlption or
curtailment whatsoever in utility services.
8. Maintenance, Repairs and Alterations.
------------------------------------
(a) Tenant shall, at Tenant's expense, maintain every part of the
Premises in good order, condition and repair, including without limitation, (i)
all interior surfaces, ceilings, walls, door frames, window frames, floors,
carpets, draperies, window coverings and fixtures, (ii) all windows, doors,
locks and closing devices, entrances, plate glass, and signs, (iii) all plumbing
and sewage pipes, fixtures and fittings, (iv) all phone lines, electrical
wiring, equipment, switches, outlets, and light bulbs, (v) any fire detection,
fire sprinkler or extinguisher equipment, (vi) all of Tenant's personal
property, improvements and alterations, and (vii) all other fixtures and special
items installed by or for the benefit of, or at the expense of Tenant. Tenant
shall, at its expense, cause to be maintained in good operating condition and
repair, all heating, ventilating, and air conditioning equipment installed in,
or on the roof of' the Premises. Tenant shall keep in force a preventive
maintenance contract with a qualified maintenance company coveting all heating,
ventilating and air conditioning equipment and shall annually provide Landlord
with a copy of this contract. Tenant shall not enter onto the roof area of the
Building, except for the purpose of maintaining the heating, ventilating, and
air conditioning equipment and provided that Tenant shall repair any damage to
the roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation) of
any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation,
roof structure, exterior walls and other structural parts of the Building, and
all other portions of the Building not the obligation of Tenant or any other
tenant in the Building. Tenant expressly waives the benefits of any statute,
including Civil Code Sections 1941 and 1942, which would afford Tenant the right
to make repairs at Landlord's expense or to terminate this Lease due to
Landlord's failure to keep the Building in good order, condition and repair.
Landlord shall have no liability to Tenant for any damage, inconvenience, or
interference with the use of the Premises by Tenant as the result of Landlord
performing any such maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under
this Paragraph 8, Landlord may, but shall not be required to, give Tenant notice
to do such acts as are reasonably required to so maintain the Premises. If
Tenant shall fail to commence such work and diligently prosecute it to
completion, then Landlord shall have the right (but not the obligation) to do
such acts and expend such funds at the expense of Tenant as are reasonably
required to perform such work, Any amounts so expended by Landlord will be
additional rent due under this Lease, and such amounts will become due and
payable on demand by Landlord. Landlord
<PAGE>
shall have no liability to Tenant for any such damages, inconvenience, or
interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises in good condition and repair, only ordinary wear
and tear excepted. Tenant, at its sole cost and expense, agrees to repair any
damages to the Premises caused by or in connection with the removal of any
articles of personal property, business or trade fixtures, signs, machinery,
equipment, cabinetwork, furniture, moveable partitions, or permanent
improvements or additions, including without limitation thereto, repairing the
floor and patching and painting the walls where required by Landlord, to
Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against any
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including without limitation, any claims made by any succeeding tenant
resulting from such delay.
(e) Tenant shall not make any alterations, improvements, or additions
in, on, or about the Premises without Landlord's prior written consent, except
that Tenant may make alterations, improvements, or additions without Landlord's
prior written consent where (i) the reasonably estimated cost does not exceed
$2,500, and (ii) such alterations, improvements, or additions do not affect or
involve the structural integrity, roof membrane, exterior areas, building
systems, or water-tight nature of the Premises, the Building or the Project. In
requesting Landlord's consent, Tenant shall, at Tenant's sole cost, submit to
Landlord complete drawings and specifications describing such work and the
identity of the proposed contractor at least ten (10) business days prior to the
commencement of any work.
With respect to any alterations, improvements or additions made
to the Premises by Tenant:
(1) Before commencing any work relating to alterations,
additions, or improvements affecting the Premises, Tenant shall notify Landlord
of the expected date of commencement thereof and of the anticipated cost
thereof. Landlord shall then have the right at any time and from time to time to
post and maintain on the Premises such notices as Landlord reasonably deems
necessary to protect the Premises and Landlord from mechanics' liens or any
other liens.
(2) Tenant shall pay when due all claims for labor or materials
furnished to Tenant for use in the Premises. Tenant shall not permit any
mechanics' liens or any other liens to be levied against the Premises for any
labor or materials furnished to Tenant in connection with work performed on the
Premises by or at the direction of Tenant. Tenant shall indemnify, hold harmless
and defend Landlord (by counsel reasonably satisfactory to Landlord) from any
liens and encumbrances arising out of any work performed or materials furnished
by, or at the direction of Tenant. In the event that Tenant shall not, within
twenty (20) days following the imposition of any such lien, cause such lien to
be released of record by payment or posting of a proper bond, Landlord shall
have, in addition to all other remedies provided herein by law, the right, but
not the obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All such
sums paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the rate of ten percent (10%) per annum.
(3) All alterations, improvements or additions in or about the
Premises performed by or on behalf of Tenant shall be done in a first-class,
workmanlike manner, shall not unreasonably lessen the value of leasehold
improvements in the Premises, and shall be completed in compliance with all
applicable laws, ordinances, regulations and orders of any governmental
authority having jurisdiction thereover, as well as the requirements of insurers
of the Premises and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant
Tenant permission for alterations, improvements or additions which require,
because of application of Americans with Disabilities Act or other laws,
substantial improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration
of the Term, require that Tenant, at Tenant's expense, remove any such
alterations, improvements or additions prior to or upon the expiration of this
Lease, and restore the Premises to their condition prior to such alterations,
improvements or additions.
<PAGE>
(7) Unless Landlord requires their removal, as set forth above,
all alterations, improvements, or additions made to the Premises shall become
the property of Landlord and remain upon and be surrendered with the Premises
upon the expiration of this Lease; provided, however, that Tenant's machinery,
equipment, and trade fixtures, other than any which may be affixed to the
Premises so that they cannot be removed without material damage to the Premises,
shall remain the property of Tenant and may be removed by Tenant subject to the
provisions of Paragraph 8(d) above.
Tenant agrees to accept the Premises in its present "AS-IS" condition,
except
10. Insurance and Indemnity.
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10.1 Insurance.
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(a) Tenant shall obtain and maintain during the Term
commercial general liability insurance with a combined single limit for personal
injury and property damage in an amount of not less than $2,000,000 (in a form,
with a deductible amount, and with carriers reasonably acceptable to Landlord)
and employer's liability and workers' compensation insurance as required by law.
The insurance carrier shall be authorized to do business in the State of
California, with a policyholders and financial rating of at least A:IX Class
status as rated in the most recent edition of Best's Key-Rating guide. Tenant's
comprehensive general liability insurance policy shall be endorsed to provide
that (i) it may not be canceled or altered in such a manner as to adversely
affect the coverage afforded thereby without thirty (30) days' prior written
notice to Landlord, (ii) Landlord is designated as an additional insured, (iii)
the insurer acknowledges acceptance of the mutual waiver of claims by Landlord
and Tenant pursuant to Paragraph 10.2(b) below, and (iv) such insurance is
primary with respect to Landlord and that any other insurance maintained by
Landlord is excess and noncontributing with such insurance. If, in the opinion
of Landlord's lender or in the commercially reasonable opinion of Landlord's
insurance adviser, the specified amounts of coverage are no longer adequate,
such coverage shall, within 30 days written notice to Tenant, be appropriately
increased. Prior to the commencement of the Term, Tenant shall deliver to
Landlord a duplicate of such policy or a certificate thereof to Landlord for
retention by it, with endorsements. At least thirty (30) days prior to the
expiration of such policy or any renewal or modification thereof, Tenant shall
deliver to Landlord a replacement or renewal binder, followed by a duplicate
policy or certificate within a reasonable time thereafter. If Tenant fails to
obtain such insurance or to furnish Landlord any such duplicate policy or
certificate as herein required, Landlord may, at its election, without notice to
Tenant and without any obligation to do so, procure and maintain such coverage
and Tenant shall reimburse Landlord on demand as additional rent for any premium
so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's
officers, directors, partners, employees, agents and representatives for loss or
damage to the extent that such loss or damage is insured against under any valid
and collectable insurance policy insuring Landlord or would have been insured
against but for any deductible amount under any such policy. Tenant waives all
claims against Landlord, and Landlord's officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns, for loss or damage
to the extent such loss or damage is insured against under any valid and
collectable insurance policy insuring Tenant or required to be maintained by
Tenant under this Lease, or would have been insured against but for any
deductible amount under any such policy. The insuring party shall, upon
obtaining the policies of insurance required under this Lease, give notice to
the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease. Tenant agrees that in the event of a
sale, assignment or transfer of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord and any subsequent
Landlord.
(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least one hundred percent
(100%) of their full replacement value. The proceeds from any such policy shall
be used by Tenant for the replacement of personal property and the restoration
of Tenant's improvements or alterations. Notwithstanding any other provisions of
the Lease, Landlord shall have no liability for damage to or destruction of
Tenant's personal property, regardless of' whether the damage or destruction
results from the acts or omissions of Landlord.
(d) During the Term, Landlord shall keep the Building, and
improvements
<PAGE>
within which the Premises are located, insured against loss or damage by (i)
fire, with extended coverage and vandalism, malicious mischief and special
extended perils (all risk) endorsements or their equivalents, in amounts not
less than one hundred percent (100%) of the replacement cost of the Building and
structures insured, and (ii) flood, in the maximum amount provided for by FEMA
under its flood loss insurance program, with loss payable thereunder to Landlord
and to any authorized encumbrancer of Landlord (with standard mortgagee loss
payable clause) in accordance with their respective interests. Landlord may
maintain rent insurance, for the benefit of Landlord, equal to at least one
year's Base Rent hereunder. If the Lease is terminated as a result of damage by
fire, casualty or earthquake as set forth in this Paragraph 10, all insurance
proceeds shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of
the signing of this Lease, insure the Building for earthquake damage. Landlord
may, when Landlord deems the premiums to be reasonable, insure the Building
fully or partially for earthquake damage. At such time, the premium for
earthquake insurance will be added to the Operating Expenses for purposes of
determining additional rent.
10.2 Indemnity.
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(a) Tenant waives all claims against Landlord for damage to any
property or injury to or death of any person in, on, or about the Premises, the
Building, or any other portion of the Project arising at any time and from any
cause, unless caused by the active negligence or willful misconduct of Landlord,
its agents, employees, or contractors. Tenant shall indemnify, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, from and against all claims, costs,
damages, actions, indebtedness and liabilities (except such as may arise from
the active negligence or willful misconduct of Landlord, and Landlord's
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, successors
and assigns) arising by reason of any death, bodily injury, personal injury,
property damage or any other injury or damage in connection with (i) any
condition or occurrence in or about or resulting from any condition or
occurrence in or about the Premises during the Term, or (ii) any act or omission
of Tenant, or Tenant's agents, representatives, officers, directors,
shareholders, partners, employees, successors and assigns, wherever it occurs.
The foregoing indemnity obligation of Tenant shall include reasonable attorneys'
fees, and all other reasonable costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made. The provisions of this
Paragraph 10.2 shall survive the termination or expiration of this Lease with
respect to any damage, injury, or death occurring prior to such expiration or
termination.
(b) Neither party shall be liable to the other for any
unauthorized or criminal entry of third parties into the Premises, Building,
Project, Common Areas, or parking facilities, or for any damage to person or
property, or loss of property in and about the Premises, Building, Project,
Common Areas, parking facilities and the approaches, entrances, streets,
sidewalks, stairs, elevators, restrooms, or corridors thereto, by or from any
unauthorized or criminal acts of third parties, regardless of any breakdown,
malfunction or insufficiency of any security measures, practices or equipment
provided by Landlord or Tenant. Tenant shall immediately notify Landlord in
writing of any breakdown or malfunction of any security measures, practices or
equipment provided by Landlord as to which Tenant has knowledge.
(c) Any diminution or interference with light, air or view by
any structure which may be erected on land adjacent to the Building or resulting
from any other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for
consequential damages, including injury to Tenant's business or any loss of
income therefrom.
(e) In the event that Landlord or any successor owner of the
Building sells or conveys the Building, then all liabilities and obligations of
Landlord or the successor owner under this Lease accruing after the sale or
conveyance shall terminate and become binding on the new owner, and Tenant shall
release Landlord from all liability under this Lease (including, without
limitation, the Security Deposit, as defined under Paragraph 16 below), except
for acts or omissions of Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a
corporation, limited liability company, trust, partnership, joint venture,
unincorporated association or other form of business entity, (i) the obligations
of Landlord shall not constitute personal obligations of the officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, or other principals, agents or representatives of such
business entity
<PAGE>
("Member of Landlord"), and (ii) Tenant shall have recourse only to the interest
of such business entity in the Building of which the Premises are a part for the
satisfaction of such obligations and not against the assets of such Member of
Landlord other than to the extent of their respective interests in the Building.
In this regard, Tenant agrees that in the event of any actual or alleged
failure, breach or default by Landlord of its obligations under this Lease, that
(i) no Member of Landlord shall be sued or named as a party in any suit or
action (except as may be necessary to secure jurisdiction of Landlord), (ii) no
judgment will be taken against any Member of Landlord, and any judgment taken
against any Member of Landlord may be vacated and set aside at any time without
hearing, (iii) no writ of execution will ever be levied against the assets of
any Member of Landlord, and (iv) these agreements by Tenant are enforceable both
by Landlord and by any Member of Landlord.
11. Damage or Destruction.
---------------------
(a) Subject to the provisions of Paragraphs 11(b) and 11(c) below,
if, during the Term, the Premises are totally or partially destroyed from any
insured casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, and Landlord is unable
to get a variance to such laws to permit the commencement of restoration of the
Premises within the 90-day period, then either party may terminate this Lease by
giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
(b) Despite the provisions of Paragraph 11(a) above, Landlord may
decide within ninety (90) days after such destruction to demolish the Building
rather than rebuild it, in which case this Lease will terminate as of the date
of the destruction. Landlord shall give Tenant written notice of its intention
within ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6)
months of the initial Term or during the last six (6) months of any extension
period, regardless of the nature and extent of the destruction, either party can
elect to terminate this Lease within thirty (30) days after the destruction
occurs. If this Lease does not terminate pursuant to this Paragraph 11(c), the
provisions of Paragraph 11(a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any
extent whatsoever, Landlord may within ninety (90) days following the date of
such damage: (i) commence to restore the Premises to substantially the same
condition as they were in immediately before the destruction and prosecute the
same diligently to completion, in which event this Lease shall continue in full
force and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which
materially interferes with Tenant's use of the Premises, if this Lease is not
terminated as above provided, there shall be an abatement or reduction of Base
Rent between the date of destruction and the date Landlord substantially
completes its reconstruction obligations, based upon the extent to which the
destruction materially interferes with Tenant's use of the Premises. All other
obligations of Tenant under this Lease shall remain in full force and effect.
Except for abatement of Base Rent, Tenant shall have no claim against Landlord
for any loss suffered by Tenant due to damage or destruction of the Premises or
any work of repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and
1933(4), and any successor statutes, are inapplicable with respect to any
destruction of the Premises, such sections providing that a lease terminates
upon the destruction of the Premises unless otherwise agreed between the parties
to the contrary.
12. Eminent Domain.
--------------
(a) If all or any part of the Premises shall be taken as a result of
the exercise of the power of eminent domain, this Lease shall terminate as to
the part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not
<PAGE>
so taken, the Base Rent shall proportionately abate so long as Tenant is not
able to continuously occupy the part remaining and not so taken.
(b) All compensation awarded or paid upon a total or partial taking
of the fee title shall belong to Landlord whether such compensation be awarded
or paid as compensation for diminution in value of the leasehold or of the fee
except: Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by Tenant herein, under
the terms of this Lease but which are required to be taken by the condemnor or
are so acquired by the condemnor; and (iii) all relocation assistance, moving
and relocation expenses to the extent (if any) provided by the condemning
authority directly to Tenant.
13. Assignment and Subletting.
-------------------------
(a) Tenant shall not assign, sublet or hypothecate this Lease or any
interest herein or sublet the Premises or any part thereof or permit the use of
the Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the foregoing
acts without Landlord's consent shall be void and shall, at the option of
Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment"
shall include, without limitation, any sale, transfer, or other disposition of
all or any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company:
(A) any dissolution, merger, consolidation, or other reorganization of Tenant;
or (B) a sale or other transfer of more than fifty percent (50%) of the value of
the assets of Tenant; or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale or other transfer of a controlling percentage of the
capital stock of Tenant; or (D) if Tenant is a limited liability company, a sale
or other transfer of a controlling percentage of the interest in Tenant. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stocks or interests possessing at least fifty percent (50%) of the total
combined voting power of the limited liability company or, in the case of a
corporation, of all classes of Tenant's stock issues, outstanding and permitted
to vote for the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty
percent (50%) of the beneficial interest of Tenant, or the dissolution of the
trust;
(3) if Tenant is a partnership or joint venture, the withdrawal,
or the transfer of the interest, of any general partner or joint venturer or the
dissolution of the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any
assignment by a sublessee of its sublease shall be subject to Landlord's prior
written consent in the same manner as if Tenant were entering into a new
sublease.
(d) Regardless of Landlord's consent, no subletting or assignment
shall release Tenant of Tenant's obligation, or alter the primary liability of
Tenant to pay the Rent and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of Rent by Landlord from any other person shall
not be deemed to be a waiver by Landlord of any provisions hereof. Consent to
one assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
(e) In the event Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, then Tenant
shall reimburse Landlord for reasonable costs and attorneys' fees incurred in
connection therewith in an amount not to exceed $1,000.00.
14. Default by Tenant.
-----------------
<PAGE>
(a) The following events shall constitute events of default under
this Lease:
(1) a failure by Tenant to pay any Rent or to deliver an
estoppel certificate (as provided in Paragraph 17 below) where such failure
continues for five (5) days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by
Tenant to defraud creditors, any assignment by Tenant for the benefit of
creditors, or the commencement of any proceedings of any kind by or against
Tenant under any provision of the Federal Bankruptcy Act or under any other
insolvency, bankruptcy or reorganization act unless, in the event any such
proceedings are involuntary, Tenant is discharged from the same within sixty
(60) days thereafter; the appointment of a receiver for a substantial part of
the assets of Tenant; or the levy upon this Lease or any estate of Tenant
hereunder by any attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given
to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligation
hereunder, and any of them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants,
agreements or conditions of this Lease to be observed or performed by Tenant
(excluding any event of default under Paragraph 14(a)(1) above), where such
failure continues for thirty (30) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of the default is such that the
same cannot reasonably be cured within the 30-day period, Tenant shall not be
deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant,
Landlord may at any time thereafter, without limiting Landlord in the exercise
of any right or remedy at law or in equity which Landlord may have by reason of
such default or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and abandonment and recover the Rent and any other monetary
charges as they become due, without terminating Tenant's right to sublet or
assign this Lease, subject only to reasonable limitations as herein provided.
During the period Tenant is in default, Landlord shall have the right to do all
acts necessary to preserve and maintain the Premises as Landlord deems
reasonable and necessary, including removal of all persons and property from the
Premises, and Landlord can enter the Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers' commissions, expenses of remodeling the Premises
required by the reletting, and like costs. Reletting can be for a period shorter
or longer than the remaining Term.
(2) Pay or perform such obligation due (but shall not be
obligated to do so), if Tenant fails to pay or perform any obligations when due
under this Lease within the time permitted for their payment or performance. In
such case, the costs incurred by Landlord in connection with the performance of
any such obligation will be additional rent due under this Lease and will become
due and payable on demand by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means,
in which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be entitled
to recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including, without limitation, the following: (A) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus (B) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such Rent loss that is proved could have been
reasonably avoided; plus (C) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that is proved could be reasonably avoided;
plus (D) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of events would be likely to result
therefrom; plus (E) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such termination of Tenant's possessory interest in and to
the Premises, Tenant (and at Landlord's sole election, Tenant's sublessees)
shall no longer have any interest in the Premises, and Landlord shall have the
right to make any reasonable repairs,
<PAGE>
alterations or modifications to the Premises which Landlord in its sole
discretion deems reasonable and necessary. The "worth at the time of award" of
the amounts referred to in subparagraphs (A) and (B) above is computed by
allowing interest at the maximum rate an individual is permitted by law to
charge. The worth at the time of award of the amount referred to in subparagraph
(C) above is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
(4) Pursue any other legal or equitable remedy available to
Landlord. Unpaid installments of Rent and other unpaid monetary obligations of
Tenant under the terms of this Lease shall bear interest from the date due at
the rate of ten percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of
the Premises by reason of any default by Tenant hereunder, Tenant hereby waives
any right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover Rent as it becomes
due under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of
this Lease then, at Landlord's sole election: (i) Tenant shall not have the
right to exercise any available right, option or election under this Lease
("Tenant's Exercise Rights") if at such time Tenant is in default hereunder,
(ii) Tenant shall not have the right to consummate any transaction or event
triggered by the exercise of any of Tenant's Exercise Rights if at such time
Tenant is in default hereunder, and (iii) Landlord shall not be obligated to
give Tenant any required notices or information relating to the exercise of any
of Tenant's Exercise Rights hereunder.
15. Default by Landlord, Notice to Mortgagee.
----------------------------------------
Landlord shall not be in default unless Landlord, or the holder of any
mortgage, deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. Security Deposit.
----------------
On execution of this Lease, Tenant shall deposit with Landlord the sum
specified in the Basic Lease Information (the "Security Deposit"). The Security
Deposit shall be held by Landlord as security for the performance by Tenant of
all of the provisions of this Lease. If Tenant fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Lease, Landlord may use, apply, or retain all or any portion of the
Security Deposit for the payment of any Rent or other charge in default, or the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of the Security Deposit, then within ten (10) days after demand therefor Tenant
shall deposit cash with Landlord in an amount sufficient to restore the deposit
to the full amount thereof, and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep the Security
Deposit separate from its general accounts. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without payment of
interest for its use, to Tenant (or, at Landlord's option to the last assignee,
if any, of Tenant's interest hereunder) at the expiration of the Terms, and
after Tenant has vacated the Premises. No trust relationship is created herein
between Landlord and Tenant with respect to the Security Deposit.
17. Estoppel Certificate.
--------------------
(a) Tenant shall within ten (10) days of notice from Landlord
execute, acknowledge and deliver to Landlord a statement certifying (i) that
this Lease is unmodified and
<PAGE>
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect), (ii) the amount of the Security Deposit, (iii) the date to which
the Rent has been paid, (iv) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any are claimed, and (v) such other matters as may reasonably
be requested by Landlord. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant, (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one month's Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such lender. All such financial
statements shall be received by Landlord in confidence and shall be used for the
purposes herein set forth.
18. Subordination.
-------------
This Lease, at Landlord's sole option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation for security
now or hereafter placed upon the Building and to any and all advances made on
the security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. Attorneys' Fees.
---------------
In the event legal action is initiated by either party, the prevailing
party shall be entitled to recover all costs and expenses incurred in such
action, including, without limitation, reasonable attorneys' fees and costs,
including attorneys' fees incurred at trial and on appeal, if any.
20. Notices.
-------
All notices, consents, demands, and other communications from one
party to the other given pursuant to the terms of this Lease shall be in writing
and shall be personally delivered, delivered by courier service, sent via
facsimile (confirmation receipt required), or deposited in the United States
mail, certified or registered, postage prepaid, and addressed as follows: To
Tenant at the address specified in the Basic Lease Information or to such other
place as Tenant may from time to time designate in a notice to Landlord; to
Landlord at the address specified in the Basic Lease Information, or to such
other place and to such other parties as Landlord may from time to time
designate in a notice to Tenant. All notices shall be effective upon delivery or
refusal of delivery.
21. General Provisions.
------------------
(a) This Lease shall be governed by and construed in accordance with
the internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information
<PAGE>
contains all agreements and understandings of the parties and supersedes and
cancels any and all prior or contemporaneous written or oral agreements,
instruments, understandings, and communications of the parties with respect to
the subject matter herein. This Lease, including the attached Exhibits, Addenda,
and Basic Lease Information, may be modified only in a writing signed by each of
the parties.
(d) No waiver of any provision hereof by either party shall be deemed by
the other party to be a waiver of any other provision, or of any subsequent
breach of the same provision. Landlord's or Tenant's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of Landlord's or
Tenant's consent to, or approval of, any subsequent act by the other party.
(e) If Tenant remains in possession, with the expressed consent of
Landlord, of all or any part of the Premises after the expiration of the Term,
such tenancy shall be from month to month only, and not a renewal hereof or an
extension for any further term, and in such case, Rent shall be payable in the
amount of the last month's Base Rent and all other charges under the Lease and
such month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be
required in the event of an emergency), Landlord and Landlord's representatives
and agents shall have the right to enter the Premises during regular business
hours for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary "For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the mutual
cancellation thereof or the termination of this Lease by Landlord as a result of
Tenant's default shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or partnership,
each individual executing this Lease on behalf of Tenant represents and warrants
that he is duly authorized to execute and deliver this Lease on behalf of the
corporation, company or partnership in accordance with, where applicable, a duly
adopted resolution of the board of directors of the corporation, the vote of the
members of the limited liability company or the vote of the partners within the
partnership, and that this Lease is binding upon the corporation, company or
partnership in accordance with its respective articles of incorporation and
bylaws, operating agreement or partnership agreement.
(j) Time is expressly declared to be of the essence of this Lease and of
each and every covenant, term, condition, and provision hereof, except as to the
conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the obligations
imposed on Tenant shall be joint and several.
(1) The language in all parts of this Lease shall be in all cases
construed as a whole according to its fair meaning and not strictly for nor
against either Landlord or Tenant.
(m) As used in this Lease and whenever required by the context thereof,
each number, both singular and plural, shall include all numbers and in each
gender shall include all genders. Landlord and Tenant, as used in this Lease or
in any other instrument referred to in or made a part of this Lease, shall
likewise include both the singular and the plural, a corporation, limited
liability company, partnership, individual or person acting in any fiduciary
capacity as executor, administrator, trustee or in any other representative
capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part hereof.
22. Force Majeure.
-------------
Any delay in construction, repairs, or rebuilding any building,
improvement or other structure herein shall be excused and the time limit
extended to the extent that the delay is occasioned by reason of acts of God,
labor troubles, laws or regulations of general applicability,
<PAGE>
acts of Tenant or other occurrences beyond the reasonable control of Landlord.
Accordingly, Landlord's obligation to perform shall be excused for the period of
the delay and the period for performance shall be extended for a period equal to
the period of such delay.
23. Broker's Fee.
------------
Each party represents that it has not had dealings with any real estate
broker, finder, or other person, with respect to this Lease in any manner,
except the brokerage firm(s) specified in the Basic Lease Information. Each
party shall hold harmless the other party from all damages resulting from any
claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the broker or finder
specified in the Basic Lease Information, with respect to this Lease in
accordance with the provisions of a separate commission contract.
24. Financial Statement.
-------------------
It is acknowledged by all parties hereto that the attached financial
declaration of Tenant is incorporated as a part of this Lease as Exhibit E, that
the information contained therein is true and correct in all material respects,
and that the accuracy of the information is a significant fact upon which
Landlord has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date
first mentioned above.
TENANT: LANDLORD:
Cerent Corporation G & W/Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: G & W Management Co.
Its: Manager
By: /s/ Cerent Corporation
---------------------------
Its: Controller By: /s/ William C. White
--------------------------- ---------------------------
William C. White, President
G & W Management Co.
By: /s/ Cerent Corporation
---------------------------
Its: MGR-HR
---------------------------
<PAGE>
[FLOOR PLAN APPEARS HERE]
Exhibit A
FLOOR PLAN
<PAGE>
[SITE PLAN APPEARS HERE]
Exhibit A-1
SITE PLAN
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
It is further agreed that the following Rules and Regulations shall be and are
hereby made a part of this Lease, and Tenant agrees that Tenant's employees and
agents, or any others permitted by Tenant to occupy or enter the Premises, will
at all times abide by said Rules and Regulations, unless otherwise specified or
provided for in the Lease, to wit:
1. The driveways, entrances and exits to the Property, sidewalks,
passages, building entries, lobbies, corridors, stairways, and elevators of the
Building shall not be obstructed by Tenant, or Tenant's agents or employees, or
used for any purpose other than ingress and egress to and from the Premises.
Tenant or Tenant's agents or employees shall not loiter on the lawn areas or
other common areas of the Property.
(a) Furniture, freight equipment and supplies will be moved in or out
of the Building only through the rear service entrances or other entrances
designated by Landlord and then only during such hours and in such manner as may
be reasonably prescribed by Landlord. Tenant shall cause its movers to use only
the loading facilities, and entrances designated by Landlord. In the event
Tenant's movers damage any part of the Building or Property, Tenant shall
forthwith pay to Landlord the amount required to repair said damage.
(b) No safe or article, the weight of which may in the opinion of
Landlord constitute a hazard to or damage to the Building or the Building's
equipment, shall be moved into the Premises without Landlord's prior written
approval, but such consent or approval shall not be unreasonably withheld,
conditioned or delayed. Landlord and Tenant shall mutually agree to the location
of such articles in the Premises. All damage done to the Property, Building or
Premises by putting in, taking out or maintaining extra heavy equipment shall be
repaired at the expense of Tenant.
(c) Landlord reserves the right to close and keep locked any and all
entrances and exits of the Building and Property and gates or doors closing the
parking areas thereof during such hours as Landlord may deem advisable for the
adequate protection of the Property and all tenants therein.
2. Except as otherwise provided for in the Lease, no sign, advertisement
or notice shall be inscribed, painted or affixed on any part of the inside or
outside of the Building unless of such color, size and style and in such place
upon or in the Building as shall be first approved in writing by Landlord. No
furniture or other materials shall be placed in front of the Building or in any
lobby or corridor, without the prior written consent of Landlord. Landlord shall
have the right to remove all non permitted signs and furniture, without notice
to Tenant.
3. Tenant shall not employ any person or persons other than the janitor
or cleaning contractor of Landlord for the purpose of cleaning or taking care of
the Premises without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed. Except as otherwise provided in
the Lease, Landlord shall in no way be responsible to Tenant for any loss of
property from the Premises, however occurring. The janitor of the Building may
at all times keep a pass key, and other agents of Landlord shall at all times be
allowed admittance to the Premises in accordance with the provisions set forth
in the Lease.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of Tenant or Tenant's agents or
employees, shall be paid for by Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals except seeing-eye dogs or other animals necessary to the
functioning of handicapped personnel shall be allowed on the lawns or sidewalks
or in the offices, halls, and corridors of the Building.
6. No persons shall disturb the occupants of this or adjoining buildings
or premises by the use of any radio, sound equipment or musical instrument or by
the making of loud or improper noises, nor interfere in any way with the other
tenants or those having business with them. Should sound mitigation measures be
required due to sounds originating in the Premises, the costs of such measures
shall be paid for by Tenant.
<PAGE>
7. Bicycles or other vehicles, other than wheel chairs, shall not be
permitted in the offices, halls, corridors and lobbies in the Building nor shall
any obstruction of sidewalks or entrances of the Building by such be permitted.
8. Tenant shall not allow anything to be placed on the outside of the
Building, nor shall anything be thrown by Tenant or Tenant's agents or
employees, out of the windows or doors, or down the corridors, ventilation ducts
or shafts of the Building. Tenant, except in case of fire or other emergency,
shall not open any outside window.
9. No awnings shall be placed over any window or entrance.
10. All garbage, including wet garbage, refuse or trash shall be placed by
Tenant in the receptacles designated by Landlord for that purpose. Tenant shall
not burn any trash or garbage at any time in or about the leased Premises or any
area of the Property. Tenant and Tenant's officers, agents, and employees shall
not throw cigar or cigarette butts or other substances or litter of any kind in
or about the Property.
11. Tenant shall not install or operate any steam or gas engine or boiler,
or other machinery or carry on any mechanical business, other than such
mechanical business which normally is identified with general use in the
Premises. Explosives or other articles of an extra hazardous nature shall not be
brought into the Building complex.
12. Any painting or decorating as may be agreed to be done by and at the
expense of Landlord shall be done during regular weekday working hours. Should
Tenant desire such work on Saturdays, Sundays, holidays or outside of regular
working hours, Tenant shall pay for the extra cost thereof, if any.
13. Tenant and Tenant's agents and employees shall park their vehicles in
areas designated from time-to-time for employee parking.
14. Tenant shall not mark, drive nails, screw, bore, or drill into, paint
or in any way deface the common area walls, exterior walls, roof, foundations,
bearing walls, or pillars without the prior written consent of Landlord. The
expense of repairing any breakage, stoppage or damage resulting from a violation
of this rule shall be borne by Tenant.
15. No waiver of any rule or regulation by Landlord shall be effective
unless expressed in writing and signed by Landlord or his authorized agent.
16. Tenant shall be responsible for cleaning up any trash blowing around
their facility that may have been left by their customers or employees.
17. In the event of any conflict between these rules and regulations or
any further or modified rules and regulations from time to time issued by
Landlord, and the lease provisions, the lease provisions shall govern and
control.
18. Landlord reserves the right at any time to change or rescind any one
or more of these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
and for the preservation of good order therein, as well as for the convenience
of other tenants of the Property. Landlord shall not be responsible to Tenant or
to any other person for the non-observance or violation of the rules and
regulations by any other tenant or person. Tenant shall be deemed to have read
these rules and to have agreed to abide by them as a condition to its occupancy
of the space herein leased, and Tenant shall abide by any additional rules and
regulations which are ordered or requested by Landlord or by any governmental
authority.
<PAGE>
EXHIBIT D
Materials Quantities
- --------- ----------
Tenant agrees that:
(a) None of the above materials will be used, held or stored on or about
the Premises in quantities of greater than one (1) gallon each, or twenty (20)
pounds each in the case of non-liquid materials; provided, however, that used or
excess materials may be stored together in a fifty-five (55) gallon drum while
awaiting transport off the Premises for disposal.
(b) The materials listed on Page 1 to this Exhibit D shall be stored in
fire-proof lockers on the Premises in accordance with applicable laws,
regulations and ordinances. No storage outside the Premises will be permitted.
(c) No used or excess materials will be disposed of in, on, under or about
the Premises or Redwood Business Park. Instead, such materials shall be
transported off-site, no less often than every one hundred eighty (180) days, by
a duly licensed hazardous materials transporter. While waiting for transport
off-site for disposal, used or excess materials shall be stored in a safe
location on the Premises in secure containers which are appropriately labeled.
(d) No materials listed on Page 1 to this Exhibit D, regardless of whether
they are water-soluable, shall be flushed down any sanitary sewer drains on or
about the Premises or Redwood Business Park.
<PAGE>
Exhibit E
Financial Statement
(TO BE PROVIDED BY TENANT)
<PAGE>
EXHIBIT 10.15
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(Short-form to be used with post 1995 AIR leases)
1. Parties. This Sublease, dated, for reference purposes only, June 30,
1999 , is made by and between Advanced Fibre Communications, Inc. a Delaware
Corporation ("Sublessor") and Cerent Corporation ("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 1440 McDowell
Boulevard North, Petaluma located in the County of Sonoma State of California
and generally described as (describe briefly the nature of the property) a
freestanding commercial building of approximately 39,830 s.f. single level and
all the buildings parking area and common areas. See Exhibit A ("Premises").
3. Term.
3.1 Term. The term of this Sublease shall be for approximately 8
years, 8 months and 25 days commencing on July 6th, 1999 and ending on March 31,
2008 sooner terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Sublessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises by the commencement
date. If, despite said efforts, Sublessor is unable to deliver possession as
agreed, the rights and obligations of Sublessor and Sublessee shall be as set
forth in Paragraph 2 of the Master Lease (as modified by Paragraph 7.3 of this
Sublease) .
4. Rent.
4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent for the
Premises equal monthly payments of $ See Addendum #1 13 a. & b. In advance, on
the first day of each month of the term hereof. Sublessee shall pay Sublessor
upon the execution hereof $9,507 as Base Rent for July 6, 1999 through August 8,
1999. See Addendum #13 a.& b. Base Rent for any period during the term hereof
which is for less than one month shall be a pro rata portion of the monthly
installment.
4.2 Rent Defined. All monetary obligations of Sublessee to Sublessor under
the terms of this Sublease (except for the Security Deposit) are deemed to be
rent ("Rent"). Rent shall be payable in lawful money of the United States to
Sublessor at the address stated herein or to such other persons or at such other
places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon
execution hereof $ N/A as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. The rights and obligations of Sublessor and
Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of
the Master Lease (as modified by Paragraph 7.3 of this Sublease).
6. Use.
6.1 Agreed Use. The Premises shall be used and occupied only for
General office and research & development uses and for no other unlawful
purpose.
6.2 Compliance NOTE: Sublessee is responsible for determining whether or
not the zoning is appropriate for its intended use, and acknowledges that past
uses of the Premises may no longer be allowed. If the Premises do not comply
with said warranty, or in the event that the Applicable Requirements are
hereafter changed, the rights and obligations of Sublessor and Sublessee shall
be as provided in Paragraph 2.3 of the Master Lease (as modified by Paragraph
7.3 of this Sublease). See Addendum #19 for continuation .
6.3 Acceptance of Premises and Lessee. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with
respect to the condition of the Premises (including but not limited to the
electrical, HVAC and fire sprinkler systems, security, environmental aspects,
and compliance with Applicable Requirements), and their suitability for
Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary
with reference to such matters and assumes all responsibility therefor as the
same relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has
made any oral or written representations or warranties with respect to said
matters other than as set forth in this Sublease. In addition, Sublessor
acknowledges that:
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and
(b) it is Sublessor's sole responsibility to investigate the
financial capability and/or suitability of all proposed tenants.
7. Master Lease
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein G&W/Redwood Associates Joint Venture, a California General
Partnership is the lessor, hereinafter the "Master Lessor"
7.2 This Sublease is and shall be at all times subject and
subordinate to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease
<PAGE>
Therefore, for the purposes of this Sublease, wherever in the Master Lease the
word "Lessor" is used it shall be deemed to mean the Sublessor herein and
wherever in the Master Lease the word "Lessee" is used it shall be deemed to
mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent
for obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom: none
----
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations" The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands. including reasonable
attorneys' fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless from
all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that no default exists on the part of any Party to the
Master Lease.
8. Assignment of Sublease and Default.
8.1
8.2 Sublessor may receive, collect and enjoy the Rent accruing under
this Sublease. However, if Sublessor shall Default in the performance of its
obligations to Master Lessor then Master Lessor may, at its option, receive and
collect, directly from Sublessee, all Rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed liable
to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee
Upon receipt of any written notice from the Master Lessor stating that a Default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the Rent due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shale pay such Rent
to Master Lessor without any obligation or right to inquire as to whether such
Default exists and notwithstanding any notice from or claim from Sublessor to
the contrary and Sublessor shall have no right or claim against Sublessee for
any such Rent so paid by Sublessee.
9. Consent of Master Lessor.
9.2
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent shall not release Sublessor of its obligations
or alter the primary liability of Sublessor to pay the Rent and perform and
comply with all of the obligations of Sublessor to be performed under the Master
Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d)
(e)
(f) In the event that Sublessor shall Default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid Rent nor any
Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any
other Defaults of the Sublessor under the Sublease.
9.4
9.5
9.6
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessee shall pay to
Keegan & Coppin Company. Inc. a licensed real estate broker, ("Broker"), a fee
as set forth in a separate agreement between Sublessor and Broker, or in the
event there is no such separate agreement, the sum of $ separate agreement for
------------------
brokerage services rendered by Broker to Sublessor in this transaction .
10.2 Sublessor agrees that if Sublessee exercises any option or right
of first refusal as granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this Sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase adjacent
property which Sublessor may own or in which Sublessor has an interest, then
Sublessor shall pay to Broker a fee in accordance with the schedule of-Broker in
effect at the time of the execution of this Sublease. Notwithstanding the
foregoing, Sublessor's obligation under this Paragraph 10.2 is limited to a
transaction in which Sublessor is acting as a Sublessor, lessor or seller.
<PAGE>
10.3
10.4
10.5 Any transferee of Sublessor's interest in this Sublease, or
Master Lessor's interest in the Master lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of Sublessor
or Master Lessor under this paragraph 10. Broker shall be deemed to be a third-
party beneficiary of this paragraph 10.
11. Attorney's Fees. If any party of the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. Additional Provisions. [ If there are no additional provisions, draw a
line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.]
See Attached Addendum #13-23
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
- ---------
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
- -------
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
- --------------------------------------------------------------------------------
Executed at: Petaluma, California Advanced Fibre Communications
-----------------------------------
on: ______________________________ By Peter A. Darbee
-------------------------------
By /s/Peter A. Darbee -Chief Financial
Officer
Address:__________________________ --------------------------------
"Sublessor" (Corporate Seal)
Executed at: Petaluma, California Cerent Corporation
--------------------- -----------------------------------
By /s/ Cerent Corporation
on:_______________________________ --------------------------------
Address___________________________ By Cerent Corporation
---------------------------------
"Master Sublessee" (Corporate Seal)
Executed at: Petaluma, California
---------------------
on:_______________________________ By ________________________________
Address:__________________________ By ________________________________
"Master Lessor"" (Corporate Seal)
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower
St., Suite 600, Los Angeles, CA 90017. (213) 687-8777.
<PAGE>
Addendum #1 To The Standard Sublease
By and Between
Advanced Fibre Communications, Inc. (Sublessor)
and
Cerent Corporation (Sublessee)
The parties hereby agree as follows:
13 a. Sublease Base Rent Schedule: Sublessee shall pay to Sublessor monthly
-----------------------------
base rent according to the following schedule: (Sublessee will also be
responsible for monthly Cam charges per Section 4 of the master lease).
Year 1: July 6, 1999 to June 30, 2000 $1.15 psf, per month
Year 2: July 1, 2000 to June 30, 2001 $1.185 psf, per month
Year 3: July 1, 2001 to June 30, 2002 $1.22 psf, per month
Year 4: July 1, 2002 to June 30, 2003 $1.26 psf, per month
Year 5: July 1, 2003 to June 30, 2004: $1.29 psf, per month
Year 6: July 1, 2004 to June 30, 2005: $1.33 psf, per month
Year 7: July 1, 2005 to June 30, 2006: $1.37 psf, per month
Year 8: July 1, 2006 to June 30, 2007: $1.41 psf, per month
Year 9: July 1, 2007 to March 31, 2008: $1.46 psf, per month
13 b. Phased Occupancy: (See Exhibit B)
------------------
Sublessee shall occupy the facility in 3 phases:
Phase I occupancy: July 6, 1999 (approximately 8,000 square feet)
Phase II occupancy: August 9, 1999 (approximately 11,000 additional
square feet)
Phase III occupancy: November 1, 1999 (approximately 20,8.30 additional
square feet, Sublessee now occupies
the entire facility of 39,830)
Sublessee shall pay a prorated monthly rent based upon the square footage
occupied between the period of July 6, 1999 and November 1, 1999.
From July 6, 1999 to August 8, 1999 Sublessee shall pay $9,507
(8,000 square feet multiplied by $1.15 psf, multiplied by 31 days)
From August 9, 1999 to August 31, 1999 Sublessee shall pay $16,752.00
(19,000 square feet multiplied by $1.15 psf, multiplied by 23 days)
From September 1, 1999 through October 31, 1999, (2 months) Sublessee shall
pay monthly rent equal to $21,850 (19,000 square feet multiplied by $1.15 psf).
Rent Abatement Period
- ---------------------
From November 1, 1999 through May 15, 2000 (6.5 months)Sublessee shall be
relieved of their base rent obligation, and shall only be responsible for
ongoing CAM charges, utilities, and interior janitorial.
14. Financial Statement Approval: Sublessor has previously reviewed and
------------------------------
approved Sublessee's Financial Statements and Credit Report.
15. Tenant Improvements: Sublessor shall grant Sublessee an interior tenant
-------------------
improvement allowance equal to $597,450. This allowance shall be divided into
one-half cash ($299,720), and one-half in the form of free base rent to
Sublessee. Sublessor shall convey the cash portion to Sublessee on or before
November 1, 1999. Sublessee shall receive six and one-half (6.5) months of free
base rent. This abated rent period shall commence November 1, 1999 and run
through May 15, 1999. (See rent schedule above, 13 a. & b.) All interior tenant
improvements shall be designed and constructed by the Sublessee at Sublessee's
sole cost. Sublessee will pay for all costs of architectural fees and any
required permits. Sublessee shall construct said premises to meet all applicable
codes including ADA requirements and codes. Sublessee shall be responsible to
provide all tenant workstations and other personal property, including all
telephone, data and computer equipment.
<PAGE>
Sublessor and Sublessee to approve plans and specifications covering the
layout of the premises and the scope of responsibility of the Tenant
Improvements between Sublessor and Sublessee as stipulated in the sublease.
Sublessee to install tenant improvements in a quality, good workmanlike
manner in accordance with approved plan and specifications in a timely
fashion.
Sublessee shall have full responsibility as indicated above and
additionally Sublessee shall remove all mechanics liens, to satisfy all
claims and meet all contract requirements with suppliers, contractors and
employees arising out of said installation of improvements. Sublessee to
have workman compensation and liability insurance with a minimum $500,000
per occurrence for said installation and to name Sublessor additional
insured. Sublessee shall indemnify and hold harmless Sublessor for all
claims of employees, invitees, materialmen, or suppliers arising out of
said installation, except on the case of Sublessor's negligence.
Area Measurements: Sublessee has reviewed and approved the system of
-----------------
measurement and the usable and rentable square footage of the subject
premises.
Restoration: If required by Master Lessor (G&W/Redwood Associates, or its
-----------
successor), Sublessee (Cerent) will restore those improvements or
alterations that Sublessee installs in the premises. All improvements or
alterations done by Sublessee shall be done per architects drawings,
previously approved by Sublessor and Master Lessor. Any existing
improvements (not altered by Cerent) will be the responsibility of
Sublessor (AFC).
16. Use Permit: If deemed necessary Sublessee shall obtain a use permit for
-------------
the use stated herein from the applicable Governmental Agency, within
twenty (20) calendar days of acceptance hereof. Sublessor shall use due
diligence in pursuing the use permit. Any permit application costs
associated with obtaining the use permit shall be borne by Sublessee.
17. Signage: Upon the commencement of Phase II (approximately August 9, 1999),
---------
AFC (Sublessor), will remove all existing building signage. Upon the
commencement of Phase III (approximately November 1, 1999), Cerent
(Sublessee), shall be allowed to install building and/or monument signage
on the property consistent with and subject to the rules and regulations of
the business park, and at the sole cost of Sublessee.
18. Real Estate Agency: Keegan & Coppin Company, Inc., is representing Cerent
--------------------
Corporation exclusively in this sublease transaction.
19. Compliance (continued from Page. 1, Paragraph 6.2) Sublessee accepts the
---------------------------------------------------
Premises "AS IS" without any warranty, express or implied. Sublessee shall
be responsible for any improvements or changes currently or hereinafter
required by any statute or regulation including, but not limited to, the
Americans with Disabilities Act. Upon full occupancy, Sublessee shall
assume all maintenance for the HVAC and security systems installed in the
Premises.
20. Subordinate: This Sublease shall be subject and subordinate at all times to
-------------
the Master Lease and to all of its provisions, covenants and conditions.
Sublessee is to perform faithfully and is bound by all of the terms,
covenants, conditions, provisions and agreements of the Master Lease
(including, without limitation, insurance requirements, as though Sublessee
were the "Tenant" under the Master Lease) for the period covered by the
Sublease.
21. Assignment & Subletting: The Sublease set forth in this agreement shall not
-------------------------
be assignable or transferable and shall not be construed as a consent by
Sublessor to any further subletting by Sublessee or to any assignment by
Sublessee of the Sublease, whether or not the Sublease purports to permit
the same, and, without limiting the generality of the foregoing. Subtenant
has no right whatsoever to assign, mortgage or encumber the Sublease nor to
sublet any portion of the Premises or permit any portion of the premises to
be used or occupied by any other party or in any other manner to transfer
all or any part of Sublessee's rights
<PAGE>
with respect to the Sublease or the Premises. All provisions in the Master
Lease restricting or prohibiting transfer of Sublessor's interests shall
also apply to restrict or prohibit transfer by Sublessee.
22. Alterations: Sublessee understands and acknowledges that (i) Landlord's
-------------
consent to the Sublease expressed herein is not a consent to any
improvements or alteration work to be performed in the Premises (including
without limitation any improvement work contemplated in the Sublease), (ii)
Landlord's consent for such work must be separately sought and (iii) any
such work shall be subject to all the provisions of the Master Lease with
respect thereto.
The herein agreement, upon execution by both parties, is herewith made an
integral part of the aforementioned Standard Office Sublease.
Sublessor: Sublessee:
/s/Advanced Fibre Communications Inc. /s/Cerent Corporation
- ---------------------------------- ------------------------------
Advanced Fibre Communications, Inc. Cerent Corporation
Date: Date:7-8-99
____________________________ ------------------------------
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ADDENDUM #23
STANDARD LEASE DISCLOSURE ADDENDUM
Notice to Owners, Buyers and Tenants Regarding Hazardous Wastes or Substances
- -----------------------------------------------------------------------------
and Underground Storage Tanks
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Comprehensive federal and state laws and regulations have been enacted in the
last few years in all effort to develop controls over the use, storage,
handling, cleanup, removal and disposal of hazardous wastes or substances. Some
of these laws and regulations, such as, for example, the so-called "Super Fund
Act", provide for broad liability schemes wherein an owner, tenant or other user
of the property may be liable for cleanup costs and damages regardless of fault.
Other laws and regulations set standards for the handling of asbestos or
establish requirements for the use, modification, abandonment, or closing of
underground storage tanks.
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, lessors and lessees are urged to consult legal counsel to
determine their respective rights and liabilities with respect to the issues
described in this Notice as well as other aspects of the proposed transaction.
If various materials that have been or may be in the future determined to be
toxic, hazardous or undesirable, or are going to be used, stored, handled or
disposed of on the property, or if the property has or may have underground
storage tanks for storage of such hazardous materials, or that such materials
may be in the equipment, improvements or soil, it is essential that legal and
technical advice be obtained to determine, among other things, what permits and
approvals have been or may be required, if any, the estimated costs and expenses
associated with the use. storage, handling, cleanup, removal or disposal of the
hazardous wastes or substances and what contractual provisions and protection
are necessary or desirable. It may also be important to obtain expert assistance
for site investigations and building inspections. The past uses of the property
may provide valuable information as to the likelihood of hazardous wastes or
substances, or underground storage tanks being on the property.
The term "hazardous wastes or substances" is used in this Notice in its very
broadest sense and includes, but is not limited to, all those listed under
Proposition 65, petroleum base products, paints and solvents, lead, cyanide,
DDT, printing inks, acids, pesticides, ammonium compounds, asbestos, PCBs and
other chemical products. Hazardous wastes or substances and underground storage
tanks may be present on all types of real property. This Notice is, therefore,
meant to apply to any transaction involving any type of real property, whether
improved or unimproved.
Although Keegan & Coppin Co., Inc. or its salespeople, will disclose any
knowledge it actually possesses with respect to the existence of hazardous
wastes or substances, or underground storage tanks on the property, Keegan &
Coppin Co., Inc. has not made investigations or obtained reports regarding the
subject matter of this Notice, except as may be described in a separate written
document, studies or investigation by experts. Therefore, unless there are
additional documents or studies attached to this notice, lease or contract, this
will serve as notification that Keegan & Coppin Co., Inc. or its salespeople
make no representation regarding the existence or non-existence of hazardous
wastes or substances, or underground storage tanks on the property. You should
contact a professional, such as a civil engineer, geologist, industrial
hygienist or other persons with experience in these matters to advise you
concerning the property.
Americans with Disabilities Act (ADA)
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On July 26, 1991, the federal legislation blown as the Americans with
Disabilities Act (ADA) was signed into law by President Bush. The purpose of the
ADA is to integrate persons with disabilities into the economic and social
mainstream of American life. Title III of the ADA applies to Lessors and Lessees
of "places of public accommodation" and "commercial facilities", and requires
that places of public accommodation undertake "readily achievable" removal of
communication and access barriers to the disabled. This requirement of Title III
of the ADA is effective January 26, 1992.
It is important that building owners identify and undertake "readily achievable"
removal of any such barriers in the common areas, sidewalks, parking lots and
other areas of the building under their control.
The lessor and lessee are responsible for compliance with ADA relating to
removal of barriers within the workplace i.e. arrangement of interior
furnishings and access within the premises, and any improvements installed by
lessor and lessee.
Keegan & Coppin Company, Inc. recommends that both parties seek expert advice
regarding the implications of the Act as it affects this agreement.
Alquist-Priolo:
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"The property which is the subject of this contract may be situated in a Special
Study Zone as designated tinder the Alquist-Priolo Geologic Hazard Act, Sections
2621-2625, inclusive, of the California Public Resources Code: and, as such, the
construction or development on this property of any structure for human
occupancy may be subject to the findings of a geologic report prepared by a
geologist registered in the State of California, unless such report is waived by
the City or County under the terms of that act. No representations on the
subject are made by the lessor or agent, and the lessee should make his own
inquiry or investigation".
Flood Hazard Area Disclosure:
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The subject property may be situated in a "Special Flood Hazard Area" as set
forth on a Federal Emergency Management Agency (FEMA) "Flood Insurance Rate Map"
(FIRM) or "Flood Hazard Boundary Map" (FHBM). The law provides that, as a
condition of obtaining financing on most structures located in a "Special Floods
Hazard Area", lender requires flood insurance where the property or its
attachments are security for a loan. Lessee should consult with experts
concerning the possible risk of flooding.
Acknowledgment:
Lessee:/s/ Cerent Corporation Date: 7-8-99
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Lessor:/s/ Advanced Fibre Communications,Inc. Date: ________________
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<PAGE>
EXHIBIT A
[FLOOR PLAN OF REDWOOD BUSINESS PARK APPEARS HERE]
<PAGE>
PHASED MOVE SCHEDULE FROM BLDG #144C
EXHIBIT B
[FLOOR PLAN APPEARS HERE]
<PAGE>
Exhibit 1
REDWOOD BUSINESS PARK
NET LEASE
THIS LEASE, dated July 10 ,1995 , is made and entered into by and between
G & W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and Advanced Fibre Communications. a California Corporation
("Tenant").
1. Premises.
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Landlord leases to Tenant, and Tenant hereby leases from Landlord for the
term of this Lease ("Term") and at the rent and upon the conditions set forth
below, the Premises described in the Basic Lease Information and identified on
the floor plan attached hereto as Exhibit A. The Premises are located within the
Building described in the Basic Lease Information, and constitute part of the
Project described in the Basic Lease Information and as shown in Exhibit A-1
attached hereto, at the Redwood Business Park, located in Petaluma, California.
All areas and facilities outside the Buildings and within the exterior
boundaries of the Project that are provided and designated by Landlord from time
to time for the general nonexclusive use and convenience of the tenants of the
Project shall be known as "Common Areas".
2. Term.
-----
(a) The Term shall commence upon the date ("Commencement Date") which is
the earlier of: (i) substantial completion of the Premises, as the term
"substantial completion" is defined in the Work Letter Agreement, attached
hereto as Exhibit B; or (ii) the date substantial completion would have occurred
but for Tenant Delays (as the term is defined in the Work Letter Agreement). The
Estimated Commencement Date is set forth in the Basic Lease Information, which
date may be postponed due to a delay in delivering the Premises as provided in
Paragraph 2(b) below. A "Lease Year" is a period of twelve (12) consecutive
calendar months. A "Lease Month" is a calendar month. The initial Term of this
Lease shall be determined as follows:
(1) If the Commencement Date of this Lease occurs on the first
calendar day of a calendar month, the Term shall be for a period of Lease Years
and Months as specified in the Basic Lease Information, unless terminated sooner
as provided in this Lease.
(2) If the Commencement Date of this Lease occurs on other than the
first calendar day of a calendar month, the Term shall be for a period of Lease
Years and Months as specified in the Basic ease Information, plus the number of
days remaining in the calendar month in which the Commencement Date occurs,
unless terminated sooner as provided in this Lease.
(b) Subject to the provisions of Paragraph 22 below, in the event the
Premises are not substantially completed (in accordance with the Work Letter
Agreement) on or within six (6) months after the Estimated Commencement Date,
then Tenant may, at Tenant's option, by notice in writing to Landlord within ten
(10) days thereafter, cancel this Lease, in which event, (i) this Lease shall be
deemed null and void and have no further force or effect, (ii) all security or
other deposits made herewith shall be promptly returned to Tenant, and (iii) the
parties shall have no further obligation to each other; provided further,
however, that if such written notice of Tenant is not received by Landlord
within said 10-day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3. Rent.
-----
(a) For purposes of this Lease, the term "Rent" shall mean the Base
Rent, Advanced Base Rent, all additional rent, and all of the other monetary
obligations of Tenant under this Lease. Upon execution of this Lease, Tenant
shall pay to Landlord the Advanced
<PAGE>
Base Rent set forth in the Basic Lease Information. Tenant shall pay to Landlord
the Base Rent specified in the Basic Lease Information, payable on or before the
first day of each and every successive calendar month following the Commencement
Date. If the Term commences on other than the first day of a calendar month, the
first payment of Base Rent shall be appropriately prorated, on the basis of a
30-day month. Tenant's payment of any Advanced Base Rent (excluding that portion
attributable to last month's rent, if any) shall be credited against Tenant's
obligation to pay Base Rent beginning as of the Commencement Date.
(b) Tenant shall pay, as additional rent, all amounts of money required to
be paid to Landlord by Tenant under this Lease in addition to monthly Base Rent,
whether or not the same be designated "additional rent." If such amounts are not
paid at the time provided in this Lease, they shall nevertheless be collectable
as additional rent with the next installment of monthly Base Rent thereafter
falling due, but nothing herein contained shall be deemed to suspend or delay
the payment of any amount of money at the time the same becomes due and payable
hereunder, or limit any other remedy of Landlord.
(c) Tenant acknowledges that late payment by Tenant to Landlord of Rent
after the expiration of any applicable grace period will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any trust deed covering the Premises. Accordingly, if
any installment of Rent or any other sums due from Tenant shall not be received
by Landlord when due, Tenant shall pay to Landlord a late charge equal to two
percent (2%)of such overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
(d) Any amount due to Landlord, if not paid when due, shall bear interest
from the date due until paid at the rate of ten percent (10%) per annum. Payment
of interest shall not excuse or cure any default hereunder by Tenant.
(e) All payments due from Tenant to Landlord hereunder shall be made to
Landlord without deduction or offset, in lawful money of the United States of
America at Landlord's address for notices hereunder, or to such other person or
at such other place as Landlord may from time to time designate in writing to
Tenant.
4. Taxes and Operating Expenses.
-----------------------------
(a) In addition to the Base Rent, Tenant shall pay (i) Tenant's Percentage
Share of Property Taxes (according to the percentage set forth in the Basic
Lease Information) relating to those Property Taxes (as the term is defined
under Paragraph 4(a)(1) below) which are assessed during the Term, and (ii)
Tenant's Percentage Share of Operating Expenses (according to the percentage set
forth in the Basic Lease Information) relating to those Operating Expenses (as
the term is defined under Paragraph 4(a)(2) below) which are paid or incurred by
Landlord during the Term.
(1) "Property Taxes" shall mean all real property taxes, bonds and
assessments and governmentally imposed fees or charges (and any tax levied
wholly or partly in lieu thereof) levied, assessed, confirmed, imposed or which
have become a lien against the Building (which for the purposes of defining
"Property Taxes" shall include the tax parcel of which the Building is a part)
and Common Areas.
(2) "Operating Expenses" shall mean the following: (A) all costs of
management, operation, maintenance and repair of the Building and Common Areas,
including, without limitation, property management expenses, maintenance and
repair materials, supplies and
<PAGE>
equipment; (B) all costs of water, power, electricity, refuse collection,
parking lot sweeping, landscaping, and other services relating to the Common
Areas; (C) all costs of alterations or improvements to the Building or Common
Areas made to achieve compliance with federal, state and local law including,
without limitation, the Americans with Disabilities Act (42 U.S.C. Section 12101
et seq.), which costs will be amortized over the useful life of each alteration
or improvement; (D) all costs of public liability and casualty insurance
maintained by Landlord with respect to the Building and Common Areas; (E) all
costs incurred by Landlord for making any capital improvements, structural
repairs or modifications to the Building or Common Areas or making any
improvements or modifications to reduce the operating expenses, which costs will
be amortized over the useful life of each capital improvement, structural repair
or modification; (F) all costs of maintaining machinery, equipment and
directional signage or other markers; and (G) the share allocable to the
Building of dues and assessments payable under any reciprocal easement or common
area maintenance agreements or declarations or by any owners' associations
affecting the Building. That portion of the Operating Expenses relating to the
property management expenses for the Building and Common Areas which shall be
charged to Tenant shall be four percent (4%) of both Tenant's annual Base Rent
and the subtotal of Tenant's share of Operating Expenses of the Building. In the
event that Landlord calculates the Operating Expenses based upon the Project
instead of the Building, as indicated on the Basic Lease Information, then the
term "Project" shall be substituted in the place of all references to the term
"Building" in this paragraph.
(b) The Property Taxes to be paid by Tenant shall be determined by
multiplying the total amount of the Property Taxes by Tenant's Percentage Share
of Property Taxes (which percentage is determined by multiplying 100% by a
fraction, the numerator of which is the rentable area of the Premises and the
denominator of which is the total rentable area of all improvements located
within the tax parcel of which the Premises are a part). Landlord may cause the
Common Areas of the Project to be separately assessed from other areas and
buildings of the Project. In such case, Tenant's Percentage Share of Property
Taxes attributable to the Common Areas shall be determined by the ratio that the
total rentable square feet in the Premises bears to the total number of square
feet of rentable area which is included in the property subject to the
assessment.
(c) Operating Expenses for each calendar year shall be adjusted to equal
Landlord's reasonable estimate of Operating Expenses as though ninety-five
percent (95%) of the total rentable area of the Building had been occupied. When
the Building is one hundred percent (100%) occupied, the Operating Expenses
shall be adjusted to reflect a 100% occupied building. The Operating Expenses to
be paid by Tenant shall be determined by multiplying the total amount of the
Operating Expenses as adjusted above by Tenant's Percentage Share of Operating
Expenses (which percentage is determined by multiplying 100% by a fraction, the
numerator of which is the rentable area of the Premises and the denominator of
which is the total rentable area located within the Building, if the Operating
Expenses are calculated for the Building, or within the Project, if the
Operating Expenses are calculated for the Project).
(d) Tenant shall pay to Landlord each month at the same time and in the
same manner as monthly Base Rent one-twelfth (1/12th) of Landlord's estimate of
the amount of Property Taxes and one-twelfth (1/12th) of Landlord's estimate of
Operating Expenses payable by Tenant for the then-current calendar year. The
initial monthly amount shall be as set forth in the Basic Lease Information.
Within one hundred twenty (120) days after the close of each calendar year, or
as soon after such 120-day period as practicable, Landlord shall deliver to
Tenant a statement in reasonable detail of the actual amount of Property Taxes
and Operating Expenses payable by Tenant in accordance with this Paragraph 4 for
such calendar year. Tenant may request further information if desired.
Landlord's failure to provide such statement to Tenant within the 120-day period
shall not act as a waiver and shall not excuse Tenant or Landlord from making
the adjustments to reflect actual costs as provided herein. If on
<PAGE>
the basis of such statement Tenant owes an amount that is less than the
estimated payments for such calendar year previously made by Tenant, Landlord
shall credit such excess to Tenant against future additional rent due under this
Paragraph 4. If on the basis of such statement Tenant owes an amount that is
more than the estimated payments for such calendar year previously made by
Tenant, Tenant shall pay the deficiency to Landlord within fifteen (15) days
after delivery of the statement. The obligations of Landlord and Tenant under
this Paragraph 4(d) with respect to the reconciliation between the estimated and
actual amounts of Property Taxes and operating Expenses payable by Tenant for
the last year of the Term shall survive the termination of the Lease. When the
final determination is made of the actual amounts of Property Taxes and
Operating Expenses payable by Tenant for the year in which this Lease
terminates, Tenant shall immediately pay any increase due over the estimated
payments and, conversely, any overpayment made by Tenant shall be immediately
reimbursed to Tenant by Landlord.
5. Other Taxes.
------------
In addition to Tenant's obligations under Paragraph 4 above, Tenant shall
pay or reimburse Landlord for (i) any taxes upon, measured by or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or leasehold improvements
made in or to the Premises at Tenant's expense, (ii) for taxes, if any, measured
by or reasonably attributable to tenant improvements paid for by Tenant, and
(iii) for any taxes, assessments, fees, or charges imposed by any public
authority or private community maintenance association upon or by reason of the
development, possession, use or occupancy of the Premises or the parking
facilities used by Tenant in connection with the Premises. On request by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment of
Tenant's business personal property taxes and deliver copies of such business
personal property tax bills to Landlord.
6. Use.
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6.1 Prohibited Uses.
----------------
(a) The Premises shall be used and occupied by Tenant solely for the
use set forth in the Basic Lease Information. Tenant shall, at Tenant's expense,
comply promptly with all applicable federal, state and local laws, regulations,
ordinances, rules, orders, and requirements in effect during the Term relating
to the condition, use or occupancy of the Premises. Tenant shall not use or
permit the use of the Premises in any manner that will tend to create waste or a
nuisance, or that unreasonably disturbs other tenants of the Building or
Project, nor shall Tenant place or maintain any signs, antennas, awnings,
lighting or plumbing fixtures, loudspeakers, exterior decoration or similar
devises on or visible from the exterior of the Premises, without Landlord's
prior written consent, which may be withheld in Landlord's sole discretion.
Tenant shall not use any corridors, sidewalks, stairs, elevators, or other areas
outside of the Premises for storage or any purpose other than access to the
Premises. Tenant shall not use, keep, or permit to be used or kept on the
Premises any foul or noxious gas or substance, nor shall Tenant do or permit to
be done anything in and about the Premises, either in connection with activities
hereunder expressly permitted or otherwise, which would cause an increase in
premiums for or a cancellation of any policy of insurance (including fire
insurance) maintained by Landlord in connection with the Premises or the
Building or which would violate the terms of any covenants, conditions, or
restrictions, or the design guidelines, or the sign guidelines affecting the
Building or the land on which it is located, or the Rules (as the term is
defined under Paragraph 6.3(b) below).
(b) Tenant shall not attach any signage to or on any part of the
outside of the Premises; the Building or the Project, or in the halls, lobbies,
windows or elevator banks of the Building without Landlord's prior written
consent, which consent may be withheld in Landlord's sole discretion. Any
signage so permitted shall be subject to prior approval of and conformance with
the
<PAGE>
requirements of the design review committee of the Project and the design review
agency of the city. At Tenant's expense, Tenant shall (i) maintain all permitted
signage, and (ii) upon the expiration or termination of this Lease, remove such
signage and repair any damage caused by their removal. If Tenant fails to do so,
Landlord may maintain, repair or remove such signage without notice to Tenant
and at Tenant's expense, the cost of which shall be payable by Tenant as
additional rent in accordance with Paragraph 14(b)(2) below.
6.2 Suitability. Tenant acknowledges that neither Landlord nor any agent
-----------
of Landlord has made any representation or warranty with respect to the Premises
or the Building or with respect to the suitability or fitness of either for the
conduct of Tenant's business or for any other purpose. Nor has Landlord agreed
to undertake any modification, alteration or improvement to the Premises except
as provided in this Lease. Tenant acknowledges that the Premises are located in
a 100-year flood zone and that the finished floor elevations of the Building are
designed to be at least one (1) foot above the federal government's estimate of
the 100-year flood level at the time of initial construction.
6.3 Use of Common Areas.
--------------------
(a) Landlord gives Tenant and its authorized employees, agents,
customers, representatives, and invitees the nonexclusive right to use the
Common Areas, with others who are entitled to use the Common Areas, subject to
Landlord's rights as set forth in this Paragraph 6.3.
(b) All Common Areas shall be subject to the exclusive control and
management of Landlord and Landlord shall have the right to establish, modify,
amend, and enforce reasonable rules and regulations with respect to the Common
Areas. Tenant acknowledges receipt of a copy of the current rules and
regulations, attached hereto as Exhibit C, and agrees that they may, from time
to time, be modified or amended by Landlord in a commercially reasonable manner
(the "Rules"). Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees, and
licensees to abide by such Rules.
(c) Landlord shall have the right to close temporarily any portion of
the Common Areas for the purpose of discouraging use by parties who are not
tenants or customers of tenants; to use portions of the Common Areas while
engaged in making additional improvements or repairs or alterations to the
Property; to use or permit the use of the Common Areas by others to whom
Landlord may grant or have granted such rights; and to do and perform such acts
in, to, and with respect to, the Common Areas as in the use of good business
judgment Landlord shall determine to be appropriate for the Project.
(d) Landlord shall have the unqualified right to increase or reduce
the Common Areas, provided the Project meets the parking requirement under
Paragraph 6.5 below.
(e) Tenant shall cooperate with Landlord and other tenants in the
Project in recycling waste paper, cardboard, or such other materials identified
under any trash recycling program that may be established in order to reduce
trash collection costs.
6.4 Environmental Matters.
----------------------
(a) (1) The term "Hazardous Materials" as used herein means any
petroleum products, asbestos, polychlorinated biphenyls, P.C.B.'s , chemicals,
compounds, materials, mixtures or substances that are now or hereafter defined
or listed in, or otherwise classified as a 'hazardous substance", "hazardous
material", "hazardous waste", "extremely hazardous waste","infectious waste",
"toxic substance", "toxic pollutant" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity or toxicity pursuant to
any federal, state or local
<PAGE>
environmental law, regulation, ordinance, resolution, order or decree relating
to industrial hygiene, environmental protection or the use, analysis,
generation, manufacture, storage, release, disposal or transportation of the
same ("Hazardous Materials Laws").
(2) Except for ordinary office supplies and janitorial cleaning
materials which in common business practice are customarily and lawfully used,
stored and disposed of in small quantities, and except for those Hazardous
Materials listed on Exhibit D attached hereto, Tenant shall not use,
manufacture, store, release, dispose or transport any Hazardous Materials in,
on, under or about the Premises, the Building or the Project without giving
prior written notice to Landlord and obtaining Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Subject to
Landlord's prior written consent, Hazardous Materials may be added to Exhibit D
on an annual review basis; any such amendments to Exhibit D shall be signed by
each party and attached hereto. Tenant shall at its own expense procure,
maintain in effect, and comply with all conditions of any and all permits,
licenses, and other governmental and regulatory approvals required in connection
with Tenant's generation, use, storage, disposal and transportation of Hazardous
Materials. Except as discharged into the sanitary sewer in strict accordance and
conformity with all applicable Hazardous Materials Laws, Tenant shall cause any
and all Hazardous Materials removed from the Premises to be removed and
transported solely by duly licensed haulers to duly licensed facilities for
final disposal of such materials and wastes. Regardless whether permitted under
the Hazardous Materials Laws, Tenant shall not maintain in, on, under, or about
the Premises, the Building or the Project any above or below ground storage
tanks, clarifiers, or sumps, nor shall any wells for the monitoring of ground
water, soils, or subsoils be allowed.
(3) Tenant shall immediately notify Landlord in writing of: (a) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Law; (b)
any claim made or threatened by any person or entity against Tenant or the
Premises relating to damage, contribution, cost, recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials; and (c)
any reports, information, inquiries or demands made, ordered, or received by or
on behalf of Tenant which arise out of or in connection with the existence or
potential existence of any Hazardous Materials in, on, under or about the
Premises, the Building, or the Project, including, without limitation, any
complaints, notices, warnings, asserted violations, or mandatory or voluntary
informational filings with any governmental agency in connection therewith, and
immediately supply Landlord with copies thereof.
(b) Tenant shall indemnify, defend (by counsel reasonably acceptable
to Landlord), protect, and hold Landlord, and each of Landlord's partners,
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, damages, fines, penalties, forfeitures, losses, cleanup and
remediation costs or expenses (including attorneys' fees) or death of or injury
to any person or damage to any property whatsoever, arising from or caused in
whole or in part, directly or indirectly, by (i) Tenant's use, analysis,
generation, manufacture, storage, release, disposal, or transportation of
Hazardous Materials by Tenant, Tenant's agents, employees, contractors,
licensees or invitees to, in, on, under, about or from the Premises, the
Building, or the Project, or (ii) Tenant's failure to comply with any Hazardous
Materials Law. Tenant's obligations hereunder shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any required or necessary
repair, cleanup, detoxification or decontamination of the Premises, the
Building, or the Project and the preparation and implementation of any closure,
remedial action or other required plans in connection therewith, and shall
survive the expiration or earlier termination of this Lease.
<PAGE>
(c) Landlord shall have the right to enter the Premises during
regular business hours upon reasonable prior notice at all times for the
purposes of ascertaining compliance by Tenant with all applicable Hazardous
Materials Laws, provided, however, that in the instance of an emergency
Landlord's entry onto the Premises shall not be restricted to regular business
hours nor shall notice be required.
(d) Landlord shall have the option to declare a default of this Lease
for the release or discharge of Hazardous Materials by Tenant, Tenant's
employees, agents, contractors, or invitees on the Premises, Building or Project
or in violation of law or in deviation from prescribed procedures in Tenant's
use or storage of Hazardous Materials. If Tenant fails to comply with any of the
provisions under this Paragraph 6.4, Landlord shall have the right (but not the
obligation) to remove or otherwise cleanup any Hazardous Materials from the
Premises, the Building or the Project. In such case, the costs of any Hazardous
Materials investigation, removal or other cleanup (including, without
limitation, transportation, storage, disposal and attorneys' fees and costs)
will be additional rent due under this Lease, whether or not a court has ordered
the cleanup, and will become due and payable on demand by Landlord.
6.5 Parking. Landlord grants to Tenant and Tenant's customers, suppliers,
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employees and invitees a nonexclusive license to use unassigned and unreserved
parking spaces in the Common Areas for the use of motor vehicles during the Term
subject to rights reserved to Landlord as specified in this Paragraph 6.5.
Landlord reserves the right to grant similar nonexclusive and unassigned and
unreserved use to other tenants; to promulgate rules and regulations relating to
the use of the Common Areas including parking by tenants and employees of
tenants; to make changes in the parking layout from time to time; and to do and
perform any other acts in and to these areas and improvements as Landlord
determines to be advisable. Tenant agrees not to overburden the parking
facilities and to abide by and conform with the rules and regulations and to
cause its employees and agents to abide by and conform to the rules and
regulations. Upon request, Tenant shall provide Landlord with license plate
numbers of all vehicles driven by its employees and to cause Tenant's employees
to park only in spaces specifically designated for tenant parking. Landlord
shall have the unqualified right to rearrange or reduce the number of parking
spaces; provided, however, the ratio of the number of parking spaces available
to Tenant will be no less than three point five (3.5) spaces per 1,000 usable
square feet of the Premises.
7. Services.
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(a) Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, telephone, refuse collection, and other utility-type services furnished
to Tenant or the Premises, together with all related installation or connection
charges or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and paid for
directly by Tenant. To the extent any of the foregoing services are provided by
Landlord, Tenant shall reimburse Landlord for all costs incurred by Landlord in
connection with the provision of such services based on Landlord's reasonable
estimate of the level of Tenant's use or consumption of such services. Landlord
shall bill Tenant on a monthly or other periodic basis for such services and
payment shall be made by Tenant within ten (10) days after submittal of
Landlord's statement.
(b) Landlord shall not be in default hereunder or be liable for any
damages or personal injuries to any person directly or indirectly resulting
from, nor shall there be any Rent abatement by reason of, any interruption or
curtailment whatsoever in utility services.
<PAGE>
8. Maintenance, Repairs and Alterations.
-------------------------------------
(a) Tenant shall, at Tenant's expense, maintain every part of the Premises
in good order, condition and repair, including without limitation, (i) all
interior surfaces, ceilings, walls, door frames, window frames, floors, carpets,
draperies, window coverings and fixtures, (ii) all windows, doors, locks and
closing devices, entrances, plate glass, and signs, (iii) all plumbing and
sewage pipes, fixtures and fittings, (iv) all phone lines, electrical wiring,
equipment, switches, outlets, and lightbulbs, (v) any fire detection, fire
sprinkler or extinguisher equipment, (vi) all of Tenant's personal property,
improvements and alterations, and (vii) all other fixtures and special items
installed by or for the benefit of, or at the expense of Tenant. Tenant shall,
at its expense, cause to be maintained in good operating condition and repair,
all heating, ventilating, and air conditioning equipment installed in, or on the
roof of the Premises. Tenant shall keep in force a preventive maintenance
contract with a qualified maintenance company covering all heating, ventilating
and air conditioning equipment and shall annually provide Landlord with a copy
of this contract. Tenant shall not enter onto the roof area of the Building,
except for the purpose of maintaining the heating, ventilating, and air
conditioning equipment and provided that Tenant shall repair any damage to the
roof area caused by its entry. Tenant shall be responsible for its own
janitorial service. Landlord shall incur no expense (nor have any obligation) of
any kind whatsoever in connection with the maintenance of the Premises.
(b) Landlord shall keep in good condition and repair the foundation, roof
structure, exterior walls and other structural parts of the Building, and all
other portions of the Building not the obligation of Tenant or any other tenant
in the Building. Tenant expressly waives the benefits of any statute, including
Civil Code Sections 1941 and 1942, which would afford Tenant the right to make
repairs at Landlord's expense or to terminate this Lease due to Landlord's
failure to keep the Building in good order, condition and repair. Landlord shall
have no liability to Tenant for any damage, inconvenience, or interference with
the use of the Premises by Tenant as the result of Landlord performing any such
maintenance and repair work.
(c) In the event Tenant fails to perform Tenant's obligations under this
Paragraph 8, Landlord may, but shall not be required to, give Tenant notice to
do such acts as are reasonably required to so maintain the Premises. If Tenant
shall fail to commence such work and diligently prosecute it to completion, then
Landlord shall have the right (but not the obligation) to do such acts and
expend such funds at the expense of Tenant as are reasonably required to perform
such work. Any amounts so expended by Landlord will be additional rent due under
this Lease, and such amounts will become due and payable on demand by Landlord.
Landlord shall have no liability to Tenant for any such damages, inconvenience,
or interference with the use of the Premises by Tenant as a result of performing
such work.
(d) Upon the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises in good condition and repair, only ordinary wear and tear
excepted. Tenant, at its sole cost and expense, agrees to repair any damages to
the Premises caused by or in connection with the removal of any articles of
personal property, business or trade fixtures, signs, machinery, equipment,
cabinetwork, furniture, moveable partitions, or permanent improvements or
additions, including without limitation thereto, repairing the floor and
patching and painting the walls where required by Landlord, to Landlord's
reasonable satisfaction. Tenant shall indemnify Landlord against any loss or
liability resulting from delay by Tenant in so surrendering the Premises,
including without limitation, any claims made by any succeeding tenant resulting
from such delay.
(e) Tenant shall not make any alterations, improvements, or additions in,
on, or about the Premises without Landlord's prior written consent, except that
Tenant may make alterations, improvements, or additions without Landlord's prior
written consent where (i) the reasonably estimated cost does not exceed $2,500,
and
<PAGE>
(ii) such alterations, improvements, or additions do not affect or involve the
structural integrity, roof membrane, exterior areas, building systems, or water-
tight nature of the Premises, the Building or the Project. In requesting
Landlord's consent, Tenant shall, at Tenant's sole cost, submit to Landlord
complete drawings and specifications describing such work and the identity of
the proposed contractor at least ten (10) business days prior to the
commencement of any work.
With respect to any alterations, improvements or additions made to the
Premises by Tenant:
(1) Before commencing any work relating to alterations, additions, or
improvements affecting the Premises, Tenant shall notify Landlord of the
expected date of commencement thereof and of the anticipated cost thereof.
Landlord shall then have the right at any time and from time to time to post and
maintain on the Premises such notices as Landlord reasonably deems necessary to
protect the Premises and Landlord from mechanics' liens or any other liens.
(2) Tenant shall pay when due all claims for labor or materials
furnished to Tenant for use in the Premises. Tenant shall not permit any
mechanics' liens or any other liens to be levied against the Premises for any
labor or materials furnished to Tenant in connection with work performed on the
Premises by or at the direction of Tenant. Tenant shall indemnify, hold harmless
and defend Landlord (by counsel reasonably satisfactory to Landlord) from any
liens and encumbrances arising out of any work performed or materials furnished
by, or at the direction of Tenant. In the event that Tenant shall not, within
twenty (20) days following the imposition of any such lien, cause such lien to
be released of record by payment or posting of a proper bond, Landlord shall
have, in addition to all other remedies provided herein by law, the right, but
not the obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All such
sums paid by Landlord and all expenses incurred by it in connection therewith,
including attorneys' fees and costs, shall be payable to Landlord by Tenant on
demand with interest at the rate of ten percent (10%) per annum.
(3) All alterations, improvements or additions in or about the
Premises performed by or on behalf of Tenant shall be done in a first-class,
workmanlike manner, shall not unreasonably lessen the value of leasehold
improvements in the Premises, and shall be completed in compliance with all
applicable laws, ordinances, regulations and orders of any governmental
authority having jurisdiction thereover, as well as the requirements of insurers
of the Premises and the Building.
(4) Upon Landlord's request, Tenant shall remove any contractor,
subcontractor or material supplier from the Premises and the Building if the
work or presence of such person or entity results in labor disputes in or about
the Building or Project or damage to the Premises, Building or Project.
(5) Landlord, at Landlord's sole discretion, may refuse to grant
Tenant permission for alterations, improvements or additions which require,
because of application of Americans with Disabilities Act or other laws,
substantial improvements or alterations to be made to the Common Areas.
(6) Landlord may, up to sixty (60) days prior to the expiration of
the Term, require that Tenant, at Tenant's expense, remove any such alterations,
improvements or additions prior to or upon the expiration of this Lease, and
restore the Premises to their condition prior to such alterations, improvements
or additions.
(7) Unless Landlord requires their removal, as set forth above, all
alterations, improvements, or additions made to the Premises shall become the
property of Landlord and remain upon and be surrendered with the Premises upon
the expiration of this Lease; provided, however, that Tenant's machinery,
equipment, and trade fixtures, other than any which may be affixed to the
Premises so that
<PAGE>
they cannot be removed without material damage to the Premises, shall remain the
property of Tenant and may be removed by Tenant subject to the provisions of
Paragraph 8(d) above.
9. Construction of Tenant Improvements.
------------------------------------
Landlord shall be responsible for constructing the tenant improvements
("Tenant Improvements") in the Premises, as provided in the Work Letter
Agreement, attached hereto as Exhibit B.
10. Insurance and Indemnity.
-----------------------
10.1 Insurance.
---------
(a) Tenant shall obtain and maintain during the Term
comprehensive general liability insurance with a combined single limit for
personal injury and property damage in an amount of not less than $2,000,000 (in
a form, with a deductible amount, and with carriers reasonably acceptable to
Landlord) and employer's liability and workers' compensation insurance as
required by law. The insurance carrier shall be authorized to do business in the
State of California, with a policyholders and financial rating of at least A:IX
Class status as rated in the most recent edition of Best's Key-Rating guide.
Tenant's comprehensive general liability insurance policy shall be endorsed to
provide that (i) it may not be canceled or altered in such a manner as to
adversely affect the coverage afforded thereby without thirty (30) days' prior
written notice to Landlord, (ii) Landlord is designated as an additional
insured, (iii) the insurer acknowledges acceptance of the mutual waiver of
claims by Landlord and Tenant pursuant to Paragraph 10.2(b) below, and (iv) such
insurance is primary with respect to Landlord and that any other insurance
maintained by Landlord is excess and noncontributing with such insurance. If, in
the reasonable opinion of Landlord's lender or in the commercially reasonable
opinion of Landlord's insurance adviser, the specified amounts of coverage are
no longer adequate, such coverage shall, within 30 days written notice to
Tenant, be appropriately increased. Prior to the commencement of the Term,
Tenant shall deliver to Landlord a duplicate of such policy or a certificate
thereof to Landlord for retention by it, with endorsements. At least thirty (30)
days prior to the expiration of such policy or any renewal or modification
thereof, Tenant shall deliver to Landlord a replacement or renewal binder
followed by a duplicate policy or certificate within a reasonable time
thereafter. If Tenant fails to obtain such insurance or to furnish Landlord any
such duplicate policy or certificate as herein required, Landlord may, at its
election, without notice to Tenant and without any obligation to do so, procure
and maintain such coverage and Tenant shall reimburse Landlord on demand as
additional rent for any premium so paid by Landlord.
(b) Landlord waives all claims against Tenant, and Tenant's officers,
directors, partners, employees, agents and representatives for loss or damage to
the extent that such loss or damage is insured against under any valid and
collectable insurance policy insuring Landlord or would have been insured
against but for any deductible amount under any such policy. Tenant waives all
claims against Landlord, and Landlord's officers, directors, partners,
employees, affiliates, joint venturers, members, trustees, owners, shareholders,
principals, agents, representatives, successors and assigns, for loss or damage
to the extent such loss or damage is insured against under any valid and
collectable insurance policy insuring Tenant or required to be maintained by
Tenant under this Lease, or would have been insured against but for any
deductible amount under any such policy. The insuring party shall, upon
obtaining the policies of insurance required under this Lease, give notice to
the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease. Tenant agrees that in the event of a
sale, assignment or transfer of the Premises by Landlord, this waiver of
subrogation shall continue in favor of the original Landlord and any subsequent
Landlord.
<PAGE>
(c) Tenant shall at its own cost maintain on all its personal
property, Tenant's improvements, and alterations, in, on, or about the Premises,
a policy of standard fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, to the extent of at least one hundred percent
(100%) of their full replacement value. The proceeds from any such policy shall
be used by Tenant for the replacement of personal property and the restoration
of Tenant's improvements or alterations. Notwithstanding any other provisions of
the Lease, Landlord shall have no liability for damage to or destruction of
Tenant's personal property, regardless of whether the damage or destruction
results from the acts or omissions of Landlord.
(d) During the Term, Landlord shall keep the Building, and
improvements within which the Premises are located, insured against loss or
damage by (i) fire, with extended coverage and vandalism, malicious mischief and
special extended perils (all risk) endorsements or their equivalents, in amounts
not less than one hundred percent (100%) of the replacement cost of the Building
and structures insured, and (ii) flood, in the maximum amount provided for by
FEMA under its flood loss insurance program, with loss payable thereunder to
Landlord and to any authorized encumbrancer of Landlord (with standard mortgagee
loss payable clause) in accordance with their respective interests. Landlord may
maintain rent insurance, for the benefit of Landlord, equal to at least one
year's Base Rent hereunder. If the Lease is terminated as a result of damage by
fire, casualty or earthquake as set forth in this Paragraph 10, all insurance
proceeds shall be paid to and retained by Landlord, subject to the rights of any
authorized encumbrancer of Landlord.
(e) Tenant acknowledges that Landlord does not, at the time of the
signing of this Lease, insure the Building for earthquake damage. Landlord may,
when Landlord deems the premiums to be reasonable, insure the Building fully or
partially for earthquake damage. At such time, the premium for earthquake
insurance will be added to the Operating Expenses for purposes of determining
additional rent.
10.2 Indemnity.
----------
(a) Tenant waives all claims against Landlord for damage to any
property or injury to or death of any person in, on, or about the Premises, the
Building, or any other portion of the Project arising at any time and from any
cause, unless caused by the active negligence or willful misconduct of Landlord,
its agents, employees, or contractors. Tenant shall indemnify, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord, and
Landlord's officers, directors, partners, employees, affiliates, joint
venturers, members, trustees, owners, shareholders, principals, agents,
representatives, successors and assigns, from and against all claims, costs,
damages, actions, indebtedness and liabilities (except such as may arise from
the active negligence or willful misconduct of Landlord, and Landlord's
officers, directors, partners, employees, affiliates, joint venturers, members,
trustees, owners, shareholders, principals, agents, representatives, successors
and assigns) arising by reason of any death, bodily injury, personal injury,
property damage or any other injury or damage in connection with (i) any
condition or occurrence in or about or resulting from any condition or
occurrence in or about the Premises during the Term, or (ii) any act or omission
of Tenant, or Tenant's agents, representatives, officers, directors,
shareholders, partners, employees, successors and assigns, wherever it occurs.
The foregoing indemnity obligation of Tenant shall include reasonable attorneys'
fees, and all other reasonable costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made. The provisions of this
Paragraph 10.2 shall survive the termination or expiration of this Lease with
respect to any damage, injury, or death occurring prior to such expiration or
termination.
(b) Neither party shall be liable to the other for any unauthorized
or criminal entry of third parties into the Premises, Building, Project, Common
Areas, or parking facilities, or for any damage to person or property, or loss
of property in and about the
<PAGE>
Premises, Building, Project, Common Areas, parking facilities and the
approaches, entrances, streets, sidewalks, stairs, elevators, restrooms, or
corridors thereto, by or from any unauthorized or criminal acts of third
parties, regardless of any breakdown, malfunction or insufficiency of any
security measures, practices or equipment provided by Landlord or Tenant. Tenant
shall immediately notify Landlord in writing of any breakdown or malfunction of
any security measures, practices or equipment provided by Landlord as to which
Tenant has knowledge.
(c) Any diminution or interference with light, air or view by any
structure which may be erected on land adjacent to the Building or resulting
from any other cause shall in no way alter this Lease or impose any liability on
Landlord.
(d) Tenant agrees that in no event shall Landlord be liable for
consequential damages, including injury to Tenant's business or any loss of
income therefrom.
(e) In the event that Landlord or any successor owner of the Building
sells or conveys the Building, then all liabilities and obligations of Landlord
or the successor owner under this Lease accruing after the sale or conveyance
shall terminate and become binding on the new owner, and Tenant shall release
Landlord from all liability under this Lease (including, without limitation, the
Security Deposit, as defined under Paragraph 16 below), except for acts or
omissions of Landlord occurring prior to such sale or conveyance.
(f) Tenant expressly agrees that so long as Landlord is a
corporation, limited liability company, trust, partnership, joint venture,
unincorporated association or other form of business entity, (i) the obligations
of Landlord shall not constitute personal obligations of the officers,
directors, partners, employees, affiliates, joint venturers, members, trustees,
owners, shareholders, or other principals, agents or representatives of such
business entity ("Member of Landlord"), and (ii) Tenant shall have recourse only
to the interest of such business entity in the Building of which the Premises
are a part for the satisfaction of such obligations and not against the assets
of such Member of Landlord other than to the extent of their respective
interests in the Building. In this regard, Tenant agrees that in the event of
any actual or alleged failure, breach or default by Landlord of its obligations
under this Lease, that (i) no Member of Landlord shall be sued or named as a
party in any suit or action (except as may be necessary to secure jurisdiction
of Landlord), (ii) no judgment will be taken against any Member of Landlord, and
any judgment taken against any Member of Landlord may be vacated and set aside
at any time without hearing,(iii) no writ of execution will ever be levied
against the assets of any Member of Landlord, and (iv) these agreements by
Tenant are enforceable both by Landlord and by any Member of Landlord.
11. Damage or Destruction.
---------------------
(a) Subject to the provisions of Paragraphs 11(b) and ll(c) below, if,
during the Term, the Premises are totally or partially destroyed from any
insured casualty, Landlord shall, within ninety (90) days after the destruction,
commence to restore the Premises to substantially the same condition as they
were in immediately before the destruction and prosecute the same diligently to
completion. Such destruction shall not terminate this Lease. Landlord's
obligation shall not include repair or replacement of Tenant's alterations or
Tenant's equipment, furnishings, fixtures and personal property. If the existing
laws do not permit the Premises to be restored to substantially the same
condition as they were in immediately before destruction, and Landlord is unable
to get a variance to such laws to permit the commencement of restoration of the
Premises within the 90-day period, then either party may terminate this Lease by
giving written notice to the other party within thirty (30) days after
expiration of the 90-day period.
<PAGE>
(b) Despite the provisions of Paragraph ll(a) above, Landlord may decide
within ninety (90) days after such destruction to demolish the Building rather
than rebuild it, in which case this Lease will terminate as of the date of the
destruction. Landlord shall give Tenant written notice of its intention within
ninety (90) days after the destruction.
(c) If any destruction occurs to the Premises during the last six (6)
months of the initial Term or during the last six (6) months of any extension
period, regardless of the nature and extent of the destruction, either party can
elect to terminate this Lease within thirty (30) days after the destruction
occurs. If this Lease does not terminate pursuant to this Paragraph ll(c), the
provisions of Paragraph ll(a) above shall apply.
(d) If the Premises are damaged from any uninsured casualty to any extent
whatsoever, Landlord may within ninety (90) days following the date of such
damage: (i) commence to restore the Premises to substantially the same condition
as they were in immediately before the destruction and prosecute the same
diligently to completion, in which event this Lease shall continue in full force
and effect; or (ii) within the 90-day period Landlord may elect not to so
restore the Premises, in which event this Lease shall cease and terminate. In
either such event, Landlord shall give Tenant written notice of its intention
within the 90-day period.
(e) In the event of destruction or damage to the Premises which materially
interferes with Tenant's use of the Premises, if this Lease is not terminated as
above provided, there shall be an abatement or reduction of Base Rent between
the date of destruction and the date Landlord substantially completes its
reconstruction obligations, based upon the extent to which the destruction
materially interferes with Tenant's use of the Premises. All other obligations
of Tenant under this Lease shall remain in full force and effect. Except for
abatement of Base Rent, Tenant shall have no claim against Landlord for any loss
suffered by Tenant due to damage or destruction of the Premises or any work of
repair undertaken as herein provided.
(f) The provisions of California Civil Code Sections 1932(2) and 1933(4),
and any successor statutes, are inapplicable with respect to any destruction of
the Premises, such sections providing that a lease terminates upon the
destruction of the Premises unless otherwise agreed between the parties to the
contrary.
12. Eminent Domain.
--------------
(a) If all or any part of the Premises shall be taken as a result of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of taking. In the case of a partial taking of
greater than fifty percent (50%) of the rentable area of the Premises, either
Landlord or Tenant shall have the right to terminate this Lease as to the
balance of the Premises by notice to the other within thirty (30) days after the
date of the taking. In the event of a partial taking of the Premises which does
not result in a termination of this Lease, the monthly Base Rent thereafter to
be paid shall be equitably reduced on a square footage basis. If the continued
occupancy of Tenant is materially interfered with for any time during the
partial taking, notwithstanding the partial taking does not terminate this Lease
as to the part not so taken, the Base Rent shall proportionately abate so long
as Tenant is not able to continuously occupy the part remaining and not so
taken.
(b) All compensation awarded or paid upon a total or partial taking of the
fee title shall belong to Landlord whether such compensation be awarded or paid
as compensation for diminution in value of the leasehold or of the fee except:
Tenant shall retain and have a claim for the following, to the extent
specifically designated by the condemning authority: (i) the unamortized value
over the Term of Tenant's leasehold improvements (to the extent Landlord has not
contributed to the cost thereof); (ii) that portion (if any) of the award made
to Landlord as a result of removing fixtures, removable by
<PAGE>
Tenant herein, under the terms of this Lease but which are required to be taken
by the condemnor or are so acquired by the condemnor; and (iii) all relocation
assistance, moving and relocation expenses to the extent (if any) provided by
the condemning authority directly to Tenant.
13. Assignment and Subletting.
--------------------------
(a) Tenant shall not assign, sublet or hypothecate this Lease or any
interest herein or sublet the Premises or any part thereof or permit the use of
the Premises by any party other than Tenant without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Any of the foregoing
acts without Landlord's consent shall be void and shall, at the option of
Landlord, terminate this Lease. In connection with each consent requested by
Tenant, Tenant shall submit to Landlord the terms of the proposed transaction,
the identity of the parties to the transaction, the proposed documentation for
the transaction, current financial statements of any proposed assignee or
sublessee and all other information reasonably requested by Landlord concerning
the proposed transaction and the parties involved therein.
(b) As used in this Paragraph 13, the term "assign" or "assignment" shall
include, without limitation, any sale, transfer, or other disposition of all or
any portion of Tenant's estate under this Lease, whether voluntary or
involuntary, and whether by operation of law or otherwise, including any of the
following:
(1) if Tenant is a corporation or a limited liability company: (A)
any dissolution, merger, consolidation, or other reorganization of Tenant; or
(B) a sale or other transfer of more than fifty percent (50%) of the value of
the assets of Tenant; or (C) if Tenant is a corporation with fewer than 500
shareholders, a sale or other transfer of a controlling percentage of the
capital stock of Tenant; or (D) if Tenant is a limited liability company, a sale
or other transfer of a controlling percentage of the interest in Tenant. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stocks or interests possessing at least fifty percent (50%) of the total
combined voting power of the limited liability company or, in the case of a
corporation, of all classes of Tenant's stock issues, outstanding and permitted
to vote for the election of directors of the corporation;
(2) if Tenant is a trust, the transfer of more than fifty percent
(50%) of the beneficial interest of Tenant, or the dissolution of the trust;
(3) if Tenant is a partnership or joint venture, the withdrawal, or
the transfer of the interest, of any general partner or joint venturer or the
dissolution of the partnership or joint venture; and
(4) if Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of the cotenancy.
(c) No sublessee shall have a right further to sublet, and any assignment
by a sublessee of its sublease shall be subject to Landlord's prior written
consent in the same manner as if Tenant were entering into a new sublease.
(d) Regardless of Landlord's consent, no subletting or assignment shall
release Tenant of Tenant's obligation, or alter the primary liability of Tenant
to pay the Rent and to perform all other obligations to be performed by Tenant
hereunder. The acceptance of Rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provisions hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Tenant or
any successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.
<PAGE>
(e) In the event Tenant shall assign or sublet the Premises or request the
consent of Landlord to any assignment or subletting, then Tenant shall reimburse
Landlord for reasonable costs and attorneys' fees incurred in connection
therewith in an amount not to exceed $1,000.00.
14. Default by Tenant.
-----------------
(a) The following events shall constitute events of default under this
Lease:
(1) a failure by Tenant to pay any Rent or to deliver an estoppel
certificate (as provided in Paragraph 17 below) where such failure continues for
five (5) days after written notice by Landlord to Tenant;
(2) the bankruptcy or insolvency of Tenant, any transfer by Tenant to
defraud creditors, any assignment by Tenant for the benefit of creditors, or the
commencement of any proceedings of any kind by or against Tenant under any
provision of the Federal Bankruptcy Act or under any other insolvency,
bankruptcy or reorganization act unless, in the event any such proceedings are
involuntary, Tenant is discharged from the same within sixty (60) days
thereafter; the appointment of a receiver for a substantial part of the assets
of Tenant; or the levy upon this Lease or any estate of Tenant hereunder by any
attachment or execution;
(3) the abandonment or vacation of the Premises;
(4) the discovery by Landlord that any financial statement given to
Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor of Tenant's obligation
hereunder, and any of them, was materially false; and
(5) a failure by Tenant to perform any of the terms, covenants,
agreements or conditions of this Lease to be observed or performed by Tenant
(excluding any event of default under Paragraph 14(a)(1) above), where such
failure continues for thirty (30) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of the default is such that the
same cannot reasonably be cured within the 30-day period, Tenant shall not be
deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
(b) In the event of any material default or breach by Tenant, Landlord may
at any time thereafter, without limiting Landlord in the exercise of any right
or remedy at law or in equity which Landlord may have by reason of such default
or breach:
(1) Pursue the remedy described in California Civil Code Section
1951.4 whereby Landlord may continue this Lease in full force and effect after
Tenant's breach and abandonment and recover the Rent and any other monetary
charges as they become due, without terminating Tenant's right to sublet or
assign this Lease, subject only to reasonable limitations as herein provided.
During the period Tenant is in default, Landlord shall have the right to do all
acts necessary to preserve and maintain the Premises as Landlord deems
reasonable and necessary, including removal of all persons and property from the
Premises, and Landlord can enter the Premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers' commissions, expenses of remodeling the Premises
required by the reletting, and like costs. Reletting can be for a period shorter
or longer than the remaining Term.
(2) Pay or perform such obligation due (but shall not be obligated to
do so), if Tenant fails to pay or perform any obligations when due under this
Lease within the time permitted for their payment or performance. In such case,
the costs incurred by
<PAGE>
Landlord in connection with the performance of any such obligation will be
additional rent due under this Lease and will become due and payable on demand
by Landlord.
(3) Terminate Tenant's rights to possession by any lawful means, in
which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall be entitled
to recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including, without limitation, the following: (A) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus (B) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such Rent loss that is proved could have been
reasonably avoided; plus (C) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such Rent loss that is proved could be reasonably avoided;
plus (D) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or which in the ordinary course of events would be likely to result
therefrom; plus (E) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
State law. Upon any such termination of Tenant's possessory interest in and to
the Premises, Tenant (and at Landlord's sole election, Tenant's sublessees)
shall no longer have any interest in the Premises, and Landlord shall have the
right to make any reasonable repairs, alterations or modifications to the
Premises which Landlord in its sole discretion deems reasonable and necessary.
The "worth at the time of award" of the amounts referred to in subparagraphs (A)
and (B) above is computed by allowing interest at the maximum rate an individual
is permitted by law to charge. The worth at the time of award of the amount
referred to in subparagraph (C) above is computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
(4) Pursue any other legal or equitable remedy available to Landlord.
Unpaid installments of Rent and other unpaid monetary obligations of Tenant
under the terms of this Lease shall bear interest from the date due at the rate
of ten percent (10%) per annum.
(c) In the event Tenant is evicted or Landlord takes possession of the
Premises by reason of any default by Tenant hereunder, Tenant hereby waives any
right of redemption or relief from forfeiture as provided by law.
(d) Even though Tenant has breached this Lease and abandoned the Premises,
this Lease shall continue in effect for so long as Landlord does not terminate
Tenant's right to possession, and Landlord may enforce all its rights and
remedies under this Lease, including the right to recover Rent as it becomes due
under this Lease. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession.
(e) In the event Tenant is in material default under any provision of this
Lease then, at Landlord's sole election: (i) Tenant shall not have the right to
exercise any available right, option or election under this Lease ("Tenant's
Exercise Rights") if at such time Tenant is in default hereunder, (ii) Tenant
shall not have the right to consummate any transaction or event triggered by the
exercise of any of Tenant's Exercise Rights if at such time Tenant is in default
hereunder, and (iii) Landlord shall not be obligated to give Tenant any required
notices or information relating to the exercise of any of Tenant's Exercise
Rights hereunder.
<PAGE>
15. Default by Landlord, Notice to Mortgagee.
-----------------------------------------
Landlord shall not be in default unless Landlord, or the holder of any
mortgage, deed of trust or ground lease covering the Premises, fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord certified mail,
postage prepaid, and to the holder of any first mortgage, deed of trust or
ground lease covering the Premises whose name and address shall have been
furnished to Tenant in writing, specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance
then Landlord shall not be in default if Landlord or the holder of any such
mortgage, deed of trust or ground lease commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion. In no event
shall Tenant be entitled to terminate this Lease by reason of Landlord's
default, and Tenant's remedies shall be limited to an action for monetary
damages at law.
16. Security Deposit.
-----------------
On execution of this Lease, Tenant shall deposit with Landlord the sum
specified in the Basic Lease Information (the "Security Deposit"). The Security
Deposit shall be held by Landlord as security for the performance by Tenant of
all of the provisions of this Lease. If Tenant fails to pay Rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Lease, Landlord may use, apply, or retain all or any portion of the
Security Deposit for the payment of any Rent or other charge in default, or the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default, or to compensate Landlord for any loss or damage which
Landlord may suffer thereby. If Landlord so uses or applies all or any portion
of the Security Deposit, then within ten (10) days after demand therefor Tenant
shall deposit cash with Landlord in an amount sufficient to restore the deposit
to the full amount thereof, and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep the Security
Deposit separate from its general accounts. If Tenant performs all of Tenant's
obligations hereunder, the Security Deposit, or so much thereof as has not
theretofore been applied by Landlord, shall be returned, without payment of
interest for its use, to Tenant (or, at Landlord's option to the last assignee,
if any, of Tenant's interest hereunder) at the expiration of the Term, and after
Tenant has vacated the Premises. No trust relationship is created herein between
Landlord and Tenant with respect to the Security Deposit.
17. Estoppel Certificate.
---------------------
(a) Tenant shall within ten (10) days of notice from Landlord execute,
acknowledge and deliver to Landlord a statement certifying (i) that this Lease
is unmodified and in full force and effect (or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect), (ii) the amount of the Security Deposit, (iii) the date to
which the Rent has been paid, (iv) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any are claimed, and (v) such other matters as may reasonably
be requested by Landlord. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Building.
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant, (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) that there are no
uncured defaults in Landlord's performance, and (iii) that not more than one
month's Base Rent has been paid in advance.
(c) If Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial statements
of Tenant as may be reasonably required by such
<PAGE>
lender. All such financial statements shall be received by Landlord in
confidence and shall be used for the purposes herein set forth.
18. Subordination.
-------------
This Lease, at Landlord's sole option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the Building and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements, refinancings and extensions thereof. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the Rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground lease,
whether this Lease is dated prior to or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. If any mortgage
or deed of trust to which this Lease is subordinate is foreclosed or a deed in
lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall
attorn to the purchaser at the foreclosure sale or to the grantee under the deed
in lieu of foreclosure; if any ground lease to which this Lease is subordinate
is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be, or to evidence such attornment. Any such document of attornment
shall also provide that the successor shall not disturb Tenant in its use of the
Premises in accordance with this Lease.
19. Attorneys' Fees.
---------------
In the event legal action is initiated by either party, the prevailing
party shall be entitled to recover all costs and expenses incurred in such
action, including, without limitation, reasonable attorneys' fees and costs,
including attorneys' fees incurred at trial and on appeal, if any.
20. Notices.
-------
All notices, consents, demands, and other communications from one party to
the other given pursuant to the terms of this Lease shall be in writing and
shall be deemed to have been fully given when personally delivered, delivered by
courier service, sent via facsimile (confirmation receipt required), or forty-
eight (48) hours after the same is deposited in the United States mail,
certified or registered, postage prepaid, and addressed as follows: To Tenant at
the address specified in the Basic Lease Information or to such other place as
Tenant may from time to time designate in a notice to Landlord; to Landlord at
the address specified in the Basic Lease Information, or to such other place and
to such other parties as Landlord may from time to time designate in a notice to
Tenant.
21. General Provisions.
-------------------
(a) This Lease shall be governed by and construed in accordance with the
internal laws of the State of California, notwithstanding any choice of law
statutes, regulations, provisions or requirements to the contrary.
(b) The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(c) This Lease including attached Exhibits, Addenda, and Basic Lease
Information contains all agreements and understandings of the parties and
supersedes and cancels any and all prior or contemporaneous written or oral
agreements, instruments, understandings, and communications of the parties with
respect to the
<PAGE>
subject matter herein. This Lease, including the attached Exhibits, Addenda, and
Basic Lease Information, may be modified only in a writing signed by each of the
parties.
(d) No waiver of any provision hereof by either party shall be deemed by
the other party to be a waiver of any other provision, or of any subsequent
breach of the same provision. Landlord's or Tenant's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of Landlord's or
Tenant's consent to, or approval of, any subsequent act by the other party.
(e) If Tenant remains in possession, with the expressed consent of
Landlord, of all or any part of the Premises after the expiration of the Term,
such tenancy shall be from month to month only, and not a renewal hereof or an
extension for any further term, and in such case, Rent shall be payable in the
amount of the last month's Base Rent and all other charges under the Lease and
such month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein.
(f) Subject to the provisions of this Lease restricting assignment or
subletting by Tenant, this Lease shall bind the parties, their personal
representatives, successors, and assigns.
(g) Upon reasonable prior notice to Tenant (which notice shall not be
required in the event of an emergency), Landlord and Landlord's representatives
and agents shall have the right to enter the Premises during regular business
hours for the purpose of inspecting the same, showing the same to prospective
purchasers or lenders, and making such alterations, repairs, improvements, or
additions to the Premises, the Building or the Common Areas as Landlord may deem
necessary or desirable. Landlord may at any time during the last one hundred
twenty (120) days of the Term place on or about the Premises any ordinary #For
Lease" sign. Landlord may at any time place on or about the Premises any
ordinary "For Sale" sign.
(h) The voluntary or other surrender of this Lease by Tenant, the mutual
cancellation thereof or the termination of this Lease by Landlord as a result of
Tenant's default shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
(i) If Tenant is a corporation, limited liability company or partnership,
each individual executing this Lease on behalf of Tenant represents and warrants
that he is duly authorized to execute and deliver this Lease on behalf of the
corporation, company or partnership in accordance with, where applicable, a duly
adopted resolution of the board of directors of the corporation, the vote of the
members of the limited liability company or the vote of the partners within the
partnership, and that this Lease is binding upon the corporation, company or
partnership in accordance with its respective articles of incorporation and
bylaws, operating agreement or partnership agreement.
(j) Time is expressly declared to be of the essence of this Lease and of
each and every covenant, term, condition, and provision hereof, except as to the
conditions relating to the delivery of possession of the Premises to Tenant.
(k) If there is more than one party comprising Tenant, the obligations
imposed on Tenant shall be joint and several.
(l) The language in all parts of this Lease shall be in all cases construed
as a whole according to its fair meaning and not strictly for nor against either
Landlord or Tenant.
(m) As used in this Lease and whenever required by the context thereof,
each number, both singular and plural, shall include all numbers and in each
gender shall include all genders. Landlord and Tenant, as used in this Lease or
in any other instrument referred to in or made a part of this Lease, shall
likewise include both the singular and the plural, a corporation, limited
liability company,
<PAGE>
partnership, individual or person acting in any fiduciary capacity as executor,
administrator, trustee or in any other representative capacity.
(n) The Exhibits and Addendum, if any, specified in the Basic Lease
Information are attached to this Lease and by this reference made a part hereof.
22. Force Majeure.
-------------
Any delay in construction, repairs, or rebuilding any building,
improvement or other structure herein shall be excused and the time limit
extended to the extent that the delay is occasioned by reason of acts of God,
labor troubles, laws or regulations of general applicability, acts of Tenant or
Tenant Delays (as the term is defined in the Work Letter Agreement attached
hereto as Exhibit B), or other occurrences beyond the reasonable control of
Landlord. Accordingly, Landlord's obligation to perform shall be excused for the
period of the delay and the period for performance shall be extended for a
period equal to the period of such delay.
23. Broker's Fee.
------------
Each party represents that it has not had dealings with any real estate
broker, finder, or other person, with respect to this Lease in any manner,
except the brokerage firm(s) specified in the Basic Lease Information. Each
party shall hold harmless the other party from all damages resulting from any
claim that may be asserted against the other party by any broker, finder, or
other person with whom the other party has or purportedly has dealt. Landlord
shall pay any commissions or fees that are payable to the broker or finder
specified in the Basic Lease Information, with respect to this Lease in
accordance with the provisions of a separate commission contract.
24. Financial Statement.
-------------------
It is acknowledged by all parties hereto that the attached financial
declaration of Tenant is incorporated as a part of this Lease as Exhibit E, that
the information contained therein is true and correct in all material respects,
and that the accuracy of the information is a significant fact upon which
Landlord has relied in the granting of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease on the date first
mentioned above.
TENANT: LANDLORD:
Advanced Fibre Communications G & W/Redwood Associates Joint Venture,
a California general partnership
- --------------------------------- By: G & W/McDowell Associates: 1985, a
a California general partnership
By: /s/ William C. White
- --------------------------------- ----------------------------
William C. White
Managing General Partner
/s/ Advanced Fibre Communications
By:---------------------------------
VP, CFO
Its:-----------------------------
<PAGE>
AMENDMENT NO. 2
TO
1440 MCDOWELL BOULEVARD NORTH NET LEASE
THIS AMENDMENT NO. 2 TO 1440 McDowell Boulevard North Net Lease ("Amendment No.
2") is entered into as of August 4 , 1997, by and between G & W/Copley
--------
Redwood Business Park, L.P., a California limited partnership, and successor to
G & W/Redwood Associates Joint Venture, a California general partnership
("Landlord"), and Advanced Fibre Communications, a Delaware corporation
("Tenant"). Terms which are capitalized in this Amendment No. 2 but not defined
herein shall have the meanings stated in the Lease.
This Amendment No. 2 is entered into on the basis of the following facts,
intentions and understandings of the parties:
A. Landlord and Tenant entered into that certain 1440 McDowell Boulevard North
Net Lease and Addendum No. 1 on July 10, 1995, and further amended by
Amendment # 1 to Redwood Business Park Net Lease Agreement dated January 4,
1996 collectively ("1440 Lease").
B. Landlord and Tenant have also entered into that certain 1435 McDowell
Boulevard North Net Lease and Addendum No. 1 ("1435 Lease") as of the
execution date of this Amendment No. 2.
C. As partial consideration for Landlord leasing to Tenant the space subject
to the terms of the 1435 Lease, Tenant is willing to extend the current
term of the 1440 Lease an additional three (3) years.
NOW, THEREFORE, in consideration of the mutual covenants and promises of the
parties, the parties agree as follows:
1. TERM.
The term of the I440 Lease shall be extended three (3) years from its
current termination date making the new termination date March 31, 2008.
The commencement date of the 1440 Lease shall remain unchanged.
2. REMAINDER UNCHANGED.
This Amendment shall supersede and cancel all prior and contemporaneous
written and oral agreements, correspondence and communications between the
parties regarding the subject matter hereof. Except as provided in this
Amendment No. 2, the 1440 Lease shall remain in full force and effect and
unamended.
IN WITNESS WHEREOF, this Amendment No. 2 is executed by the parties on the date
first written and shall be deemed effective as of the execution date of the 1435
Lease.
TENANT: LANDLORD:
Advanced Fibre Communications, Inc., G & W/Copley Redwood Business Park, L.P.
a Delaware corporation a limited partnership
By: G & W Management Co.
Its: Manager
By:/S/ Peter A Darbee
------------------------
Peter A Darbee
By:/s/ William C. White
-----------------------
William C. White, President
G & W Management Co.
Its:
-----------------------
Vice President, CFO
<PAGE>
[FLOOR PLAN APPEARS HERE]
(EXHIBIT A)
<PAGE>
[PLAN APPEARS HERE]
(EXHIBIT B)
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
Exhibit 10.16
PURCHASE AGREEMENT
------------------
This Purchase Agreement ("Agreement") is entered into as of April 23, 1999
---------
(the "Effective Date"), by and between Williams Communications, Inc., a Delaware
--------------
corporation with principal offices at One Williams Center, 26/th/ Floor, Tulsa,
Oklahoma 74172 ("Williams"), and Cerent Corporation, a Delaware corporation,
with principal offices at 1450 North McDowell Blvd., Petaluma, CA 94954
("Cerent").
In consideration of the mutual promises contained herein, the parties agree
as follows:
1.0 CERTAIN DEFINITIONS.
-------------------
"Intellectual Property Rights" means all patents, patent rights,
----------------------------
copyrights, trade secret rights, trademark, service mark and trade dress rights
and other intellectual property rights, current or future, under the laws of any
jurisdiction, together with all applications therefor and registrations thereto.
"Products" means the Cerent 454 product line, [*]
--------
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
"Software" means any proprietary software of Cerent provided to
--------
Williams and any software imbedded or included in the Products.
"Specifications" means those Product specifications in the user
--------------
documentation for such Product.
2.0 PURCHASE COMMITMENT
-------------------
2.1 Minimum Purchase Commitment. During the Term. Williams shall purchase
---------------------------
Products from Cerent totaling at least [*] of Products, net of any applicable
discounts or returns. In the event of any shortfall upon the expiration of the
Term, Williams shall, subject to the terms and conditions of this Agreement,
within thirty (30) days of such expiration, submit a Purchase Order (as defined
below) and accept shipment of Products to meet such [*] purchase commitment.
[*]
3.0 WARRANT.
-------
In consideration for Products shipped to Williams during calendar year
1999, Cerent shall grant Williams, for a purchase price of $10.00 plus the
obligations set forth therein, a warrant for the purchase of common shares of
Cerent, exercisable at $6.50 per share until December 31, 2004 (the "Warrant").
The number of shares exercisable by Williams pursuant to the Warrant shall be as
set forth on the attached Exhibit B, and based upon the total dollar amount of:
---------
(i) Products shipped to Williams during calendar year 1999 (net of any
applicable discounts or returns); and (ii) Products ordered by Williams on or
before December 1, 1999 that Cerent is unable to fulfill, provided such
unfulfilled orders are within the Product volumes set forth in Williams' rolling
six (6) month forecast provided to Cerent at the beginning of the fourth
quarter 1999 (pursuant to Section 8.1 hereof). The terms and conditions of the
Warrant shall be those set forth on Exhibit B.
---------
4.0 CERENT DEVELOPMENT OBLIGATIONS.
------------------------------
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-2-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
4.3 Network Architecture Lab Support. Cerent will provide Williams a
--------------------------------
total of [*] Product units for Williams' non-commercial use in lab
infrastructure testing and quality assurance. Cerent will provide Williams [*],
for non-commercial testing and quality assurance use only, for each [*] Cerent
454 units purchased by Williams during the Term. All Products provided to
Williams under this Section 4.3 will be at [*], shall not be subject to Cerent's
warranty obligations, and all installation, use and liabilities relating thereto
shall be Williams' sole responsibility.
4.4 Training. Cerent will provide Williams with (i) up to [*] day-long
--------
training courses for each of [*] and (ii) [*] day-long training courses for each
[*] Cerent 454 Product units purchased by Williams. Such training courses shall
be at no charge to Williams. Each training course shall be at location within
the United States specified by Williams, and may be attended by up to [*]
Williams' employees or contractors. Cerent shall provide a trainer and necessary
training materials for such courses. Williams shall provide all travel and other
expenses for attendance of Williams' employees or contractors, and shall provide
all necessary facilities if training courses are not held at Cerent's facility
in Petaluma, California.
4.5 Development Incentive. In the event of any delay by Cerent in the
---------------------
general availability of [*] (with the respective functionalities as specified in
Section 1.0) as of the dates specified in this Section 4.0 (each, a "Delay"),
Cerent shall give Williams an [*] of the purchase price of the Products set
forth on Exhibit A for [*] of such Delay on all Products purchased during the
---------
period of such Delay. The foregoing discount shall apply only to those Products
shipped to Williams during such Delay. In the event of a Delay in excess of [*]
months, Williams shall be entitled to reduce its minimum purchase obligations
under Section 2.1 by the greater of (i) the aggregate dollar amount of all
Purchase Orders canceled during such Delay pursuant to Section 8.4, or (ii) [*].
In the event of any Delay of more than [*] full months, Williams may, at its
sole option, terminate this Agreement with no further purchase obligation under
Section 2.1. Notwithstanding anything else in this Agreement, the provisions of
this Section 4.5 shall constitute Williams' sole remedy, and Cerent's sole
obligation, for any breach of Sections 4.1 and/or 4.2.
4.6 Certain Changes. Cerent may at any time, without prior approval from
---------------
or notice to Williams, make changes to the Products (i) which do not adversely
affect form, fit or function or performance; or (ii) when required for safety,
regulatory, or legal purposes.
5.0 OWNERSHIP
---------
5.1 Intellectual Property Rights. Cerent shall retain all right, title
----------------------------
and interest in and to all Intellectual Property Rights in the Products and the
Software, including all Intellectual Property Rights in any improvements or
modifications thereto, subject to any Joint Developments pursuant to Section 5.2
below.
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-3-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
5.2 Joint Developments. The parties may agree jointly to develop
------------------
improvements to the Products or Software ("Joint Development"). Any such Joint
Development shall be mutually agreed upon by the parties, and set forth in
writing signed by both parties on an attached Exhibit to this Agreement.
-------
Williams and Cerent will jointly own any Joint Developments, and Williams will
retain the right to internally use both the source and object code of any Joint
Development software.
6.0 SOFTWARE LICENSE, RIGHTS AND AGREEMENTS
---------------------------------------
6.1 Software License. Subject to the terms and conditions of this
----------------
Agreement, Cerent hereby grants to Williams a perpetual, non-exclusive, non-
sublicensable, non-transferable (except as provided in Sections 8.2 and 17.7),
royalty-free license to use the Software contained in the Products solely in
conjunction with such Products, in object code form only.
6.2 Sale Conveys No Right to Manufacture or Copy. Except for the license
--------------------------------------------
granted in Section 6.1, all right, title and interest in the Software shall
remain the exclusive property of Cerent or its licensors. This Agreement does
not entitle Williams to the receipt or use of, or access to, Software source
code or any right to reproduce the Software or any related documentation. The
Products are offered for sale and are sold by Cerent subject in every case to
the condition that such sale does not convey any license, expressly or by
implication, to manufacture, reproduce, decompile, disassemble, compile or
reverse engineer the Software or the Products. Prior to the disposal of any
Product (excluding any resale permitted under Section 8.2), Williams shall erase
or remove the Software from such Product. Williams acknowledges that it receives
no title or ownership rights to such Software.
6.3 Support. Cerent will provide Williams with technical support as
-------
specified in the attached Exhibit C.
---------
7.0 INFORMATION REGARDING PRODUCTS.
------------------------------
7.1 Operations Support System. [*]
-------------------------
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-4-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
(b) Additional information specific to SNMP Devices:
[*]
8.0 TERMS AND CONDITIONS FOR SUPPLY OF PRODUCTS.
-------------------------------------------
8.1 Forecasts. Within the first [*] days of the beginning of each
---------
calendar quarter, Williams shall provide Cerent with a [*] month rolling
forecast, updated quarterly, setting
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-5-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
forth Williams' estimated monthly requirements for Products. Such forecasts are
for planning purposes only, and shall not be binding on either party.
8.2 Ordering. Except as otherwise set forth in this Agreement, all
--------
purchases and sales between Cerent and Williams will be initiated by Williams'
issuance of written purchase orders or written purchase requisitions
(collectively, "Purchase Orders") to Cerent. All such Purchase Orders shall be
submitted to the following address:
Cerent Corporation
Attention: Order Administration
1450 North McDowell Blvd.
Petaluma, CA 94954-6515
Phone: 877-CERENT4
Fax: 877-CERENT2
All Purchase Orders shall include the following: (i) purchase order number;
(ii) Product part number, description and price; (by line item); (iii) billing
address; (iv) shipping address; (v) delivery date; (v) preferred method of
Product shipment; and (vi) authorized signature. Cerent will notify Williams of
the acceptance or rejection of a Purchase Order within [*] days of receipt of
the Purchase Order; however, no Purchase Order will be binding upon Cerent until
accepted by Cerent in writing. This Agreement shall govern all orders of
Products by Williams. No terms on Purchase Orders, invoices or like documents by
Williams shall serve to alter or add to the terms of this Agreement unless
agreed to and signed by both parties in writing. All Products sold hereunder are
for use solely by Williams. Nothing in this Agreement shall permit Williams to
resell or distribute Products to third parties legs than [*] years after
Williams' purchase thereof without Cerent's prior written consent, which consent
will not be unreasonably withheld. Cerent's withholding of such consent will be
deemed reasonable in connection with any proposed resale to an existing or
future Cerent customers or prospects.
No Purchase Order or fax release will specify a delivery date later than
[*] days after the expiration of this Agreement, however in no event may a
delivery date exceed the termination date pursuant to Section 12.0. Orders are
subject to acceptance by Cerent and assignment of delivery-schedules by Cerent
in accordance with availability. Cerent will use its reasonable commercial
efforts to accommodate Williams' schedule and delivery dates.
If Cerent does not confirm or reject Williams' Purchase Order within [*]
days of receipt, Williams' Purchase Order will be deemed accepted by Cerent.
8.3 Shipping. All Products delivered by Cerent pursuant to the terms of
--------
this Agreement will be suitably packed for shipment in Cerent's standard
containers, marked for shipment to Williams' address set forth above or to an
address specified in Williams' Purchase Order, and delivered to a carrier or
forwarding agent chosen by Williams. Should Williams fail to designate a
carrier, forwarding agent or type of conveyance, Cerent will make such
designation in conformance with its standard shipping practices. Shipment will
be F.O.B. Cerent's manufacturing facility ("Delivery Point"), at which time
--------------
title (excluding any Software), but not
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-6-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
risk of loss, shall pass to Williams. All freight, insurance and other shipping
expenses from the Delivery Point, as well as any special packing expenses
requested by Williams, will be borne by Williams. Williams shall also bear all
applicable taxes, duties, and similar charges that may be assessed against the
Products after delivery to the carrier at Cerent's Delivery Point. Risk of loss
shall pass to Williams upon delivery of Products by the carrier or forwarding
agent to Williams.
8.4 Delivery; Installation. Cerent shall use commercially reasonable
----------------------
efforts to deliver any Products in accordance with Cerent's then current lead
times. Cerent commits to shipment of Products within [*] after Cerent's
acceptance of any Purchase Order or such other delivery date as the parties may
agree to in writing. Cerent shall not be liable for delivery under such Purchase
Order made within a reasonable time after a stated delivery date; provided,
--------
however, that Williams may cancel any Purchase Order without penalty if Cerent
- -------
delays shipment thereof by more than [*]. Any Purchase Order so canceled shall
reduce Williams' minimum purchase commitment under Section 2.1 by the amount of
such Purchase Order. Further, Cerent reserves the right to deliver any Product
orders up to [*] in advance of Williams' requested delivery dates, upon at least
[*] prior written notice to Williams. Williams shall be solely responsible for
any installation of Products.
8.5 Inspection and Acceptance. Williams will inspect all the Products for
-------------------------
obvious physical damage upon receipt thereof, and will note any such damage on
all accompanying shipping and other career documents, and shall notify Cerent of
any such damage within [*]. Williams shall be responsible for the full value of
any Products damaged during shipment for which Cerent is unable to recover
payment from its insurer or the carrier because of Williams' delay in notifying
Cerent. Williams may test any Product for a reasonable period of time, and
reject any Product that fails in any material way to meet such Product's
Specifications after such testing period. Any Product not rejected within
[*] of receipt of such Product by Williams (the "Rejection Period") will be
----------------
deemed accepted. To reject a Product, Williams will, within the Rejection
Period, notify Cerent in writing or by facsimile of its rejection and request a
Returned Material Authorization ("RMA"), and shall comply with Cerent's repair
---
and return procedures set forth on the attached Exhibit D. Within [*] of receipt
---------
of the RMA number, Williams will return to Cerent the rejected Product, freight
prepaid, in its original shipping carton with the RMA number displayed on the
outside of the carton. Cerent reserves the right to refuse to accept any
rejected Products that do not bear an RMA number on the outside of the carton.
As promptly as possible but no later than [*] after receipt by Cerent of
properly rejected Products, Cerent will, at its option and expense, either
repair or replace the returned Products. Shipment of such repaired or
replacement Products shall be at Cerent's expense, except that a [*] fee will be
imposed for returned Products that Cerent determines after testing are not
defective and conform to Specifications.
8.6 Security Interest. Cerent hereby reserves, and Williams hereby grants
-----------------
to Cerent, a purchase money security interest in each Product sold under this
Agreement until full payment has been received by Cerent for such Product. These
interests will be satisfied by payment in full of Williams' purchase price.
Williams hereby appoints Cerent as its attorney-in-fact to execute, on Williams'
behalf and in Williams' name, financing statements and other instruments to
perfect Cerent's security interest in each Product for the amount of Williams'
purchase price. A copy of
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-7-
<PAGE>
[CONFIDENTIAL TREATMENT IS REQUESTED]
this Agreement may be filed with the appropriate authorities at any time after
its execution as a financing statement or chattel mortgage to perfect Cerent's
security interest.
8.7 Cancellations. Williams may cancel orders for the Products scheduled
-------------
for shipment, subject to a [*] cancellation fee (based upon Williams' purchase
price for such canceled order) for orders canceled less than [*] days before the
scheduled shipment date; provided, however, that Williams may, at any time more
than [*] before any scheduled shipment date, change the shipment destination of
such order without penalty. Williams shall be entitled to a [*] delay (of no
more than [*]) in the shipment of any order, provided Williams notifies Cerent
in writing of such delay at least [*] prior to the original shipment date.
9.0 PRICE AND PAYMENT TERMS
-----------------------
9.1 Prices. The prices for the Products are set out in Exhibit A and are
------- ---------
subject to the terms contained in such Exhibit and the terms of this Agreement.
All payments shall be made in United States dollars and are exclusive of any
withholding tax and any currency control or restrictions. Product prices exclude
all sales, use, value added or other taxes, customs duties, or similar tariffs
and fees. Unless tax-exempt status acceptable to the relevant taxing authorities
is provided by Williams, Williams shall pay all such taxes, duties, tariffs and
fees, including all amounts Cerent may be required to pay or collect upon the
sale or delivery of the Products or upon collection of the sales price.
9.2 Payment Terms. Cerent will invoice Williams upon any shipment of
-------------
Products. Williams shall pay Cerent all invoiced amounts for Products [*] from
date of each invoice. Without prejudice to any other remedy, including the right
to terminate this Agreement under Section 10.0, in the event any charge is not
paid when due, Cerent may assess, and Williams agrees to pay, a late charge of
the lower of [*] per month or the maximum percentage allowed by law, if lower.
9.3 Credit. At Cerent's option, shipments may be made on credit terms
------
established by Cerent and in effect at the time an order is accepted. Cerent
reserves the right, upon written notice to Williams, to declare all sums owing
to Cerent immediately due and payable in the event of a breach by Williams of
any of its obligations to Cerent, including the failure of Williams to comply
with established credit terms. Furthermore, Cerent reserves the right at all
times, either generally or with respect to any specific order by Williams, to
vary, change or limit the amount or duration of any credit to be allowed to
Williams; provided, however, that nothing in this Section 9.3 shall affect
-------- --------
Williams' initial purchase deferment right in Section 2.2 above. Williams agrees
to pay for the Products-as invoiced and accepted per Section 8.0 above.
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-8-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
10.0 TERM AND TERMINATION
--------------------
10.1 Term. This Agreement shall continue in full force and effect from
----
the Effective Date through and including December 31,2001 (the "Term"), unless
----
terminated earlier pursuant to this Section 10.0.
10.2 Termination for Cause. If either party breaches any material
---------------------
provision of this Agreement (excluding Sections 4.1 or 4.2), then the non-
breaching party may give written notice to the defaulting party that if the
default is not cured within [*] of receipt of such notice, then the Agreement
will be terminated. If the non-defaulting party gives such notice and the
default is not cured during the [*] period, then the Agreement shall
automatically terminate at the end of that period. In the event of any
termination by Williams pursuant to this Section 10.2, Williams shall have no
further purchase obligation under Section 2.1.
10.3 Termination for Insolvency. Either party may immediately terminate
--------------------------
this Agreement by written notice to the other party (without prior notice) if
(i) the other party enters into proceedings in bankruptcy or insolvency; (ii)the
other party makes an assignment for the benefit of creditors; (iii) a petition
is filed against the other party under a bankruptcy law, a corporate
reorganization law, or any other law for relief of debtors or similar law
analogous in purpose of effect, which petition is not dismissed within [*]; or
(iv) the other party enters into liquidation or dissolution proceedings, or a
receiver is appointed with respect to any assets of the other party, which
appointment is not vacated within [*].
10.4 Fulfillment of Orders upon Termination. Upon termination of this
--------------------------------------
Agreement for any reason, Cerent's obligations under existing Purchase Orders
shall immediately cease, including any orders accepted by Cerent prior to the
date of termination.
10.5 Effect of Termination. Upon any expiration or termination of this
---------------------
Agreement:
(a) Except as expressly provided in this Agreement, all rights
granted to Williams under this Agreement shall immediately cease and terminate,
except for the licenses granted in Section 6.1, which shall continue subject to
the restrictions in Section 6.2.
(b) The provisions of Sections 1.0, 3.0, 5.0, 9.2, 9.3, 10.5, 11.0,
12.0, 13.0, 14.0, 15.0, 16.0 and 17.O (excluding 17.16 and 17.19) shall survive
the termination of this Agreement for any reason. All other rights and
obligations of the parties shall cease upon termination of this Agreement.
11.0 CONFIDENTIALITY.
----------------
11.1 Definition. "Confidential Information" shall mean any information,
----------
including, without limitation, technical information, specifications, trade
secrets, confidential information and supporting documentation, owned by or
licensed to a party hereto, which is in written, graphic, machine readable or
other tangible form and is marked "Confidential," "Proprietary" or in some other
manner to indicate its confidential nature. Confidential Information may include
oral information disclosed by one party to the other pursuant to this Agreement,
provided that such information is designated as confidential at the time of
disclosure and is reduced to writing by the
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-9-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
disclosing party within a reasonable time (not to exceed [*] days) after its
oral disclosure, and such writing is marked in a manner to indicate its
confidential nature and delivered to the receiving party. Notwithstanding any of
the other provisions of this Section 11.1, all Software and Product source code
shall be deemed Confidential Information of Cerent.
11.2 Non-disclosure and Non-use. Each party hereto agrees not to use any
--------------------------
Confidential Information of the other party for any purpose, other than to
enforce its rights and perform its obligations hereunder, or disclose any
Confidential Information of the other party to any third party for any purpose.
Each party hereto shall use at least the same degree of care, but no less than
reasonable care, to avoid disclosure or use of the Confidential Information of
the other party as such party employs with respect to its own Confidential
Information of like importance. Without limitation of the foregoing, each party
agrees during the term of this Agreement and thereafter to hold such
Confidential Information in strict confidence, not to disclose it to third
parties or to use it in any way, commercially or otherwise, except as otherwise
expressly authorized by this Agreement, and not to allow any unauthorized person
access to such Confidential Information, either before or for a period of five
(5) years after termination or expiration of this Agreement, without the prior
written consent of the disclosing party. Each party will limit the disclosure of
the Confidential Information to employees with a need to know who: (i) have been
advised of the confidential nature thereof; and (ii) agree to be bound by the
restrictions in this Section 11.2 as to the non-disclosure and non-use of such
Confidential Information.
11.3 Exceptions. Notwithstanding anything in this Agreement to the
----------
contrary, Confidential Information need not be treated as such if it is or has
become:
(a) published or otherwise available to the public other than by a
breach of this Agreement;
(b) rightfully received by the receiving party from a third party
without confidential limitation;
(c) approved in writing for public release by the disclosing party;
(d) known to the receiving party prior to its first receipt of such
Confidential Information from the disclosing party; as evidenced by the
receiving party's contemporaneous written records; or
(e) required to be disclosed pursuant to court order and the
receiving party as notified the disclosing party within a sufficient time prior
to such disclosure to permit the disclosing party to secure a protective order
maintaining the confidentiality of such information.
11.4 Return of Confidential Information. Upon the termination or the
----------------------------------
expiration of the Agreement, each party shall: (i) return to the other party or
destroy, as requested by the disclosing party, the original and all copies of
any Confidential Information of the disclosing party, the original and all
copies of any Confidential Information of the disclosing party and any summaries
or analyses thereof or studies or notes thereon in the receiving party's
possession or control; and
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-10-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
(ii) at the disclosing party's request, have one of the officers of the
receiving party certify in writing that: (x) it shall not make any further use
of such Confidential Information of the disclosing party; (y) it shall comply
with the terms of this Section 11.0 regarding prohibited use of Confidential
Information of the disclosing party; and (z) it has fully complied with the
provisions of this Section l1.4.
12.0 WARRANTY AND DISCLAIMER
-----------------------
12.1 Limited Warranty. Cerent warrant that (i) the Products will be free
----------------
from defects in material and workmanship, and will conform to all material
Specifications in effect as of the date of shipment, for a period of [*] from
the date of shipment to Williams; and (ii) the Software will conform to all
material Specifications for a period of [*] from the date of shipment to
Williams. The limited warranty set forth in this Section 12.1 shall not apply to
defects or errors in a Product or Software which are caused by: (i) Williams'
failure to follow Cerent's environmental, installation, operation or maintenance
instructions or procedures in the Product's Specifications; (ii) Williams'
mishandling, abuse, misuse, negligence, or improper storage, servicing or
operation of the Product (including without limitation use with incompatible
equipment), (iii) modifications, repairs or improper installations not made by
Cerent (except for Williams removal and return of cards provided in connection
with the Products, which shall not be considered a modification or repair), or
(iv) power failures, surges, fire, flood, accident, actions of third parties or
other like events outside Cerent's reasonable control. Cerent does not warrant
that the operation of the Software will be error-free.
12.2 Warranty Procedures. In the event of any warranty claim, Williams
-------------------
shall request a Returned Material Authorization ("RMA"), and shall comply with
---
Cerent's repair and return procedures set forth on the attached Exhibit D.
---------
Within [*] of receipt of the RMA number, Williams will return to Cerent the
defective Product, freight prepaid, in its original shipping carton with the RMA
number displayed on the outside of the carton. Cerent reserves the right to
refuse to accept any defective Products that do not bear an RMA number on the
outside of the carton. As promptly as possible but no later than [*] after
receipt by Cerent of such defective Products, Cerent will, at its option and
expense, either repair or replace the returned Products. Shipment of such
repaired or replacement Products shall be at Cerent's expense, except that a [*]
will be imposed for returned Products that Cerent determines after testing are
not defective and conform to Specifications. The foregoing sets forth Williams'
sole remedy and Cerent's sole liability under Cerent's warranty obligations in
Section 12.1.
12.3 Loss of Data. Cerent shall not be responsible for any data stored
------------
in any Product returned to Cerent for repairs, and Cerent shall have no
liability arising out of any loss of such data.
12.4 Disclaimer. EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN SECTION
----------
12.1, CERENT MAKES AND WILLIAMS RECEIVES NO WARRANTIES OR CONDITIONS ON THE
PRODUCTS, EXPRESS, IMPLIED, CONTRACTUAL OR STATUTORY, AND CERENT SPECIFICALLY
DISCLAIMS ALL OTHER WARRANTIES AND REPRESENTATIONS, INCLUDING WITHOUT LIMITATION
ANY IMPLIED WARRANTY OF MERCHANTABILITY, INFRINGEMENT OR FITNESS FOR A
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-11-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
PARTICULAR PURPOSE, ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR
TRADE PRACTICE, AND ANY WARRANTIES CONCERNING THE NON-INFRINGEMENT OF THIRD
PARTY RIGHTS.
12.5 Limitation of Liability. CERENT'S LIABILITY UNDER THE WARRANTY
-----------------------
SHALL BE LIMITED TO A REFUND OF WILLIAMS' PURCHASE PRICE. IN NO EVENT SHALL
CERENT BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE GOODS OR FOR ANY
SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES FOR BREACH OF WARRANTY.
13.0 INDEMNIFICATION
---------------
13.1 Indemnification. Cerent, at its own expense, shall indemnify,
---------------
defend and hold harmless Williams, its parents, subsidiaries, officers,
directors, employees, representatives and agents, against any third party action
or proceeding based upon a claim that the use of the Products in accordance with
this Agreement infringes a third party U.S. patent, trade secret or copyright,
and Cerent shall pay all settlements entered into and damages awarded against
Williams (including reasonable attorneys' fees) to the extent based on such
action; provided, however, that Williams shall (a) provide Cerent with prompt
-------- -------
written notice of any claim; (b) permit Cerent to assume and control the defense
of any action; and (c) not enter into any settlement or compromise of any claim
without Cerent's prior written consent. Cerent shall not be liable for any costs
or expenses incurred by Williams in connection with any third party action or
proceeding without Cerent's prior written authorization.
If the Products (including the Software), or any part thereof, are, or in
the opinion of Cerent may become, the subject of any claim, suit or proceeding
for infringement of any third party United States patent or copyright, or if it
is adjudicatively determined that the Products, or any part thereof, infringe
any United States patent or copyright, or if the sale or use of the Products, or
any part thereof, is, as a result, enjoined, then Cerent may, at its option and
expense either: (i) procure for Williams the right under such patent or
copyright to sell or use, as appropriate, the Products (including the Software)
or such part thereof; or (ii) replace the Products (including the Software) or
part thereof, with other suitable Products or parts; or (iii) suitably modify
the Products (including the Software) or part thereof; or (iv) if none of the
foregoing is reasonably available, accept return of the Products (including the
Software) or applicable part thereof and refund the aggregate payments paid
therefor by Williams as depreciated over a [*] period.
13.2 Limitation. Notwithstanding the provisions of Section 13.1 above,
----------
Cerent assumes no liability for any third party action or proceeding based upon
a claim: (i) arising out of the combination, operation or use of the Products
with hardware or software not furnished by Cerent to the extent such claim would
not have arisen had such combination, operation or use not occurred; or (ii) for
infringements involving the installation, modification or servicing of the
Products, or any part thereof, unless such installation, modification or
servicing was done by Cerent.
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-12-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
13.3 Cross Indemnity for Resale of Products. Williams agrees, at its own
--------------------------------------
expense, to indemnify, defend and hold harmless Cerent, its parent,
subsidiaries, officers, directors, employees, representatives and agents,
against any third party action or proceeding based upon a claim arising out of
the use of any Products resold by Williams more than five (5) years after
Williams' purchase thereof (excluding any claim for which Cerent is obligated to
indemnify Williams pursuant to Section 13.1), and Williams shall pay all
settlements entered into and damages awarded against Cerent (including
reasonable attorneys' fees) to the extent based on such action; provided,
--------
however, that Cerent shall (a) provide Williams with prompt written notice of
- -------
any claim; (b) permit Williams to assume and control the defense of any action;
and (c) not enter into any settlement or compromise of any claim without
Williams' prior written consent.
14.0 LIMITATION OF LIABILITY
-----------------------
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER OR TO ANY THIRD PARTY
FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY
KIND, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR
OTHERWISE, INCLUDING, WITHOUT LIMITATION, LOST PROFITS, BUSINESS INTERRUPTIONS,
LOSS OF DATA ARISING OUT OF THE PERFORMANCE OR NON-PERFORMANCE HEREUNDER OR ANY
USE OF OR FAILURE TO BE ABLE TO USE THE PRODUCTS, EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. EXCEPT FOR EACH PARTY'S OBLIGATIONS
UNDER SECTIONS 13.0 AND 17.17, THE LIABILITY OF ANY PARTY FOR DAMAGES OR ALLEGED
DAMAGES HEREUNDER, WHETHER 1N CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER
LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, THE AMOUNTS TO BE PAID BY
WILLIAMS TO CERENT HEREUNDER.
15.0 EXPORT CONTROLS
Williams agrees to fully comply with all applicable United States and EC or
other countries regulations and laws in effect now and hereinafter, including
compliance with all export controls on the distribution or dissemination of
Products, technology, and information related to and/or exchanged under this
Agreement, including but not limited to the Export Administration Act of 1979,
as amended, any successor legislation, and the Export Administration Regulations
issued by the Department of Commerce, the International Trade Administration,
and the Bureau of Export Administration. Williams shall not export, directly or
indirectly, any Products without first obtaining all required licenses and
approvals from appropriate government agencies. Williams' failure to-comply
strictly with this clause will constitute its material breach of this Agreement
and if not cured within [*] days may result in immediate termination for cause.
Cerent will provide Williams with required documents and reasonable assistance
with respect to export compliance. In addition, Williams agrees to notify Cerent
[*] days in advance of any proposed shipment of Products outside of the United
States for any reason. Cerent may, in its sole discretion, prohibit such
transfer of Products and technology outside of the United States by providing
Williams with timely notice. Notwithstanding anything to the contrary contained
herein, Williams agrees that unless prior authorization is obtained from the
Office of Export
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-13-
<PAGE>
Licensing, the parties shall not export, reexport, or transship, directly or
indirectly, to country groups Q, S, W, Y or Z (as defined in the Export
Administration Regulations), or Afghanistan or the People's Republic of China
(excluding Taiwan), the Products or any of the technical data disclosed
hereunder or the direct product of such technical data.
16.0 COMPLIANCE WITH LAWS
--------------------
16.1 Foreign Corrupt Practices Act. In conformity with the United
-----------------------------
States Foreign Corrupt Practices Act and with Cerent's established corporate
policies regarding foreign business practices, Williams and its employees and
agents shall not directly or indirectly make an offer, payment, promise to pay,
or authorize payment, or offer a gift, promise to give, or authorize the giving
of anything of value for the purpose of influencing an act or decision of an
official of any foreign, state or federal government (including a decision not
to act) or inducing such a person to use his influence to affect any such
governmental act or decision in order to assist Cerent in obtaining, retaining
or directing any such business.
16.2 Compliance with Applicable Laws. Each party shall comply with all
-------------------------------
laws and regulations applicable to each party with respect to the Products.
17.0 GENERAL PROVISIONS
------------------
17.1 Independent Contractors. The relationship of Cerent and Williams
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to: (i) give either party the
power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow either party to
create or assume any obligation on behalf of the other for any purpose
whatsoever.
17.2 Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived with the written consent of the parties or their respective successors
and assigns. Any amendment or waiver effected in accordance with this Section
17.2 shall be binding upon the parties and their respective successors and
assigns.
17.3 Entire Agreement. This Agreement, and all addenda and exhibits
----------------
hereto, all of which are incorporated by this reference, sets forth the entire
agreement and understanding of the parties relating to the subject matter herein
and merges all prior discussions between them. No modification of or amendment
to this Agreement, nor any waiver of any rights under this Agreement, shall be
effective unless in writing signed by both parties.
17.4 Governing Law and Jurisdiction. This Agreement shall be governed by
------------------------------
and construed under the laws of the State of New York, without reference to its
choice of law provisions.
17.5 Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be either (i) personally delivered, (ii) sent by
telecopy followed with written confirmation sent by mail, or (iii) sent by
prepaid registered or certified U.S. mail, return receipt requested, addressed
to the other party at the address shown at the beginning of this Agreement or at
such
-14-
<PAGE>
other address for which such party gives notice hereunder. Such notice shall be
deemed to have been given upon delivery.
17.6 Force Majeure. Each party shall be excused from performance and
-------------
shall not be liable for delay in performance under this Agreement, or any
Purchase Order(s), attributable in whole or in part to any cause beyond its
reasonable control, including but not limited to Acts of God, government
actions, war, civil disturbance, insurrection, sabotage, labor shortages or
disputes, failure or delay in delivery by Cerent's suppliers or subcontractors,
transportation difficulties, shortage of energy, raw materials or equipment. In
the event of any such delay the date of delivery shall, at the request of
Cerent, be deferred for a period equal to the time lost by reason of the delay.
In the event that any force majeure event continues for more than sixty (60)
days, the party not affected by the force majeure event shall be entitled to
terminate this Agreement or any affected Purchase Order(s). The Product volumes
in any Purchase Order terminated by Williams pursuant to this Section 17.6 shall
count towards Williams' minimum purchase commitment in Section 2.1.
17.7 Nonassignability and Binding Effect. This Agreement may not be
-----------------------------------
assigned by either party, by operation of law or otherwise, without the express
prior written consent of the other party (which consent shall not be
unreasonably withheld), except that no such consent shall be required in
connection with any merger, consolidation, or to an acquiror of all or
substantially all of such party's business. This Agreement shall be binding
upon, and inure to the benefit of, the permitted successors and assigns of each
party. Any purported assignment in violation of this Section shall be null and
void.
17.8 Legal Expenses. The prevailing party in any legal action brought by
--------------
one party against the other and arising out of this Agreement shall be entitled,
in addition to any other rights and remedies it may have, to reimbursement for
its expenses, including court costs and reasonable attorneys' fees.
17.9 Dollars. All references to "dollars", "U.S. $" or "$" shall mean
-------
United States dollars.
17.10 Language. This Agreement is in the English Language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties. All correspondence, notices, orders, claims, suits and other
communication between the parties shall be written or conducted in English.
17.11 Section Headings. The section headings contained in this Agreement
----------------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17.12 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
17.13 Severability. If any term or provision of the Agreement shall be
------------
found to be illegal or unenforceable therein, this Agreement shall remain in
full force and effect and such term or
-15-
<PAGE>
provision shall be deemed stricken and the parties will endeavor to substitute
similar language that is as consistent as possible with the original intent.
17.14 Year 2000 Warranty. Cerent warrants that the Products will be "Year
------------------
2000 Compliant" (defined below). This warranty is perpetual and
shall survive the expiration of any other warranty period or the
termination of this Agreement. For purposes of this Agreement, the
following definitions shall apply:
"Date Data" means any data, formula, algorithm, process, input or
output which includes, calculates or represents a date, a reference
to a date or a representative of a date;
"Year 2000 Compliant" means:
1. the functions, calculations, and other computing processes of
the Product (collectively, "Processes") perform in a consistent
manner regardless of the date in time on which the Processes
are actually performed and regardless of the Date Data input to
the Product, whether before, on, during or after January 1,
2000 and whether or not the Date Data is affected by leap
years;
2. the Product accepts, calculates, compares, sorts, extracts,
sequences, and otherwise processes Date Data, and returns and
displays Date Data, in a consistent manner regardless of the
dates used in Date Data, whether before, on, during or after
January 1, 2000;
3. the Product will function without interruptions caused by the
date in time on which the Processes are actually performed or
by the Date Data input to the Product, whether before, on,
during or after January 1, 2000;
4. the Product accepts and responds to two-digit year-date input
in a manner that resolves any ambiguities as to the century in
a defined and predetermined manner, and
5. the Product stores and displays Date Data in ways that are
unambiguous as to the determination of the century.
6. no Date Data will cause the Product to perform an abnormally
ending routine or function within the Processes or generate
incorrect value or invalid results.
Upon Williams' written request, Cerent agrees to participate in reasonable
tests of the Product at no charge to determine Year 2000 Compliance. Cerent
shall notify Williams immediately of the results of any test or any claim or
other information that indicates the Product is not Year 2000 Compliant.
To the extent that it is determined by Cerent or Williams, in its
reasonable discretion, that the Product is not Year 2000 compliant, Cerent
agrees to use its best efforts to immediately formulate and implement a written
plan of action to modify the Product such that it is Year 2000 compliant. As
part of any such plan, Cerent shall, at its expense, commit the resources
necessary to correct any nonperformance, error or defect in a timely manner
commensurate with the nature of harm caused by nonperformance, error or defect,
and shall deliver the correction to Williams promptly.
-16-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
17.15 Audit. During the Term and for a period of [*] thereafter, Cerent
-----
agrees to keep such books and records (which books and records shall be
maintained on a consistent basis and substantially in accordance with generally
accepted accounting principles) as necessary to comply with Section 9.4.
Williams shall be entitled, no more than once per year during the Term, upon not
less than [*] prior notice to Cerent and only during Cerent's normal business
hours, to have a certified public accountant from a Big Four accounting firm
audit such books and records to determine compliance with Section 9.4. The
auditor shall execute a confidentiality agreement in a form acceptable to Cerent
and shall not disclose any confidential information to Williams or any third
party except to the extent necessary to confirm Cerent's compliance with Section
9.4. All costs of such audit shall be borne by Williams.
17.16 Insurance. Cerent will carry or cause to be carried and maintained
---------
in force throughout the entire term of this Agreement insurance coverages as
described in paragraphs (A) through (C) below. The limits set forth below are
minimum limits and will not be construed to limit Cerent's liability. All costs
and deductible amounts will be for the sole account of Cerent.
(A) Worker's Compensation insurance complying with the laws of the State or
States having jurisdiction over each employee, whether or not Cerent 'is
required by such laws to maintain such insurance, and Employer's Liability
with limits of [*] each accident, [*] disease each employee, and [*]
disease policy limit. If work is to be performed in Nevada, North Dakota,
Ohio, Washington, Wyoming or West Virginia, Cerent will participate in the
appropriate state fund(s) to cover all eligible employees and provide a
stop gap endorsement.
(B) Commercial or Comprehensive General Liability insurance on an occurrence
form with a combined single limit of [*] each occurrence, and annual
aggregates of [*] for bodily injury and property damage, including coverage
for blanket contractual liability, broad form property damage, personal
injury liability, independent contractors, products/completed operations,
and when applicable the explosion, collapse and underground exclusion will
be deleted.
(C) Automobile Liability insurance with a combined single limit of [*] each
occurrence for bodily injury and property damage to include coverage for
all owned, non-owned, and hired vehicles.
Under the policies described in (B) and (C) above, Williams will be named as
additional insurers as respects Cerent's operations and as respects any work
performed under this contract. Any costs associated with naming Williams as an
additional insure shall be borne by Williams.
The policies described in (B) and (C) above will include the following "other
insurance" amendment: "This insurance is primary insurance with respect to
Williams and any other insurance maintained by Williams is excess and not
contributory with this insurance."
Non-renewal or cancellation of policies described above will be effective only
after written notice is received by Williams from the insurance company [*] in
advance of any such non-
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-17-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
renewal or cancellation. Prior to commencing the work hereunder, Cerent will
deliver to Williams certificates of insurance on an Accord 25 or 25S form
evidencing the existence of the insurance coverage required above.
In the event of a loss or claim by Williams arising out of or in connection with
this contract, Cerent agrees, upon request of Williams, to submit a copy of its
insurance policies for inspection by Williams.
Except for Williams' obligations under Section 17.17, Williams will not insure
nor be responsible for any loss or damage (including loss of use thereof),
regardless of cause, to any property owned, leased or borrowed by Cerent (or its
employees, servants or agents) on any Williams' facility.
17.17 Negligence Indemnity. Each party will defend, indemnify, and hold
--------------------
the other harmless, from and against any and all claims, demands, losses,
damages, orders, judgments, or decrees (collectively the "Loss") for personal
injury including death and/or property damage to the extent the Loss is caused
by the negligence or willful misconduct of the indemnitor; provided, however,
-------- -------
that the indemnitee (a) provide the indemnitor with prompt written notice of any
claim; (b) permit the indemnitor to assume and control the defense of any
action; and (c) not enter into any settlement or compromise of any claim without
the indemnitee's prior written consent.
17.18 Cerent agrees that it will not use any funds received under this
Agreement for illegal or otherwise improper purposes. An improper purpose would
include, for example, payment of commissions, fees or rebates to an employee of
Williams and/or favoring such employee with gifts of entertainment of
significant cost or value. Cerent will provide reasonable cooperation to
Williams to assist Williams in determining compliance with this Section 17.18.
17.19 Joint Marketing Activities. Cerent and Williams agree to
--------------------------
participate jointly in public announcements and marketing concerning Williams'
next generation architecture and Cerent's 454 Product offerings. Such
announcements and publicity may include joint press releases, joint promotional
activities (including press interviews, co-presenting at industry conferences
and co-authoring of technical papers), and use of each Party's corporate logo on
collateral materials (including web pages, white papers and presentation
material). Cerent and Williams will each contribute an amount not to exceed [*]
of Williams' purchases of Products under this Agreement for joint marketing
activities. All such joint marketing activities will be subject to mutual
agreement in writing, and each party will present the other with proposals for
such joint marketing activities (including cost estimates) prior to making any
commitments to third parties. Upon approval by a party of the other's joint
marketing proposal, the originating party shall invoice the other party for its
share of the expenses of such proposal (payable net 30 days). Notwithstanding
the foregoing, neither Party will make a public announcement or issue joint
marketing material or press releases concerning such matters without having made
available to the other Party for review and comment the proposed text of such
announcement, press release or material, with approval not to be unreasonably
withheld or delayed.
[Signature Page Follows]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
duly authorized officers or representatives as of the date first above written.
WILLIAMS COMMUNICATIONS, INC., CERENT CORPORATION,
a Delaware corporation a Delaware corporation
By /s/ [Signature Illegible]^^ By /s/ Terence P. Brown
-------------------------------- -----------------------------
Title Vice President Engineering Title Vice President
----------------------------- --------------------------
and Construction
----------------------------
-19-
<PAGE>
[CONFIDENTIAL TREATMENT REQEUSTED]
EXHIBIT A
PRICE LIST
----------
Williams Price List for Cerent Equipment
March 19,
1999
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT B
WARRANT
-------
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SUCH ACT.
WARRANT TO PURCHASE COMMON STOCK
OF
CERENT CORPORATION
Void after December 31, 2004
This Warrant is issued to Williams Communications, Inc., d/b/a Williams
Networks ("Holder"), by Cerent Corporation, a Delaware corporation (the
"Company"), as of April 23, 1999 (the "Warrant Issue Date"). This Warrant is
issued in connection with the Purchase Agreement of even date herewith between
the parties hereto (the "Purchase Agreement") for a purchase price of $10.00
plus the obligations of Holder as set forth in the Purchase Agreement.
1. Payment Received of Shares. Subject to the terms and conditions
--------------------------
hereinafter set forth and the particular terms of the Purchase Agreement
referenced herein, the Holder is entitled, upon surrender of this Warrant at the
principal office of the Company (or at such other place as the Company shall
notify the Holder hereof in writing), to purchase from the Company up to that
aggregate number of fully paid and nonassessable shares of Common Stock of the
Company as indicated below:
(a) 25,000 shares of Common Stock for a minimum of [*] in Purchases (as
defined below) in 1999;
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
(b) 50,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999;
(c) 75,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999;
(d) 100,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999;
(e) 125,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999;
(f) 150,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999;
(g) 175,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999; or
(h) 200,000 shares of Common Stock for a minimum of [*] in Purchases
(as defined below) in 1999.
The number of shares of Common Stock issuable to Holder pursuant to this Section
1 (the "Shares") shall be based upon the total dollar amount of: (i) Products
shipped to Williams during calendar year 1999 (net of any applicable discounts
or returns); and (ii) Products ordered by Williams on or before December 1, 1999
that Cerent is unable to fulfill, provided such unfulfilled orders are within
the Product volumes set forth in Williams' rolling [*] forecast provided to
Cerent at the beginning of the fourth quarter 1999 (pursuant to Section 8.1 of
the Purchase Agreement). Such product shipments and orders described in subparts
(i)and (ii) shall be referred to herein as the "Purchases". The Shares shall be
subject to adjustment pursuant to Section 8 hereof and upon determination of the
number of Shares, shall thereafter become exercisable in accordance with Section
3 of this Agreement.
2. Exercise Price. The purchase price for the Shares shall be $6.50 per
--------------
Share. Such purchase price shall be subject to adjustment pursuant to Section 8
hereof (such price, as adjusted from time to time, is herein referred to as the
"Exercise Price").
3. Exercise Periods. Subject to Section 1 of this Agreement, this Warrant
----------------
shall be exercisable between the date that it becomes exercisable hereunder and
5:00 p.m. (Central Standard Time) on December 31, 2004.
4. Method of Exercise. So long as this Warrant remains outstanding and
------------------
exercisable in accordance with Section 3 above, the Holder may exercise, in
whole or in part, and from time to time in as many separate transactions as
Holder may determine in its sole discretion, the purchase rights evidenced
hereby. Such exercise shall be effected by:
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
(a) the surrender of the Warrant, together with a duly executed copy of the
form of Notice of Exercise attached hereto to the Secretary of the Company
at its principal offices; and
(b) the payment to the Company of an amount equal to the aggregate Exercise
Price for the number of Shares being purchased.
5. Net Exercise. In lieu of exercising this Warrant pursuant to Section
------------
4, the Holder may elect to receive, without the payment by the Holder of any
additional consideration, shares of Common Stock equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with notice of such election, in
which event the Company shall issue to the Holder hereof a number of shares of
Common Stock computed using the following formula:
Y(A - B)
-------
X= A
Where: X = The number of shares of Common Stock to be issued to the
Holder pursuant to this net exercise;
Y = The number of Shares in respect of which the net issue
election is made;
A = The fair market value (defined below) of one share of the
Common Stock at the time the Holder delivers its notice of net
issue election;
B = The Exercise Price (as adjusted to the date of delivery of the
Holder's notice of net issuance election).
For purposes of this Section 5, the "fair market value" of one share of Common
Stock as of a particular date shall be determined upon agreement by parties but
if they cannot so agree than by an independent appraiser to be mutually agreed
upon by the parties, except that in the event that the Common Stock is traded on
a nationally recognized exchange, the fair market value shall be the closing
price on the date of delivery to the Company of the Holder's notice of net issue
election. As long as this Warrant remains outstanding and exercisable in
accordance with Section 3 above, the Holder may exercise, in whole or in part,
and from time to time in as many separate transactions as Holder may determine
in its sole discretion, the net exercise rights evidenced hereby.
6. Certificates for Shares. Upon the exercise of the purchase rights
-----------------------
evidenced by this Warrant, one or more certificates for the number of Shares so
purchased shall be issued to the Holder as soon as practicable thereafter (with
appropriate restrictive legends, if applicable), and in any event within thirty
(30) days of the delivery of the Holder's subscription notice. Upon
<PAGE>
Holder's surrender of this Warrant to the Company pursuant to Holder's exercise
of any purchase rights or net exercise rights under this Warrant, the Company
shall reissue this Warrant to the Holder to evidence any remaining rights which
Holder may have under this Warrant.
7. Issuance of Shares. The Company covenants that the Shares, when issued
------------------
pursuant to the exercise of this Warrant, will be duly authorized and validly
issued, fully paid and nonassessable and free from all taxes (other than
Holder's income taxes), liens, encumbrances and charges.
8. Adjustment of Exercise Price and Number of Shares. The number of and
-------------------------------------------------
kind of securities purchasable upon exercise of this Warrant and the Exercise
Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company
----------------------------------------------
shall at any time prior to the expiration of this Warrant subdivide its Common
Stock, by split-up or otherwise, or combine its Common Stock, or issue
additional shares of its Common Stock as a dividend with respect to any shares
of its Common Stock, the number of Shares issuable on the exercise of this
Warrant shall forthwith be proportionately increased in the case of a
subdivision or stock dividend, or proportionately decreased in the case of a
combination. Appropriate adjustments shall also be made to the purchase price
payable per share, but the aggregate purchase price payable for the total number
of Shares purchasable under this Warrant (as adjusted) shall remain the same.
Any adjustment under this Section 8(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective, or as of
the record date of such dividend, or in the event that no record date is fixed,
upon the making of such dividend.
(b) Reclassification, Reorganization, Consolidation, Merger and Sale
----------------------------------------------------------------
of Assets. In case of any reclassification of the capital stock of the Company,
- ---------
capital reorganization (other than as a result of a subdivision, combination, or
stock dividend provided for in Section 8(a) above), consolidation, merger with
or into another corporation (other than a consolidation or merger which the
Company is the surviving entity) or sale of all or substantially all of the
Company's assets ("Merger Event"), then, as part of such Merger Event, lawful
provision shall be made, so that the Holder shall have the right at any time
prior to the expiration of this Warrant to purchase, at a total price equal to
that payable upon the exercise of this Warrant, the kind and amount of shares of
stock and other securities and property receivable in connection with such
Merger Event as were purchasable by the Holder immediately prior to such Merger
Event. In any such case appropriate provisions shall be made with respect to the
rights and interest of the Holder so that the provisions hereof shall thereafter
be applicable with respect to any shares of stock or other securities and
property deliverable upon exercise hereof, and appropriate adjustments shall be
made to the purchase price per share payable hereunder, provided the aggregate
purchase price shall remain the same.
(c) Notice of Adjustment. When any adjustment is required to be made
--------------------
in the number or kind of shares purchasable upon exercise of the Warrant, or in
the Exercise Price, the Company shall promptly notify the Holder of such event
and of the number of shares of
<PAGE>
Common Stock or other securities or property thereafter purchasable upon
exercise of this Warrant.
9. Representations and Warranties of the Holder.
(a) Investment Intent. Holder hereby warrants and represents that it
-----------------
is acquiring this Warrant and any Shares which may be issued upon exercise of
this Warrant which are not registered under the Securities Act of 1933 (the
"Act") or for which an exemption from registration does not apply, for Holder's
own account and not with a view to their resale or distribution.
(b) Exempt from Registration. Holder acknowledges that this Warrant
------------------------
has not been registered under the Act.
(c) Investment Experience. In connection with the investment
---------------------
representations made herein Holder represents that it has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment, has the ability to bear the economic risks
of its investment, and has been furnished with and has had access to such
information as it has requested and deemed appropriate to its investment
decision.
(d) Restricted Securities. Holder hereby confirms that it has been
---------------------
informed that this Warrant, and the Shares issued upon exercise of this Warrant,
are restricted securities under the Act and may not be resold or transferred
unless the securities to be resold are first registered under the federal
securities laws or unless an exemption from such registration is available.
Accordingly, Holder hereby acknowledges that it is prepared to hold this
Warrant, and the Shares issued upon exercise of this Warrant, for an indefinite
period and that Holder is aware that Rule 144 of the SEC issued under the Act is
not presently available to exempt the issuance of this Warrant from the
registration requirements of the Act.
(e) Disposition of Shares. Holder hereby agrees that it shall make no
---------------------
disposition of this Warrant, or the Shares issued upon exercise of this Warrant.
to any parent, affiliate or subsidiary of Holder, or to a purchaser of all or
substantially all of Holder's assets, unless and until:
(i) Holder shall have complied with all requirements of this
Warrant applicable to the disposition; and
(ii) Holder shall have provided the Company with satisfactory
written assurances, that (1) the proposed disposition does not require
registration under the Act, or (2) all appropriate action necessary for
compliance with the registration requirements of the Act or of any exemption
from registration available under the Act (including Rule 144) has been taken.
(f) Restrictive Legends. Holder hereby confirms that the Company has
-------------------
informed the Holder that the Company, in order to reflect the restrictions on
disposition of the Shares issued upon exercise of this Warrant, the Company
shall endorse the stock certificates for the Shares with the following
restrictive legend:
<PAGE>
The shares represented by this certificate have not been registered under
the Securities Act of 1933. The shares may not be sold or offered for sale
in the absence of (a) an effective registration statement for the shares
under such Act. (b) a 'no action' letter of the Securities and Exchange
Commission with respect to such sale or offer, or (c) satisfactory
assurances to the Company that registration under such Act is not required
with respect to such sale or offer .
10. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Holder as follows:
(a) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant. and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens, pledges and
encumbrances except for restrictions on transfer provided for herein or under
applicable federal and state securities laws. The Company further represents and
warrants that there are no voting trusts, stockholder agreements, proxies or
other agreements in effect which relate to voting or transfer of the Shares. The
Shares are not and will not be. during the term of this Warrant, subject to any
preemptive rights or any rights of first refusal that have not been properly
waived or complied with.
(b) The Company will reserve for issuance pursuant to this Warrant a sufficient
number of shares of the Common Stock of the Company, and the Company
covenants that it shall at all times cause to be reserved and kept
available out of its authorized and unissued shares of Common Stock of the
Company such number of shares of Common Stock as will be sufficient to
permit the exercise in full of this Warrant.
(c) Exemption from Registration. Assuming the accuracy of the
---------------------------
representations and warranties of the Holder contained herein, the Company
represents and warrants that the offer, sale and issuance of this Warrant to
Holder, and the issuance of the Shares to Holder under this Warrant, are exempt
from registration of the Act pursuant to Section 4(2) of the Act or Rule 506
promulgated by the SEC under the Act. The Company shall seek and obtain all
necessary permits, authorizations, orders of exemption and other documents as
may be necessary or appropriate to ensure and to evidence such exemption under
applicable state and federal laws.
(d) Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized and validly existing under the laws of the State of
Delaware. The Company has full power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted. The
Company is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions in the aggregate in which
the nature of its activities and of its properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions, in the aggregate,
in which failure to do so would not have a material adverse effect on the
Company or its business.
<PAGE>
(e) Capitalization. The authorized capital stock of the Company,
--------------
immediately prior to the Closing, consists of 50,000,000 authorized shares of
Common Stock. 9,677,917 shares of which are issued and outstanding and 585.000
of which are reserved for issuance under outstanding stock options and warrants
other than this Warrant. All issued and outstanding shares of the Company's
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with all applicable state and
Federal laws concerning the issuance of securities.
(f) Authorization: Binding Obligations. All corporate action on
----------------------------------
the part of the Company, its officers, directors and shareholders necessary for
the authorization, execution and delivery of this Warrant, and the sale and
issuance of the Shares pursuant hereto, and for the performance of the Company's
obligations hereunder has been taken. This Warrant, when executed and delivered,
is a valid and binding obligation of the Company, enforceable in accordance with
its terms.
(g) Registration Rights. Except for the registration rights granted
-------------------
under the Company's Investors' Rights Agreement, which shall be executed by
Holder on even date herewith, the Company is presently not under any obligation,
and has not granted any rights, to register any of the Company's presently
outstanding securities or any of its securities that may hereafter be issued. No
obligation, covenant or representation under this Agreement is intended to
conflict with any obligation, covenant or representation under the Investors'
Rights Agreement, and in the event of any such conflict, the Investors' Rights
Agreement shall control.
(h) Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any term of its Certificate of Incorporation or Bylaws
or in any material respect of any provision of any mortgage, indenture,
agreement, instrument or contract to which it is a party or by which it or its
property is bound or, to the best of its knowledge, of any federal, state or
local judgment, order, writ, decree, statute, rule or regulation applicable to
the Company where such violation or default would, or could reasonably be
expected to, materially and adversely affect the Company. The execution,
delivery, and performance of and compliance with this Warrant, and the issuance
and sale of the Shares pursuant hereto, will not result in any such violation,
result in a conflict with or constitute either a default under any such
provision or an event that results in the creation of any lien, charge, or
encumbrance of more than $100,000 upon any assets of the Company or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations, or any of its assets or properties.
(i) Litigation. There is no action, suit, proceeding or
----------
investigation pending or currently threatened against the Company which (i)
questions the validity of this Warrant, or the right of the Company to enter
into it, or (ii) to consummate the transactions contemplated hereby. The Company
is not a party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality. There
is no action, suit, proceeding or investigation by the Company currently pending
or which the Company intends to initiate.
<PAGE>
(j) Tax Returns and Payments. The Company has filed all tax returns
------------------------
(federal state and local) required to be filed by it. All taxes shown to be due
and payable on such returns, any assessments imposed, and all other taxes due
and payable by the Company have been paid or will be paid prior to the time they
become delinquent, except where the failure thereof would not have a material
and adverse effect on the financial condition, operations or prospects of the
Company. The Company has not elected pursuant to the Internal Revenue Code of
1986, as amended ("Code"), to be treated as a collapsible corporation or a
Subchapter S corporation pursuant to Section 341(f) or Section 1362(a) of the
Code, nor has it made any other elections pursuant to the Code (other than
elections which relate solely to methods of accounting, depreciation or
amortization) which would have a material effect on the Company, its financial
condition, its business as presently conducted or proposed to be conducted or on
any of its properties or material assets.
(k) Compliance with Laws. The Company has complied in all material
--------------------
respects with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business and ownership of its
properties. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Warrant, and the issuance of the Shares, except such as have been duly and
validly obtained or filed, or with respect to any filings that must be made
after the Closing, except such as will be filed in a timely manner.
(1) Disclosure. This Warrant (including the schedules and exhibits
----------
hereto), and any other documents, certificates, instruments or other written
materials or information furnished to Holder by or on behalf of the Company in
connection with the transactions contemplated by this Warrant do not contain any
untrue statement of a material fact or omit to state a material fact necessary,
in order to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading. There is no fact known to
the Company which is materially adverse to the business operations or financial
performance of Company which has not been furnished to Holder or set forth or
reflected in this Warrant, or the other documents, certificates, and instruments
referred to herein and delivered to Holder by or on behalf of the Company in
connection with the transactions contemplated by this Warrant.
(m) Compliance: Governmental Authorizations and Regulations. The
--------------------------------------------------------
Company is in compliance with each applicable law of a governmental entity and
has all material licenses, franchises, permits, certificates and other
authorizations from all federal, state, municipal and other governmental
authorities having jurisdiction over its business. All such licenses,
franchises, permits, certificates and other governmental authorizations held by
the Company, in respect of its business are valid and sufficient to permit the
Company to conduct its operations as currently used or conducted except where
the failure to have such licenses, franchises, permits, certificates or other
governmental authorizations would not have a material adverse effect, and there
are no violations of any such licenses, franchises, permits, certificates and
other governmental authorizations, nor are there any proceedings, to the
knowledge of the
<PAGE>
Company, pending or threatened against the Company to revoke or limit any such
license, franchise, permit, certificate or other governmental authorization.
11. No Fractional Shares or Scrip No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares the Company shall make a cash
payment therefor to the Holder on the basis of the Exercise Price then in
effect.
12. No Stockholder Rights.
---------------------
(a) Notwithstanding anything in this Agreement or the Investors' Rights
Agreement. prior to exercise of this Warrant, the Holder shall not be
entitled to any rights of a stockholder with respect to the Shares,
including (without limitation) the right to vote such Shares receive
dividends or other distributions thereon, exercise preemptive rights or be
notified of stockholder meetings, and such holder shall not be entitled to
any notice or other communication concerning the business or the Company.
However, nothing in this Section 12 shall limit the right of the Holder to
be provided the Notices required under this Warrant.
(b) If at any time a Change of Control (as defined below) is submitted for
approval to the stockholders of the Company and the Holder is at such time
a record holder of Shares, the Holder shall vote all such Shares then held
by the Holder in favor of such Change of Control if the holders of at least
a majority of the outstanding shares of Common Stock and Preferred Stock (
excluding the Shares) vote in favor of such Change of Control. For purpose
of the foregoing, a "Change of Control" shall mean the closing of the
acquisition of the Company by another entity by means of merger,
consolidation or other transaction or series of related transactions, in
which at least 50% of the voting power of the Company is transferred.
13. Transfers of Warrant. This Warrant and all rights hereunder are not
--------------------
transferable, except to successors or assigns of Holder, which successors or
assigns shall be acceptable to the Company, and such transfer shall be subject
to compliance with applicable federal and state securities laws. In the event of
the Company's acceptance, the transfer of the Warrant shall be recorded on the
books-of the Company upon the surrender of this Warrant, properly endorsed, to
the Company at its principal offices, and the payment to the Company of all
transfer taxes and other governmental charges imposed on such transfer. This
Warrant may not be transferred in parts.
14. Successors and Assigns. The terms and provisions of this Warrant
----------------------
shall inure to the benefit of, and be binding upon, the Company and the Holders
hereof and their respective successors and assigns.
15. Amendments and Waivers. Any term of this Warrant may be amended and
----------------------
the observance of any term of this Warrant may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company
<PAGE>
and the Holder. Any waiver or amendment effected in accordance with this Section
15 shall be binding upon each holder of any Shares purchased under this Warrant
at the time outstanding (including securities into which such Shares have been
converted), each future holder of all such Shares, and the Company.
16. Notices. All notices required under this Warrant shall be given or
-------
made for all purposes (i) by personal delivery, (ii) by facsimile, provided that
sender obtains a confirmation receipt that the communication was successfully
sent to the applicable facsimile number; (iii) by professional overnight courier
service, or (iv) by registered or certified mail, all postage prepaid. All such
notices shall be effective upon delivery. Notices to the Company shall be sent
to the principal office of the Company (or at such other place as the Company
shall notify the Holder hereof in writing). Notices to the Holder shall be sent
to the address of the Holder on the books of the Company (or at such other place
as the Holder shall notify the Company hereof in writing).
17. Captions. The section and subsection headings of this Warrant are
--------
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
18. Governing Law. This Warrant shall be governed by the laws of the
-------------
State of Delaware as applied to agreements among Delaware residents made and to
be performed entirely within the State of Delaware.
19. Entire Agreement. This Warrant, together with the Investors' Rights
----------------
Agreement and other documents delivered pursuant hereto, and the specific
references herein to the Purchase Agreement constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof. Nothing in this Warrant, whether expressed or implied, is
intended to convey upon any party, other than the parties hereto, and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Warrant except as expressly provided
herein.
20. Severability. In case any provision of this Warrant shall be invalid,
------------
illegal, or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
21. Delays and Omissions. It is agreed that no delay or omission to
--------------------
exercise any right, power or remedy accruing to either party shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
breach, default, noncompliance, nor any acquiescence therein, or of or in any
similar breach, default or noncompliance thereafter occurring.
22. Counterparts. This Warrant may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
<PAGE>
IN WITNESS WHEREOF the Company has caused this Warrant to be executed by an
officer thereunto duly authorized.
CERENT CORPORATION
By: /s/ Terence P. Brown
--------------------
<PAGE>
NOTICE OF EXERCISE
------------------
To: Cerent Corporation
The undersigned hereby elects to [check applicable subsection]:
_______ (a) Purchase _____________ shares of Common Stock of Cerent
Corporation pursuant to the terms of the attached Warrant and
payment of the Exercise Price per share required under such
Warrant accompanies this notice:
OR
_______ (b) Exercise the attached Warrant for [all of the shares] [______ of
the shares] [cross out inapplicable phrase] purchasable under the
Warrant pursuant to the net exercise provisions of such Warrant.
The undersigned hereby represents and warrants that the undersigned is
acquiring such shares for its own account for investment purposes only, and not
for resale or with a view to distribution of such shares or any part thereof.
WARRANT HOLDER:
_____________________________________
By:__________________________________
[NAME]
Address: _____________________________________
_____________________________________
Date:_____________________
Name in which shares should be registered:
_________________________________________
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT C
TECHNICAL SUPPORT
-----------------
[LOGO OF CERENT]
Technical Support Policy
Toll Free I-877-3CERENT
Cerent is committed to providing our customers with the best customer care in
the industry. In keeping with this philosophy, Cerent has established a 24-hour,
7 day per week Technical Assistance Center (TAC). Cerent's TAC is staffed with
qualified technicians to aid in your service needs.
TAC was instituted to deliver instant support to our customers regardless of the
situation. Customers within their warranty periods and those with extended
warranties receive 24 hour, 7 day per week technical assistance at no charge.
There is a [*] charge for customers who have exceeded their warranty
period.
Cerent uses an advanced database and tracking system to record customer contact
information and any technical information related to the inquiry. This database
aids Cerent in monitoring potential problem systems, identify customers with
repeat problems and ensure proactive resolution of customer faults. In this way,
Cerent is able to use this statistical data to track failure types in the field
and take corrective action to improve the reliability and functionality of the
Cerent 454.
All calls to the TAC will receive immediate and direct attention. When a call is
received, the attendant will determine the severity and type of problem. The
customer call is assigned and managed by a technical support engineer for
attention and resolution.
Cerent is committed to the following procedures:
During normal business hours, 8:00 am to 7:00pm Central Standard Time, a
qualified technician will be available for immediate contact on urgent problems.
Outside of normal business hours, an attendant will ensure a qualified
technician responds to the customer call within 1 hour.
For technical problems that are not of an urgent nature, a qualified technician
will respond to the customer call within [*] during normal business hours
and within the first hour of the next business day for customer calls outside of
normal business hours.
If a severe problem goes unresolved for an [*] period, it is Cerent's policy to
have a qualified technician on-site within [*] to help resolve the situation.
Cerent also provides on-site field support at the rate of [*], plus travel and
living.
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT D
REPAIR AND RETURN
-----------------
[LOGO OF CERENT]
Repair and Return Policy
Cerent Corporation offers a repair and return policy to ensure prompt, efficient
service for damaged or malfunctioning equipment. All failed equipment processed
through Cerent's repair facility is repaired and upgraded, if required, to the
most current version possible. Equipment purchased from Cerent is covered under
various warranty plans. Check with the service administrator to determine the
type and duration of the warranty plan for a specific system.
Equipment failures must be reported to the Technical Assistance Center (TAC)in
Petaluma, CA. TAC can be contacted during normal working hours, 8:00 AM to 7:00
PM Central Standard Time. The phone number is:
Toll Free 1-877-3CERENT
In the event of an emergency failure, Buyer is to call the Cerent 24-hour
Technical Assistance Center (TAC) at 1-877-3CERENT. The technician will assign a
Return Maintenance Authorization (RMA) number to each failed piece of equipment.
The RMA number is a unique number and should be recorded. The RMA number can be
used when communicating with Cerent order administration and repair personnel to
determine repair status and return schedules. When preparing a RMA, please have
the following information available: Purchase Order number, Serial number of the
card, Equipment ID (e.g. OC-12 IR, DS3-12, etc.), reason for return and return
to address.
Customer is to return failed cards to:
Cerent Corporation
1450 North McDowell Boulevard
Petaluma, CA 94954
Attn: Repair Service Department
RMA No. __________
There is no charge for repair and return for equipment under warranty or covered
by extended warranty agreements with normal turn around. Failed equipment will
be repaired and returned with shipment from Cerent to the customer within
[*] of receipt. There is a [*] for returned equipment deemed to be without
trouble.
Cerent offers two additional levels of repair and return service as follows:
Emergency priority: A replacement unit will be shipped and be on-site within 24
- ------------------
hours of receipt of the failure notice. This service is subject to a [*]
per unit. Failed equipment must be returned within [*] or the
customer will be invoiced at [*] of the current list price.
Customer Requested Priority: Failed equipment will be repaired and returned
- ---------------------------
within three business days of receipt of the failed equipment. This service is
subject to a [*]. Failed equipment must be returned within [*] or the customer
will be invoiced at [*] of the current list price.
Out of Warranty Coverage: Customers that request out of warranty repair and
- ------------------------
return will pay [*] of the purchase price of a new part plus emergency or
customer requested priority charges as described above to have the equipment
repaired and returned. Repaired equipment has a [*] warranty.
Contact Cerent Order Administration department for a list of repair and return
costs.
To facilitate the repair and return process, Cerent's support engineer may
request that written information accompany the equipment shipped to the Cerent
Repair Service Department. All charges for shipping to Cerent's facility will be
the responsibility of the customer. Cerent is responsible for shipping costs
when returning boards.
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
Exhibit E
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
Exhibit F
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[LOGO OF WILLIAMS]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
1 OVERVIEW
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
AMENDMENT TO PURCHASE AGREEMENT BETWEEN CERENT CORPORATION AND WILLIAMS
-----------------------------------------------------------------------
COMMUNICATIONS, INC.
--------------------
This Amendment to Purchase Agreement between Cerent Corporation, a Delaware
corporation ("Cerent") and Williams Communications, Inc. ("Williams") (the
------ --------
"Amendment") is made as of the 28th day of April, 1999 between Cerent and
---------
Williams.
RECITALS
--------
On April 23, 1999, Cerent and Williams entered into a Purchase Agreement
(the "Purchase Agreement") whereby Cerent agreed to issue warrants for the
------------------
purchase of common stock of Cerent (the "Warrants") in connection with products
--------
shipped to Williams during the calendar year 1999.
The parties wish to amend the Purchase Agreement, effective as of the date
set forth above, so as to set the number of shares of common stock of Cerent
issuable to Williams by Cerent under the Purchase Agreement and Warrant at
100,000, effective and issuable as of the date set forth above.
Section 17.2 of the Purchase Agreement allows the parties to amend the
Purchase Agreement with the written consent of the parties.
AGREEMENT
---------
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. WARRANT: Section 3.0 of the Purchase Agreement is hereby amended and
-------
restated to read in its entirety as follows:
"3.0. WARRANT. In connection with the commercial obligations set
-------
forth in this Agreement, Cerent shall grant Williams, for a purchase price of
$10.00, a warrant for the purchase of 100,000 shares of common stock of Cerent,
exercisable at $6.50 per share until December 31, 2004 (the "Warrant"). The
number of shares of common stock of Cerent exercisable by Williams pursuant to
the Warrant, and the purchase price for such shares, shall be subject to
adjustment in accordance with the terms therein. The terms and conditions of the
Warrant shall be those set forth in the Warrant, a copy of which is attached
hereto as Exhibit B."
2. EXHIBIT B: Exhibit B of the Purchase Agreement is hereby amended and
---------
restated to read in its entirety as attached to this Amendment.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
signed by duly authorized officers or representatives as of the date first above
written.
WILLIAMS COMMUNICATIONS, INC., CERENT CORPORATION,
a Delaware corporation a Delaware corporation
By /s/ WILLIAMS COMMUNICATIONS, INC. By /s/ CERENT CORPORATION
--------------------------------- -------------------------------
Title_______________________________ Title ____________________________
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER
SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.
_______________________________________________________________________________
Warrant No. CW-2 Number of Shares: 100,000
Date of Issuance: April 28, 1999 (subject to adjustment)
WARRANT TO PURCHASE COMMON STOCK
Of
CERENT CORPORATION
Void after December 31, 2004
This Warrant is issued to Williams Communications, Inc., d/b/a Williams
Networks ("Holder"), by Cerent Corporation, a Delaware corporation (the
"Company"), as of April 28, 1999 (the "Warrant Issue Date"). This Warrant is
issued pursuant to a Purchase Agreement dated April 23 between the Company and
Holder (the "Purchase Agreement") and an Amendment to Purchase Agreement dated
April 28th, 1999 between the Company and Holder (the "Amendment"), and is
subject to the terms of the Purchase Agreement and the Amendment. This Warrant
is issued for a purchase price of $10.00 plus the obligations of Holder as set
forth in the Purchase Agreement. The shares purchasable upon exercise of this
Warrant and the purchase price per share, as adjusted from time to time pursuant
to the provisions of this Warrant, are sometimes hereinafter referred to as the
"Warrant Stock" and the "Purchase Price," respectively.
1. Exercise Price. The purchase price for the Shares shall be $6.50 per
--------------
Share. Such purchase price shall be subject to adjustment pursuant to Section 7
hereof (such price, as adjusted from time to time, is herein referred to as the
"Exercise Price").
2. Exercise Periods. This Warrant shall be exercisable between the date
----------------
of Issuance and 5:00 p.m. (Central Standard Time) on December 31, 2004.
3. Method of Exercise. So long as this Warrant remains outstanding and
------------------
exercisable in accordance with Section 2 above, the Holder may exercise, in
whole or in part, and from time to time in as many separate transactions as
Holder may determine in its sole discretion, the purchase rights evidenced
hereby. Such exercise shall be effected by:
<PAGE>
(a) the surrender of the Warrant, together with a duly executed copy
of the form of Notice of Exercise attached hereto to the Secretary of the
Company at its principal offices; and
(b) the payment to the Company of an amount equal to the aggregate
Exercise Price for the number of Shares being purchased.
4. Net Exercise. In lieu of exercising this Warrant pursuant to Section
------------
3, the Holder may elect to receive, without the payment by the Holder of any
additional consideration, shares of Common Stock equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with notice of such election, in
which event the Company shall issue to the Holder hereof a number of shares of
Common Stock computed using the following formula:
Y (A - B)
---------
X = A
Where: X = The number of shares of Common Stock to be issued to the
Holder pursuant to this net exercise;
Y = The number of Shares in respect of which the net issue
election is made;
A = The fair market value (defined below) of one share of the
Common Stock at the time the Holder delivers its notice of
net issue election;
B = The Exercise Price (as adjusted to the date of delivery of
the Holder's notice of net issuance election).
For purposes of this Section 4, the "fair market value" of one share of Common
Stock as of a particular date shall be determined upon agreement by parties but
if they cannot so agree than by an independent appraiser to be mutually agreed
upon by the parties, except that in the event that the Common Stock is traded on
a nationally recognized exchange, the fair market value shall be the closing
price on the date of delivery to the Company of the Holder's notice of net issue
election. As long as this Warrant remains outstanding and exercisable in
accordance with Section 2 above, the Holder may exercise, in whole or in part,
and from time to time in as many separate transactions as Holder may determine
in its sole discretion, the net exercise rights evidenced hereby.
5. Certificates for Shares. Upon the exercise of the purchase rights
-----------------------
evidenced by this Warrant, one or more certificates for the number of Shares so
purchased shall be issued to the Holder as soon as practicable thereafter (with
appropriate restrictive legends, if applicable), and in any event within thirty
(30) days of the delivery of the Holder's subscription notice. Upon Holder's
surrender of this Warrant to the Company pursuant to Holder's exercise of any
purchase rights or net exercise rights under this Warrant, the Company shall
reissue this Warrant to the Holder to evidence any remaining rights which Holder
may have under this Warrant.
-2-
<PAGE>
6. Issuance of Shares. The Company covenants that the Shares, when issued
------------------
pursuant to the exercise of this Warrant, will be duly authorized and validly
issued, fully paid and nonassessable and free from all taxes (other than
Holder's income taxes), liens, encumbrances and charges.
7. Adjustment of Exercise Price and Number of Shares. The number of and
-------------------------------------------------
kind of securities purchasable upon exercise of this Warrant and the Exercise
Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company
----------------------------------------------
shall at any time prior to the expiration of this Warrant subdivide its Common
Stock, by split-up or otherwise, or combine its Common Stock, or issue
additional shares of its Common Stock as a dividend with respect to any shares
of its Common Stock, the number of Shares issuable on the exercise of this
Warrant shall forthwith be proportionately increased in the case of a
subdivision or stock dividend, or proportionately decreased in the case of a
combination. Appropriate adjustments shall also be made to the purchase price
payable per share, but the aggregate purchase price payable for the total number
of Shares purchasable under this Warrant (as adjusted) shall remain the same.
Any adjustment under this Section 7(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective, or as of
the record date of such dividend, or in the event that no record date is fixed,
upon the making of such dividend.
(b) Reclassification, Reorganization and Consolidation. In case of
--------------------------------------------------
any reclassification, capital reorganization, or change in the Common Stock of
the Company (other than as a result of a subdivision, combination, or stock
dividend provided for in Section 7(a) above), then, as a condition of such
reclassification, reorganization, or change, lawful provision shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the Holder, so that the Holder shall have the right at any
time prior to the expiration of this Warrant to purchase, at a total price equal
to that payable upon the exercise of this Warrant, the kind and amount of shares
of stock and other securities and property receivable in connection with such
reclassification, reorganization, or change as were purchasable by the Holder
immediately prior to such reclassification, reorganization, or change. In any
such case appropriate provisions shall be made with respect to the rights and
interest of the Holder so that the provisions hereof shall thereafter be
applicable with respect to any shares of stock or other securities and property
deliverable upon exercise hereof, and appropriate adjustments shall be made to
the purchase price per share payable hereunder, provided the aggregate purchase
price shall remain the same.
(c) Notice of Adjustment. When any adjustment is required to be made
--------------------
in the number or kind of shares purchasable upon exercise of the Warrant, or in
the Exercise Price, the Company shall promptly notify the Holder of such event
and of the number of shares of Common Stock or other securities or property
thereafter purchasable upon exercise of this Warrant.
8. Representations and Warranties of the Holder.
-3-
<PAGE>
(a) Investment Intent. Holder hereby warrants and represents that it
-----------------
is acquiring this Warrant and any Shares which may be issued upon exercise of
this Warrant which are not registered under the Securities Act of 1933 (the
"Act") or for which an exemption from registration does not apply, for Holder's
own account and not with a view to their resale or distribution.
(b) Exempt from Registration. Holder acknowledges that this Warrant
------------------------
has not been registered under the Act.
(c) Investment Experience. In connection with the investment
---------------------
representations made herein Holder represents that it has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment, has the ability to bear the economic risks
of its investment, and has been furnished with and has had access to such
information as it has requested and deemed appropriate to its investment
decision.
(d) Restricted Securities. Holder hereby confirms that it has been
---------------------
informed that this Warrant, and the Shares issued upon exercise of this Warrant,
are restricted securities under the Act and may not be resold or transferred
unless the securities to be resold are first registered under the federal
securities laws or unless an exemption from such registration is available.
Accordingly, Holder hereby acknowledges that it is prepared to hold this
Warrant, and the Shares issued upon exercise of this Warrant, for an indefinite
period and that Holder is aware that Rule 144 of the SEC issued under the Act is
not presently available to exempt the issuance of this Warrant from the
registration requirements of the Act.
(e) Disposition of Shares. Holder hereby agrees that it shall make no
---------------------
disposition of this Warrant, or the Shares issued upon exercise of this Warrant,
to any parent, affiliate or subsidiary of Holder, or to a purchaser of all or
substantially all of Holder's assets, unless and until:
(i) Holder shall have complied with all requirements of this
Warrant applicable to the disposition; and
(ii) Holder shall have provided the Company with satisfactory
written assurances, that (1) the proposed disposition does not require
registration under the Act, or (2) all appropriate action necessary for
compliance with the registration requirements of the Act or of any exemption
from registration available under the Act (including Rule 144) has been taken.
(f) Restrictive Legends. Holder hereby confirms that the Company has
-------------------
informed the Holder that the Company, in order to reflect the restrictions on
disposition of the Shares issued upon exercise of this Warrant, the Company
shall endorse the stock certificates for the Shares with the following
restrictive legend:
The shares represented by this certificate have not been registered
under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration
statement for the shares under such Act, (b) a `no action' letter
of the Securities and Exchange Commission with respect to such sale
or offer, or (c) satisfactory assurances to the Company that
registration under such Act is not required with respect to such
sale or offer.
-4-
<PAGE>
9. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Holder as follows:
(a) Valid Issuance; Absence of Liens. All Shares which may be issued
--------------------------------
upon the exercise of the purchase right represented by this Warrant, and all
securities, if any, issuable upon conversion of the Shares, shall, upon
issuance, be duly authorized, validly issued, fully paid and nonassessable, and
free of any liens, pledges and encumbrances except for restrictions on transfer
provided for herein or under applicable federal and state securities laws. The
Company further represents and warrants that there are no voting trusts,
stockholder agreements, proxies or other agreements in effect which relate to
voting or transfer of the Shares. The Shares are not and will not be, during the
term of this Warrant, subject to any preemptive rights or any rights of first
refusal that have not been properly waived or complied with.
(b) Reservation of Shares. The Company will reserve for issuance
---------------------
pursuant to this Warrant a sufficient number of shares of the Common Stock of
the Company, and the Company covenants that it shall at all times cause to be
reserved and kept available out of its authorized and unissued shares of Common
Stock of the Company such number of shares of Common Stock as will be sufficient
to permit the exercise in full of this Warrant.
(c) Exemption from Registration. Assuming the accuracy of the
---------------------------
representations and warranties of the Holder contained herein, the Company
represents and warrants that the offer, sale and issuance of this Warrant to
Holder, and the issuance of the Shares to Holder under this Warrant, are exempt
from registration of the Act pursuant to Section 4(2) of the Act or Rule 506
promulgated by the SEC under the Act. The Company shall seek and obtain all
necessary permits, authorizations, orders of exemption and other documents as
may be necessary or appropriate to ensure and to evidence such exemption under
applicable state and federal laws .
(d) Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized and validly existing under the laws of the State of
Delaware. The Company has full power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted. The
Company is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions in the aggregate in which
the nature of its activities and of its properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions, in the aggregate,
in which failure to do so would not have a material adverse effect on the
Company or its business.
(e) Capitalization. The authorized capital stock of the Company,
--------------
immediately prior to the Closing, consists of 50,000,000 authorized shares of
Common Stock, 9,677,917 shares of which are issued and outstanding and 585,000
of which are reserved for issuance under outstanding stock options and warrants
other than this Warrant. All issued and outstanding shares of the Company's
Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(f) Authorization; Binding Obligations. All corporate action on the
----------------------------------
part of the Company, its officers, directors and shareholders necessary for the
authorization, execution and
-5-
<PAGE>
delivery of this Warrant, and the sale and issuance of the Shares pursuant
hereto, and for the performance of the Company's obligations hereunder has been
taken. This Warrant, when executed and delivered, is a valid and binding
obligation of the Company, enforceable in accordance with its terms.
(g) Registration Rights. Except for the registration rights granted
-------------------
under the Company's Investors' Rights Agreement, which shall be executed by
Holder on even date herewith, the Company is presently not under any obligation,
and has not granted any rights, to register any of the Company's presently
outstanding securities or any of its securities that may hereafter be issued. No
obligation, covenant or representation under this Agreement is intended to
conflict with any obligation, covenant or representation under the Investors'
Rights Agreement, and in the event of any such conflict, the Investors' Rights
Agreement shall control.
(h) Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any term of its Certificate of Incorporation or Bylaws
or in any material respect of any provision of any mortgage, indenture,
agreement, instrument or contract to which it is a party or by which it or its
property is bound or, to the best of its knowledge, of any federal, state or
local judgment, order, writ, decree, statute, rule or regulation applicable to
the Company where such violation or default would, or could reasonably be
expected to, materially and adversely affect the Company. The execution,
delivery, and performance of and compliance with this Warrant, and the issuance
and sale of the Shares pursuant hereto, will not result in any such violation,
result in a conflict with or constitute either a default under any such
provision or an event that results in the creation of any lien, charge, or
encumbrance of more than $100,000 upon any assets of the Company or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations, or any of its assets or properties.
(i) Litigation. There is no action, suit, proceeding or investigation
----------
pending or currently threatened against the Company which (i) questions the
validity of this Warrant, or the right of the Company to enter into it, or (ii)
to consummate the transactions contemplated hereby. The Company is not a party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
(j) Tax Returns and Payments. The Company has filed all tax returns
------------------------
(federal, state and local) required to be filed by it. All taxes shown to be due
and payable on such returns, any assessments imposed, and all other taxes due
and payable by the Company have been paid or will be paid prior to the time they
become delinquent, except where the failure thereof would not have a material
and adverse effect on the financial condition, operations or prospects of the
Company. The Company has not elected pursuant to the Internal Revenue Code of
1986, as amended ("Code"), to be treated as a collapsible corporation or a
Subchapter S corporation pursuant to Section 341(f) or Section 1362(a) of the
Code, nor has it made any other elections pursuant to the Code (other than
elections which relate solely to methods of accounting, depreciation or
amortization) which would have a material effect on the Company, its financial
condition, its business as presently conducted or proposed to be conducted or on
any of its properties or material assets.
-6-
<PAGE>
(k) Compliance with Laws. The Company has complied in all material
--------------------
respects with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business and ownership of its
properties. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Warrant, and the issuance of the Shares, except such as have been duly and
validly obtained or filed, or with respect to any filings that must be made
after the Closing, except such as will be filed in a timely manner.
(l) Disclosure. This Warrant (including the schedules and exhibits
----------
hereto), and any other documents, certificates, instruments or other written
materials or information furnished to Holder by or on behalf of the Company in
connection with the transactions contemplated by this Warrant do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading. There is no fact known to
the Company which is materially adverse to the business operations or financial
performance of Company which has not been furnished to Holder or set forth or
reflected in this Warrant, or the other documents, certificates, and instruments
referred to herein and delivered to Holder by or on behalf of the Company in
connection with the transactions contemplated by this Warrant.
(m) Compliance: Governmental Authorizations and Regulations. The
-------------------------------------------------------
Company is in compliance with each applicable law of a governmental entity and
has all material licenses, franchises, permits, certificates and other
authorizations from all federal, state, municipal and other governmental
authorities having jurisdiction over its business. All such licenses,
franchises, permits, certificates and other governmental authorizations held by
the Company, in respect of its business are valid and sufficient to permit the
Company to conduct its operations as currently used or conducted except where
the failure to have such licenses, franchises, permits, certificates or other
governmental authorizations would not have a material adverse effect, and there
are no violations of any such licenses, franchises, permits, certificates and
other governmental authorizations, nor are there any proceedings, to the
knowledge of the Company, pending or threatened against the Company to revoke or
limit any such license, franchise, permit, certificate or other governmental
authorization.
10. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares the Company shall make a cash
payment therefor to the Holder on the basis of the Exercise Price then in
effect.
11. No Stockholder Rights.
---------------------
(a) Notwithstanding anything in this Agreement or the Investors'
Rights Agreement, prior to exercise of this Warrant, the Holder shall not be
entitled to any rights of a stockholder with respect to the Shares, including
(without limitation) the right to vote such Shares, receive dividends or other
distributions thereon, exercise preemptive rights or be notified of stockholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company. However,
nothing in this
-7-
<PAGE>
Section 11 shall limit the right of the Holder to be provided the Notices
required under this Warrant.
(b) If at any time a Change of Control (as defined below) is
submitted for approval to the stockholders of the Company and the Holder is at
such time a record holder of Shares, the Holder shall vote all such Shares then
held by the Holder in favor of such Change of Control if the holders of at least
a majority of the outstanding shares of Common Stock and Preferred Stock
(excluding the Shares) vote in favor of such Change of Control. For purposes of
the foregoing, a "Change of Control" shall mean the closing of the acquisition
of the Company by another entity by means of merger, consolidation or other
transaction or series of related transactions, in which at least 50% of the
voting power of the Company is transferred.
12. Transfers of Warrant. This Warrant and all rights hereunder are not
--------------------
transferable, except to successors or assigns of Holder, which successors or
assigns shall be acceptable to the Company, and such transfer shall be subject
to compliance with applicable federal and state securities laws. In the event of
the Company's acceptance, the transfer of the Warrant shall be recorded on the
books of the Company upon the surrender of this Warrant, properly endorsed, to
the Company at its principal offices, and the payment to the Company of all
transfer taxes and other governmental charges imposed on such transfer. This
Warrant may not be transferred in parts.
13. Successors and Assigns. The terms and provisions of this Warrant
----------------------
shall inure to the benefit of, and be binding upon, the Company and the Holders
hereof and their respective successors and assigns.
14. Amendments and Waivers. Any term of this Warrant may be amended and
----------------------
the observance of any term of this Warrant may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holder. Any waiver or amendment effected
in accordance with this Section 14 shall be binding upon each holder of any
Shares purchased under this Warrant at the time outstanding (including
securities into which such Shares have been converted), each future holder of
all such Shares, and the Company.
15. Notices. All notices required under this Warrant shall be given or
-------
made for all purposes (i) by personal delivery, (ii) by facsimile, provided that
sender obtains a confirmation receipt that the communication was successfully
sent to the applicable facsimile number; (iii) by professional overnight courier
service, or (iv) by registered or certified mail, all postage prepaid. All such
notices shall be effective upon delivery. Notices to the Company shall be sent
to the principal office of the Company (or at such other place as the Company
shall notify the Holder hereof in writing). Notices to the Holder shall be sent
to the address of the Holder on the books of the Company (or at such other place
as the Holder shall notify the Company hereof in writing).
-8-
<PAGE>
16. Captions. The section and subsection headings of this Warrant are
--------
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
17. Governing Law. This Warrant shall be governed by the laws of the
-------------
State of Delaware as applied to agreements among Delaware residents made and to
be performed entirely within the State of Delaware.
18. Entire Agreement. This Warrant, together with the Investors' Rights
----------------
Agreement and other documents delivered pursuant hereto, and the specific
references herein to the Purchase Agreement constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof. Nothing in this Warrant, whether expressed or implied, is
intended to convey upon any party, other than the parties hereto, and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Warrant except as expressly provided
herein.
19. Severability. In case any provision of this Warrant shall be invalid,
------------
illegal, or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
20. Delays and Omissions. It is agreed that no delay or omission to
--------------------
exercise any right, power or remedy accruing to either party shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
breach, default, noncompliance, nor any acquiescence therein, or of or in any
similar breach, default or noncompliance thereafter occurring.
21. Counterparts. This Warrant may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by an officer thereunto duly authorized.
CERENT CORPORATION
By: /s/ Carl Russo
-----------------
-9-
<PAGE>
NOTICE OF EXERCISE
------------------
To: Cerent Corporation
The undersigned hereby elects to [check applicable subsection]:
________ (a) Purchase _________________ shares of Common Stock of Cerent
Corporation pursuant to the terms of the attached Warrant and
payment of the Exercise Price per share required under such
Warrant accompanies this notice;
OR
________ (b) Exercise the attached Warrant for [all of the shares] [________
of the shares] [cross out inapplicable phrase] purchasable under
the Warrant pursuant to the net exercise provisions of such
Warrant.
The undersigned hereby represents and warrants that the undersigned is
acquiring such shares for its own account for investment purposes only, and not
for resale or with a view to distribution of such shares or any part thereof.
WARRANT HOLDER:
_________________________________________
By: _____________________________________
[NAME]
Address: _________________________________________
_________________________________________
Date:_____________
Name in which shares should be registered:
_________________________________________
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT 10.17
CERENT CORPORATION
MANUFACTURING AGREEMENT
This Manufacturing Agreement (this "Agreement") is entered into as of April
1, 1999 (the "Effective Date") by and between Cerent Corporation, a Delaware
corporation, whose principal place of business is 1450 North McDowell Blvd.,
Petaluma California 94954-6515 ("Customer") and P.C.B. Assembly, Inc., a
California corporation, whose principal place of business is 545 Oakmead
Parkway, Sunnyvale, California 94086 ("Manufacturer").
RECITALS
WHEREAS, Manufacturer is a contract manufacturer of printed circuit board and
other assemblies;
WHEREAS, Customer has developed certain designs, drawings, bills of materials
and other specifications for certain products in which printed circuit board and
other assemblies are used; and
WHEREAS, Customer desires to have certain assemblies manufactured by
Manufacturer on a "turnkey" basis on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the promises and the mutual covenants and
agreements herein contained, the parties hereby agree as follows:
1. Definitions.
------------
"Confidential Information" of a party shall mean any information
--------------------------
disclosed by that party to the other pursuant to this Agreement which is in
written, graphic, machine readable or other tangible form and is marked
"Confidential," "Proprietary" or in some other manner to indicate its
confidential nature. Confidential Information may also include oral information
disclosed by one party to the other pursuant to this Agreement, provided that
such information is designated as confidential at the time of disclosure and is
reduced to writing or referred to in a writing by the disclosing party within a
reasonable time (not to exceed thirty (30) days) after its oral disclosure, and
such writing is marked in a manner to indicate its confidential nature and
delivered to the receiving party. Notwithstanding any failure to so identify it,
however, all Product drawings, designs, specifications, layouts and the like and
all business plans and forecasts of Customer shall be Confidential Information
of Customer, and all information concerning Manufacturer's personnel (including
without limitation their identities and capabilities) and Manufacturer's
processes, together with all information concerning Manufacturer's work for its
other customers shall be Confidential Information of Manufacturer.
"Cost Model" has the meaning set forth in Section 5(c).
----------
"Forecast" shall have the meaning set forth in Section 2(c).
--------
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-1-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
"Intellectual Property" means (i) all rights held by Customer in the
---------------------
Products and in its Confidential Information and other intellectual property,
including, but not limited to, patents, copyrights, authors' rights, trademarks,
tradenames, know-how and trade secrets, irrespective of whether such rights
arise under U.S. or international intellectual property, unfair competition or
trade secret laws, and (ii) all rights held by Manufacturer in its Confidential
Information and other intellectual property, including, but not limited to,
patents, copyrights, authors' rights, trademarks, tradenames, know-how and trade
secrets, irrespective of whether such rights arise under U.S. or international
intellectual property, unfair competition or trade secret laws.
"Lead Time" means one [*]
"Material" or "Materials" means raw materials, components and other
-------- ---------
supplies necessary for the manufacture of Products pursuant to this Agreement.
"NCNR Items" means those materials which, in the event they are not
----------
incorporated into Products which are shipped to Customer or an end-customer,
cannot be returned to the vendors from which they are purchased for a full
refund.
"Products" means the products and finished goods available for shipment
--------
that are manufactured by Manufacturer pursuant to this Agreement, as mutually
agreed to in writing by the parties as of the Effective Date and as may be
amended thereafter upon mutual written agreement of the parties.
"Purchase Order for Shipment" means an order placed by Customer to ship
---------------------------
Product(s) to an end-customer, which shall specify the Product, quantity, ship-
to address and shipping method.
"Specifications" means the specifications for the Products, as provided by
--------------
Customer and accepted in writing by Manufacturer, and as revised from time to
time upon mutual written agreement of the parties.
"Virtual Factory Stores" means vendor stock rooms within Manufacturer's
----------------------
facility.
2. Manufacture and Storage of Products.
------------------------------------
(a) Agreement to Manufacture. Subject to the terms and conditions of this
------------------------
Agreement, Manufacturer shall: (1) pursuant to Forecasts, procure Materials,
manufacture, assemble and test Products; and (2) pursuant to Purchase Orders for
Shipment, ship Products to the location specified by Customer. This Agreement
shall not constitute a requirement contract and Customer shall not be obligated
to order Products from Manufacturer. Manufacturer will not place its name or
any other marking not approved by Customer anywhere on the Products or their
respective packaging material, except markings, if any, which are required by
law.
-2-
* Represents confidential information for which Cerent Corporation is
seeking confidential treatment from the Securities and Exchange
Commission.
<PAGE>
CONFIDENTAIL TREATMENT REQUESTED
(b) Demand Flow Technology. Manufacturer shall implement Demand Flow
----------------------
Technology ("DFT") in the manufacturing of Products for Customer and shall send
---
appropriate personnel involved in the manufacturing of Products to the JIT
institute for training. The parties will mutually develop a definition of DFT
and a DFT implementation plan.
(c) Forecasts. By the [*], Customer shall
---------
provide Manufacturer with a [*] of Customer's estimated purchase requirements of
Products for such period, indicating the number of Products to be purchased
during each month of the period covered by the Forecast and designating the
quantity of Product to be maintained in Finished Goods under 2(e) . . Subject
to the obligations of Customer under this Agreement to purchase excess inventory
of material, work-in-process and finished goods in the event of a deviation from
forecast, forecasts shall not be legally binding on Customer, but shall be
prepared in good faith and shall represent Customer's reasonable expectation of
its purchase requirements of Products for such period. Each Forecast shall be
submitted in writing to Manufacturer, by mail or facsimile, and shall supersede
prior Forecasts to the extent the Forecast overlaps with prior Forecasts.
Manufacturer may place orders for Material as required to meet the Forecast
within Material leadtime [*], taking into consideration any minimum order
quantities, and may manufacture Products in reliance on the quantity
requirements specified for the first [*] of any Forecast, In the event that
Customer's actual orders are for fewer than the quantities forecast for that
period of time, or in the event of termination of this Agreement under Section
19, Customer will purchase the excess Finished Goods Held for 30 Days, Stocked
Material Held for [*], and Finished Goods, WIP and Material for No Further
Demand Products on the terms set forth in Section 5(e).
(d) Forecast Variations. For each Forecast, Customer shall be entitled,
-------------------
without penalty, to: (i) during the period of time between [*] and [*] prior to
any shipment period specified in the Forecast, increase the quantity of Product
required for such shipment period by a cumulative amount equal to [*], including
any prior increase under Section 2(d)(ii) and (ii) during the period of time
between [*] and [*] prior to any shipment period specified in the Forecast,
increase the quantity of Product required for such shipment period by a
cumulative amount equal to one hundred percent (100%). Such rescheduled
Forecasts shall be submitted in writing to Manufacturer, by mail or facsimile,
and shall supersede prior Forecasts for the same period to the extent such prior
Forecasts conflict with the rescheduled Forecast. Manufacturer shall use its
best efforts to meet increases in ordered Products requested by Customer in
excess of the foregoing amounts. Customer may, within its sole discretion,
reduce the amount of Products in a Forecast at any time, subject to its
obligations under Section 5(e).
Manufacturer and Customer shall enter good faith negotiations
regarding the terms for NCNR Items needed to support Forecast increases
requested by Customer under this Section 2(d).
Customer shall pay any freight cost premiums that are required for
Manufacturer to meet increases in the amount of Products ordered pursuant to
this Section 2(d), provided, that Manufacturer obtains Customer's written
approval prior to incurring such costs.
-3-
* Represents confidential information for which Cerent Corporation is
seeking confidential treatment from the Securities and Exchange
Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
(e) Finished Goods Levels. Until such time as the DFT implementation plan
---------------------
is developed and implemented, Manufacturer shall manufacture, assemble and test
that amount of Products (the "Finished Goods Level") which will satisfy [*]
--------------------
rolling demand for Products according to the most recent Forecast, including any
permitted increases requested by Customer under Section 2(d). Under the DFT
implementation plan the Finished Goods Level may be less than the number which
would satisfy such two-weeks' rolling demand.
(f) Engineering Changes. Customer may request at any time, in writing,
-------------------
that Manufacturer incorporate an engineering change into the Product. Such
request will include a description of the proposed change and a proposed
implementation schedule. Manufacturer shall respond to such a request in
writing within three (3) business days, stating its ability to implement the
requested change per the proposed implementation schedule (or proposing an
alternative implementation schedule if Manufacturer cannot meet the proposed
implementation schedule) and the impact of the change on the delivery schedule
and the cost of the change per the Cost Model. Manufacturer will not be
obligated to proceed with the engineering change until the parties have agreed
in good faith in writing on the changes to the Specifications, the
implementation schedule and pricing and Customer has provided all designs,
drawings, parts lists, and other information needed to implement the change.
(g) Product Inventory. Subject to the time, quantity, and other limits
-----------------
set forth in this Agreement, Manufacturer shall be responsible for storing
Products, at Manufacturer's expense, until Customer requests shipment pursuant
to Section 4(a) or until such Products are purchased under Section 5(e).
(h) Certification. During the Term, Manufacturer shall be certified to
-------------
ISO 9002 and Underwriters' Laboratory ("UL") equivalent standards.
(i) Year 2000 Compliance. Manufacturer shall develop and implement a Y2K
--------------------
compliance plan intended to avoid any possible business interruption.
3. Components; Tooling.
-------------------
(a) Approved Vendor List. Customer shall provide a Bill of Materials and
--------------------
Approved Vendor List ("AVL") for each Product to be manufactured hereunder.
Manufacturer shall manufacture the Products using components obtained solely
from vendors included on the AVL. The AVL shall not be amended without prior
written approval of the Customer, and the parties recognize that Manufacturer
may need to modify prices or delivery schedules if the AVL is changed.
(b) Tooling/Non-Recurring Expenses. Except as set forth herein,
------------------------------
Manufacturer shall provide tooling for Products at its own expense. All tooling
paid for by Customer and consigned to Manufacturer shall be set forth in a
separate list maintained by Customer (the "Customer Owned Equipment"). Customer
Owned Equipment shall include the testing equipment provided by Customer to
Manufacturer pursuant to Section 6 herein. Customer shall own title to all
-4-
* Represents confidentail information for which Cerent Corporation is
seeking confidential treatment from the Securities and Exchange
Commission.
<PAGE>
Customer Owned Equipment. Manufacturer shall hold and maintain all Customer
Owned Equipment and other property for Customer and shall exercise reasonable
care in the use and custody of such property and shall use such property only in
performing its obligations under this Agreement. Manufacturer shall not grant
any security interest, incur any liens or any other encumbrances on said
Customer Owned Equipment. Upon termination of this Agreement and upon
Customer's written request Manufacturer will promptly return all Customer Owned
Equipment in good, workable and properly maintained condition at Customer's cost
to a location identified by Customer. Upon Customer's request, Manufacturer
shall execute a form UCC-1, and any related documents, in form and substance
reasonably acceptable to Manufacturer and its counsel, for all Customer Owned
Equipment indicating Customer's interest therein.
4. Shipment and Inspection.
-----------------------
(a) Shipment. Upon receiving a Purchase Order for Shipment (or a PO under
--------
Section 5(e)) from Customer, Manufacturer shall deliver to the specified carrier
or forwarding agent the specified Product(s) suitably packed for shipment in
accordance with Customer's specifications, marked for shipment to the
destination specified in the Purchase Order for Shipment (or, in the case of a
PO under Section 5(e), to Customer). Manufacturer shall deliver such Products
to the specified carrier or forwarding agent by the date specified in the
Purchase Order for Shipment, provided that such date is within the appropriate
Lead Time. Manufacturer shall satisfy Purchase Orders for Shipment for Products
up to an amount equal to that set forth in the most recent Forecast plus, to the
extent required by Section 2(d), any increases made by Customer pursuant to
Section 2(d). Manufacturer shall use its best efforts to meet any Purchase
Orders for Shipment for amounts of Product in excess of the foregoing. Shipment
will be F.O.B. Manufacturer's factory, at which time risk of loss and title will
pass to Customer. All freight, insurance and other shipping expenses for the
Products will be paid by Customer. Customer shall provide Manufacturer with
shipping account numbers for pre-paid shipment. Manufacturer shall invoice
Customer for Products upon delivery of such Products to the specified carrier or
forwarding agent. A delivery shall be considered on-time if received by
Customer or shipped to the specified end-customer, as applicable, no earlier
than three (3) days prior to, and no later than, the shipment date.
(b) Inspection and Acceptance. Products manufactured by Manufacturer can
-------------------------
be inspected and tested by Customer or the end-customer within a reasonable time
after receipt of such Products. Customer or the end customer can reject any
Products found to be defective in material or workmanship, failing to meet the
Specifications or drawings, failing the test criteria per the Product
documentation, and/or which do not meet the IPC 610B Class 2 workmanship
standard. Customer and end-customers shall have the right to inspect Products
in Manufacturer's custody at any time provided that such inspection does not
disrupt the delivery schedule for such Products.
5. Payment.
--------
(a) Payment Terms. Payment for any products, services or other costs to
be paid by Customer hereunder is due thirty (30) days from the invoice date.
Customer shall receive a one
-5-
<PAGE>
percent (1%) reduction in the amount due if Customer makes payment within ten
(10) days of the invoice date. Continued extension of trade credit is subject to
the approval of Manufacturer's credit department and may be revoked at any time
at Manufacturer's sole discretion. Manufacturer may place future deliveries of
goods and/or services on credit hold, suspend production after written
notification to Customer, or accept orders only on a COD or cash with order
basis in the event the Customer fails to make prompt payment or if, in
Manufacturer's reasonable opinion, the financial condition of Customer or other
grounds for insecurity warrants such action. Manufacturer reserves the right to
impose on invoices not paid when due a daily finance charge at the rate of .05%
per day (or, if less, the maximum allowed by applicable law) to cover the costs
of servicing the account. Partial orders will be billed as delivered and
payments for partial orders are subject to the same terms as full shipments.
(b) Duties and Taxes. All prices quoted are exclusive of federal, state
----------------
and local excise, sales, use and similar duties and taxes, and Customer shall be
responsible for all such items.
(c) Price. The price for Products shall be calculated as set forth on
-----
Exhibit A hereto (the "Cost Model").
(d) Security Interest.
-----------------
Customer grants to Manufacturer and Manufacturer reserves a purchase money
security interest in all goods sold to Customer to secure payment of all amounts
and the performance by Customer of its other obligations due hereunder. In the
event of default by Customer in any obligation to Manufacturer, Manufacturer
will have all rights of a secured party under the California Commercial Code,
and Customer agrees to take no action which would constitute a breach of the
peace in response. Manufacturer may file a copy of this document at any time as
a financing statement to perfect Manufacturer's security interest. On
Manufacturer's request, Customer will promptly execute financing statements and
other instruments that Manufacturer may request to perfect Manufacturer's
security interest.
(e) Cancellations or Change of Forecasts.
-------------------------------------
(i) Excess/ No Demand Schedule. Within ten (10) days after the end
--------------------------
of each fiscal quarter and within thirty (30) days after termination of this
Agreement, Manufacturer will provide to Customer an Excess/ No Demand Schedule,
which shall be a report that includes the following:
A. Excess Finished Goods Held for 30 Days. "Finished Goods
--------------------------------------
Held for 30 Days" means the Products manufactured by Manufacturer in order to
satisfy the Forecast and Finished Goods Levels pursuant to Section 2(e), and
which Manufacturer has held for at least thirty (30) days. The Excess/ No Demand
Schedule shall include the amount of Finished Goods Held for 30 Days together
with the per unit sales price and the total purchase price under this Agreement
for such items.
B. Excess Stocked Material Held for 90 Days. "Excess
----------------------------------------
Stocked Material Held for 90 Days" means the Materials ordered by Manufacturer
pursuant to
-6-
<PAGE>
Section 2(c), and which Manufacturer has held for at least ninety (90) days. The
Excess/ No Demand Schedule shall include the quantity and part number of each
type of Material together with the per unit cost (including the applicable
overhead factor per Exhibit "A") and the total purchase price (including such
overhead factor) for all such items.
C. Finished Goods, WIP and Material for No Further Demand
------------------------------------------------------
Products. "Finished Goods, WIP and Material for No Further Demand Products"
- --------
means, with respect to Products (including earlier versions of Products which
have had changes to their designs) for which no projected orders exist on the
most recent Forecast or, upon termination of this Agreement, (i) the quantity
and sales price under this Agreement of all work-in-process and finished goods
manufactured by Manufacturer pursuant to Sections 2(c) or 2(e), (ii) the
quantity, unit price (including the applicable overhead factor per Exhibit "A"),
and aggregate price of all NCNR items and partially used Material, including
broken packages, ordered by Manufacturer pursuant to Section 2(c), and (iii) a
list of all restocking fees, scrap, disposal and other charges for items ordered
by Manufacturer pursuant to Section 2(c) which cannot be returned by
Manufacturer for a full refund. The Excess/ No Demand Schedule shall include a
list of all Finished Goods, WIP and Material for No Further Demand Products.
(ii) Responsibility for Purchase of Excess. On the terms set forth
-------------------------------------
below, it shall be Customer's responsibility to purchase all Finished Goods Held
for 30 Days, Stocked Material Held for 90 Days, and Finished Goods, WIP and
Material for No Further Demand Products which are in excess of the quantities
needed (a) to fill existing Purchase Orders for Shipment, and (b) to meet
Manufacturer's obligation under Section 2(e) to maintain a Finished Goods Level.
(iii) Procedure and Timing. Within thirty (30) days after receipt
--------------------
of the Excess/No Demand Schedule, Customer will provide a Purchase Order ("PO")
to Manufacturer for all items described in the immediately preceding
subparagraph at the prices specified on the Excess/No Demand Schedule. Customer
will make payment in full for such items within ten (10) days after
Manufacturer's invoice. Failure to provide a PO within thirty (30) days shall
result in an additional charge in the amount of 1.5% per month or the maximum
rate allowed by law. Customer shall be entitled to take prompt delivery of all
materials and Products paid for by Customer under this Section.
(iv) Disputes. Customer agrees to adequately document any dispute
--------
concerning the Excess/No Demand Schedule, and the parties shall work to resolve
any such disputes in good faith. Manufacturer shall be responsible to notify
customer of excess material in a timely manner, considered to be within six
months of occurrence.
(v) Returns. Manufacturer will request credit and return of
-------
Material no longer required to meet Customer's requirements, or attempt to apply
it to other customer demand, however, cannot guarantee the ability to return
parts for credit or apply them to other customer demand.
6. Product Testing. Manufacturer shall test all Products before shipment to
---------------
demonstrate that they meet the Specifications, using tests specified in writing
and agreed to by both parties in
-7-
<PAGE>
advance. Except as set forth below in Sections 6(a), (b) and (c), Manufacturer
shall provide, and shall bear all costs associated with, all test equipment used
to test the Products.
(a) Functional Testing. Customer shall provide the functional test
------------------
equipment to be used by Manufacturer. Manufacturer shall maintain and calibrate
such functional test equipment. Within thirty (30) days after invoice, Customer
shall pay Manufacturer's direct out of pocket costs of such maintenance and
calibration. In the event that the Functional Unit Test ("FUT") first pass
---
yield for any Product is less than ninety-five percent (95%) due to a faulty
design, component or test system, Customer shall, within a reasonable time,
provide Manufacturer with a workable plan to improve such yield, and
Manufacturer may, if reasonable under the circumstances, stop production of such
Product until such plan is received and appropriate changes are made to pricing
and scheduling.
(b) Burn-in Testing. Customer shall specify the burn-in equipment to be
---------------
used by Manufacturer. In the event Customer specifies burn-in equipment other
than that otherwise used by Manufacturer, Manufacturer shall develop, build and
maintain the burn-in equipment requested by Customer. Within thirty (30) days
after invoice, Customer shall pay Manufacturer's direct out of pocket costs of
developing, building, and maintaining such burn-in equipment.
(c) ICT Equipment. All ICT fixtures and programs shall be purchased and
-------------
owned by Customer. At Customer's request, Manufacturer shall provide Customer
with a cost quotation for ICT fixtures and programs. Manufacturer shall
maintain the ICT fixtures and programs selected by Customer. Within thirty (30)
days after invoice, Customer shall pay Manufacturer's direct costs of developing
and maintaining such ICT fixtures.
7. License Grant; Ownership Rights.
--------------------------------
(a) Nonexclusive License. For the Term, Customer grants Manufacturer a
--------------------
non-exclusive, nontransferable, royalty-free license, without right to
sublicense, to use Customer's Intellectual Property (i) that is necessary for
the manufacturing, assembling and testing Products for Customer pursuant to this
Agreement and (ii) for the sole purpose of manufacturing, assembling and testing
Products for Customer pursuant to this Agreement.
(b) Intellectual Property Rights. Each party shall retain sole ownership
----------------------------
of, and all rights to, any Intellectual Property of any kind previously owned by
that party or created solely by that party. The parties shall jointly own any
intellectual property rights where both parties made substantial contributions
to the creation thereof, provided, however, that Customer shall be the sole
owner of all right, title and interest in and to any intellectual property
rights related to Products and any improvements, modifications or derivative
works of any Products other than intellectual property rights to Manufacturer's
processes and, which shall belong solely to Manufacturer.
8. Indemnity.
----------
-8-
<PAGE>
(a) Indemnification by Manufacturer. Manufacturer agrees, at its own
-------------------------------
expense, to indemnify the Customer against any damages, costs (including
attorneys' fees and costs) or other liability arising from any claim brought
against them with respect to any Products manufactured by Manufacturer, and any
out-of-pocket costs to Customer of any returned or failed Products manufactured
by Manufacturer, including all costs incurred as a result of a Product
withdrawal or recall (collectively "Customer Losses") to the extent such
Customer Losses are caused by Manufacturer's failure to manufacture the Products
in conformance with the Specifications and with Manufacturer's warranties as set
forth in this Agreement, or by Manufacturer's misconduct or negligence;
provided, with respect to any claim or action, that Customer provides (i) prompt
- --------
written notice of such claim or action, (ii) sole control and authority over the
defense or settlement of such claim or action and (iii) proper and full
information and reasonable assistance to defend and/or settle any such claim or
action.
(b) Mutual Indemnity. The parties will indemnify each other against
----------------
actions, liabilities, loss, damages and expenses resulting from injury or death
of any person or loss of or damage to any tangible real or tangible personal
property to the extent that such injury, death, loss or damage is proximately
caused by the indemnifying party's negligent act or omission or intentional
misconduct or that of its agents, employees or subcontractors in connection with
the performance of its obligations under this Agreement, provided that the
indemnifying party has been notified in writing as soon as practicable of any
such claim. The indemnifying party will have the sole right to control the
defense of all such claims and in no event will the indemnified party settle any
claim without the indemnifying party's prior written approval.
(c) Notwithstanding any other provision of this Agreement, Customer shall
indemnify, defend and hold Manufacturer harmless from and against all expenses,
damages, liabilities, costs, losses and causes of action (including attorneys'
fees) resulting from any claim of infringement, violation or misappropriation of
any patent, copyright, trademark, trade secret, or proprietary information or
other industrial or intangible property right, unfair competition, or product
liability arising out of or in any way connected with compliance by Manufacturer
with the designs, specifications or instructions of Customer. If any such claim
is alleged prior to completion of delivery of the Products, then,
notwithstanding any other provision of this Agreement, Manufacturer may decline
to make further deliveries without being in breach of this Agreement.
9. Warranty. Manufacturer warrants that all Products will conform to the
--------
Specifications and will be free from defects in material and workmanship for a
period of one (1) year from date of shipment to Customer or to another party
specified in a Purchase Order for Shipment and that all Products will conform to
the IPC 610B Class 2 workmanship standard. Customer's sole and exclusive remedy
with respect to the Products and the liability of Manufacturer under this
Agreement shall be limited to repair or replacement, at Manufacturer's option,
of any defective Products which are returned freight prepaid to Manufacturer's
plant, (or, if repair or replacement cannot be made despite Manufacturer's best
efforts to attempt to do so, refund of the purchase price (other than any
separate set-up or NRE fees) for such Products so returned.) THE FOREGOING
STATES THE FULL EXTENT OF MANUFACTURER'S LIABILITY TO CUSTOMER OR TO ANY OTHER
PARTY BASED ON ANY LEGAL THEORY,
-9-
<PAGE>
INCLUDING BREACH OF CONTRACT, BREACH OF WARRANTY, OR TORT THEORIES, AND FOR
DAMAGES, WHETHER DIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL, RESULTING FROM
ANY SUCH BREACH AND CUSTOMER SHALL HAVE NO RIGHT TO "COVER" BY PROCURING
SUBSTITUTE PRODUCTS AT THE COST OR EXPENSE OF MANUFACTURER. EXCEPT AS PROVIDED
ABOVE, MANUFACTURER MAKES NO WARRANTIES EXPRESS, IMPLIED OR STATUTORY, AND
EXPRESSLY EXCLUDES AND DISCLAIMS ANY WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE. Notwithstanding any other provision of this Agreement, the foregoing
warranty shall not apply to goods or parts which have been subject to improper
storage, abuse, misuse, accident, alteration, neglect or unauthorized repair or
installation. All Products returned shall be handled per Manufacturer's RMA
procedure. Manufacturer shall be responsible for tracking board serialization
and warranty dates and such information shall be accessible to Customer upon its
reasonable request.
10. Term and Termination.
--------------------
(a) Term. The term of the this Agreement shall begin on the Effective
----
Date and, unless sooner terminated as provided herein, shall extend for one (1)
year (the "Initial Term") and thereafter automatically renew for additional one
(1) year periods (each, a "Renewal Term") unless either party gives the other
written notice of termination at least three (3) months prior to the end of the
Initial Term or Renewal Term, as applicable. As used herein, "Term" means the
Initial Term plus any applicable Renewal Term.
(b) Termination for Cause. Either party may cancel this Agreement at any
---------------------
time if the other party breaches any term hereof and fails to cure such breach
within thirty (30) days after written notice specifying the nature of such
breach.
(c) Termination Liability. Except as otherwise provided in this
---------------------
Agreement, including without limitation Section 5(e), neither party shall be
liable in any manner on account of the termination or cancellation of this
Agreement. The rights of termination and cancellation as set forth herein are
absolute. Both Customer and Manufacturer are aware of the possibility of
expenditures necessary in preparing for performance hereunder and the possible
losses and damages that may occur to each in the event of termination or
cancellation. Both parties clearly understand that neither shall be liable for
damages of any kind (including but not limited to special, incidental or
consequential damages) by reason of the termination or cancellation of this
Agreement. Notwithstanding any other provisions of this Agreement, upon
termination of the Agreement, Customer will immediately purchase, for cash, all
Finished Goods, WIP and Material for No Further Demand Products as provided in
Section 5(e) of this Agreement.
(d) Obligations Upon Termination. The termination or expiration of this
----------------------------
Agreement shall in no way relieve either party from its obligations to pay the
other any sums accrued hereunder prior to such termination or expiration or
required as a result of such termination.
(e) Survival. Notwithstanding anything to the contrary in this Agreement,
--------
the following sections shall survive termination or expiration of this
Agreement: 1, 4, 5, 7(b), 8, 9, 10, 11, 13,
-10-
<PAGE>
15, 16, and 17. The confidentiality provisions of Section 15 shall survive the
termination or expiration of this Agreement for a period of three (3) years.
11. Limitation of Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY
-----------------------
HEREIN, NEITHER PARTY NOR ITS AGENT(S), REPRESENTATIVE(S) OR EMPLOYEE(S) SHALL
BE LIABLE TO THE OTHER PURSUANT TO THIS AGREEMENT FOR AMOUNTS REPRESENTING LOSS
OF REVENUES, LOSS OF PROFITS, LOSS OF BUSINESS OR INDIRECT, CONSEQUENTIAL,
SPECIAL OR PUNITIVE DAMAGES OF THE OTHER PARTY, HOWEVER CAUSED AND ON ANY THEORY
OF LIABILITY, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. THE LIABILITY OF CUSTOMER, ITS AGENT(S), REPRESENTATIVE(S) AND
EMPLOYEE(S) TO THE MANUFACTURER FOR DAMAGES OR ALLEGED DAMAGES WHETHER IN
CONTRACT OR TORT (INCLUDING STRICT LIABILITY AND NEGLIGENCE) WITH RESPECT TO
THIS AGREEMENT IS LIMITED TO AND SHALL NOT EXCEED THE AMOUNTS PAID BY CUSTOMER
TO MANUFACTURER UNDER THIS AGREEMENT DURING THE TWELVE (12) MONTHS IMMEDIATELY
PRECEDING THE EVENT AND/OR PRODUCT GIVING RISE TO THE DAMAGES.
12. Quarterly Reviews. The parties shall hold quarterly progress reviews at
-----------------
the same time as the quarterly pricing reviews per Exhibit A, in which the
parties will discuss, without limitation, quality performance, delivery
performance, the inventory plan, manufacturability issues, yield improvements,
new product plans, costs and cost reduction plans. The agenda and location of
such meetings shall be mutually agreed upon at least two (2) weeks in advance of
such meetings.
13. Attorneys' Fees. The prevailing party in any court proceeding,
----------------
arbitration or in any judicial enforcement or review proceeding shall be
entitled to its reasonable attorneys' fees, experts' fees and costs, including
the costs of arbitration, together with interest on any amount owed at the
maximum legal rate, in addition to any other amount of recovery ordered by such
arbitrator or court.
14. Insurance. During the Term, Manufacturer shall maintain in force and
---------
effect: (a) comprehensive general liability insurance in an amount not less
than $1,000,000 per occurrence for bodily injury and property damage; (b) errors
and omissions insurance in an amount not less than $1,000,000 per claim; (c)
employer's liability insurance in an amount not less than $1,000,000 per
occurrence; and (d) workers' compensation insurance in any amount not less than
that required by applicable law. Manufacturer shall provide Customer with proof
of such insurance upon Customer's request. Manufacturer shall name Customer as
an additional insured on its general liability insurance policies for work
performed pursuant to this Agreement. At Customer's request, Manufacturer will
use reasonable efforts to obtain additional insurance covering Customer Owned
Equipment located on Manufacturer's premises; provided, however, that any
increase in Manufacturer's premium resulting therefrom shall affect the Cost
Model.
15. Confidential Information.
------------------------
-11-
<PAGE>
(a) Nondisclosure and Nonuse. Each party shall treat as confidential all
------------------------
Confidential Information of the other party, shall not use such Confidential
Information except to fulfill its obligations under this Agreement, and shall
use reasonable efforts not to disclose such Confidential Information to any
third party except as required to carry out its duties hereunder. Without
limiting the foregoing, each of the parties shall use at least the same degree
of care which it uses to prevent the disclosure of its own confidential
information of like importance to prevent the disclosure of Confidential
Information disclosed to it by the other party under this Agreement. Each party
shall disclose Confidential Information of the other party only to its
directors, officers, employees, and consultants who are required to have such
information in order for such party to carry out the transactions contemplated
by this Agreement and who have signed nondisclosure agreements protecting the
Confidential Information on substantially the same terms as this Agreement.
Each party shall promptly notify the other party of any actual or suspected
misuse or unauthorized disclosure of the other party's Confidential Information.
(b) Exceptions. Notwithstanding the above, neither party shall have
----------
liability to the other with regard to any Confidential Information of the other
which the receiving party can prove: (i) was in the public domain at the time
it was disclosed or has entered the public domain through no fault of the
receiving party; (ii) was known to the receiving party, without restriction, at
the time of disclosure, as demonstrated by files in existence at the time of
disclosure; (iii) is disclosed with the prior written approval of the disclosing
party; (iv) becomes known to the receiving party, without restriction, from a
source other than the disclosing party without breach of this Agreement by the
receiving party and otherwise not in violation of the disclosing party's rights;
(v) is disclosed pursuant to the order or requirement of a court, administrative
agency, or other governmental body; provided, however, that the receiving party
shall provide prompt notice of such court order or requirement to the disclosing
party to enable the disclosing party to seek a protective order or otherwise
prevent or restrict such disclosure.
(c) Return of Confidential Information. Upon expiration or termination of
----------------------------------
this Agreement, each party shall promptly return all Confidential Information of
the other party. In addition, each party shall, upon written request of the
other party, return Confidential Information of such other party; provided, that
Manufacturer shall incur no liability for failure to meet its obligations due to
the need for Confidential Information which has been returned after such a
request.
(d) Remedies. Any breach of the restrictions contained in this Section 15
--------
is a breach of this Agreement which may cause irreparable harm to the
nonbreaching party. Any such breach shall entitle the nonbreaching party to
injunctive relief in addition to all other available legal remedies.
(e) Confidentiality of Agreement. Each party shall be entitled to
----------------------------
disclose the existence of this Agreement, but agrees that the terms and
conditions of this Agreement shall be treated as Confidential Information and
shall not be disclosed to any third party; provided, however, that each party
may disclose the terms and conditions of this Agreement: (i) as required by any
court or other governmental body; (ii) as otherwise required by law; (iii) to
legal counsel of the parties; (iv) in confidence, to accountants, banks, and
financing sources and their advisors; (v) in
-12-
<PAGE>
connection with the enforcement of this Agreement or rights under this
Agreement; or (vi) in confidence in connection with an actual or proposed
merger, acquisition, or similar transaction.
16. No Other Terms Apply. ALL SALES BY MANUFACTURER TO CUSTOMER, INCLUDING
--------------------
WITHOUT LIMITATION THOSE UNDER SECTION 5(E), WILL BE MADE ONLY ON THE TERMS SET
FORTH IN THIS AGREEMENT, AND MANUFACTURER WILL NOT BE BOUND BY AND MANUFACTURER
HEREBY OBJECTS TO ANY TERMS OF CUSTOMER'S PURCHASE ORDER OR OTHER DOCUMENTS THAT
ARE ADDITIONAL TO OR DIFFERENT FROM THOSE CONTAINED IN THIS AGREEMENT, AND
CUSTOMER HEREBY OBJECTS TO ANY TERMS OF ANY ACCEPTANCE DOCUMENTS OF MANUFACTURER
THAT ARE ADDITIONAL TO OR DIFFERENT FROM THOSE CONTAINED IN THIS AGREEMENT. TO
THE EXTENT THE TERMS OF ANY OTHER DOCUMENT ARE INCONSISTENT WITH THE TERMS OF
THIS AGREEMENT, THE TERMS OF THIS AGREEMENT WILL PREVAIL.
17. Miscellaneous.
-------------
(a) Amendments and Waivers. Any term of this Agreement may be amended or
----------------------
waived only with the written consent of the parties or their respective
successors and assigns. Any amendment or waiver effected in accordance with
this Section 17(a) shall be binding upon the parties and their respective
successors and assigns.
(b) Assignment. Except as may be allowed elsewhere in this Agreement,
----------
Manufacturer shall not assign any of its rights, obligations or privileges (by
operation of law or otherwise) hereunder without the prior written consent of
Customer, which shall not be unreasonably withheld. Customer shall have the
right to assign its rights, obligations and privileges hereunder to an assignee
that agrees in writing to be bound by the terms and conditions of this
Agreement. Subject to the foregoing, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
(c) Governing Law. This Agreement and all acts and transactions pursuant
-------------
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(d) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(e) Section Headings. The section headings and subheadings used in this
----------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
-13-
<PAGE>
(f) Notices. Any notice required or permitted by this Agreement shall be
-------
in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed facsimile, or
forty-eight (48) business hours after being deposited in the regular mail as
certified or registered mail (airmail if sent internationally) with postage
prepaid, if such notice is addressed to the party to be notified at such party's
address or facsimile number as set forth below, or as subsequently modified by
written notice. Email, electronic mail, is not adequate notice.
(g) Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith, in order to maintain the economic position enjoyed by
each party as close as possible to that under the provision rendered
unenforceable. In the event that the parties cannot reach a mutually agreeable
and enforceable replacement for such provision, then (i) such provision shall be
excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of the
Agreement shall be enforceable in accordance with its terms.
(h) Entire Agreement. This Agreement and all Exhibits, Appendices and
----------------
Schedules attached hereto are the product of both of the parties hereto, and
constitute the entire agreement between such parties pertaining to the subject
matter hereof, and merge all prior negotiations and drafts of the parties with
regard to the transactions contemplated herein. Any and all other written or
oral agreements existing between the parties hereto regarding such transactions
are expressly canceled.
(i) Independent Contractors. The relationship of Manufacturer and
-----------------------
Customer established by this Agreement is that of independent contractors, and
nothing contained in this Agreement will be construed (i) to give either party
the power to direct and control the day-to-day activities of the other, (ii) to
constitute the parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) to allow either party to
create or assume any obligation on behalf of the other for any purpose
whatsoever.
(j) Advice of Legal Counsel. Each party acknowledges and represents that,
-----------------------
in executing this Agreement, it has had the opportunity to seek advice as to its
legal rights from legal counsel and that the person signing on its behalf has
read and understood all of the terms and provisions of this Agreement or has had
an opportunity to do so. This Agreement shall not be construed against any
party by reason of the drafting or preparation thereof.
(k) Expenses. Except as otherwise expressly provided in this Agreement,
--------
each party to this Agreement shall bear all expenses incurred by it in
connection with the preparation and negotiation of this Agreement and in the
consummation and performance of the transactions contemplated hereby.
(l) Acquisition. Customer will notify Manufacturer in writing at least
------------
fifteen (15) days before any proposed change in ownership of substantially all
the assets of Customer, merger of
-14-
<PAGE>
Customer in which the Customer is not the surviving entity, or change in
ownership of more than fifty (50%) of the voting stock, identifying the other
party to the proposed transaction and, unless Manufacturer otherwise requests in
writing, Customer will use its best efforts to require the other party to the
proposed transaction to assume the Customer's obligations and commitments to
Manufacturer.
(m) Force Majeure. Manufacturer shall not be liable for any delay due to
--------------
unforeseen circumstances or to causes beyond its reasonable control or
compliance with any law, regulation or order, whether valid or invalid, of any
governmental body or any instrumentality thereof. Performance shall be deemed
suspended during and extended for such time as any such circumstance or cause
delays its execution. Whenever any such circumstance or cause has been
remedied, Manufacturer will make and Customer shall accept performance under
this Agreement. Manufacturer is not responsible for delays in delivery dates
resulting from Customer's failure to furnish test fixtures, equipment,
procedure, specifications, and other items in a timely fashion.
The parties have executed this Agreement as of the date first set forth above.
CUSTOMER: MANUFACTURER:
CERENT CORPORATION P.C.B. ASSEMBLY, INC.
By: /s/ CERENT CORPORATION By: /s/ P.C.B ASSEMBLY, INC.
------------------------------- ------------------------------
Name: ____________________________ Name: ___________________________
Title: ___________________________ Title: __________________________
Facsimile Number for Notices: Facsimile Number for Notices:
- -------------------------- (408) 737-9098
-15-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
Exhibit A
---------
Pricing
1. Additional Definitions.
----------------------
"Labor Cost" means the cost of labor [*]
----------
"Material Cost" means the cost of Materials used in Products sold to Customer
-------------
by Manufacturer as determined as set forth herein.
"Overhead Cost" [*]
-------------
2. Pricing and Carried Inventory.
-----------------------------
(a) Pricing. Customer shall pay to Manufacturer for Products a price
equal to the Material Cost plus the Labor Cost plus the Overhead Cost. [*]
* Represents confidential information which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-16-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
3. New Product Introduction. The production of prototypes for new Products
------------------------
may be included within this Agreement upon mutual agreement of the parties.
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
-17-
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT 10.18
CUSTOM PRODUCT DEVELOPMENT AND PRODUCTION AGREEMENT
between
Fiberlane Communications, Inc. And Hamilton Hallmark
1. AGREEMENT TO BUY AND SELL
-------------------------
(a) SELLER and BUYER agree to sell and buy, respectively, Custom Products
and/or Services for the price and on the terms and conditions contained herein.
The manufacturer of the Custom Products will be LSI LOGIC ("MANUFACTURER").
(b) SELLER certifies that MANUFACTURER has agreed with SELLER to undertake
the obligations and responsibilities as set forth for MANUFACTURER in this
Agreement.
2. DEFINITIONS
-----------
The below terms shall have the following meanings:
(a) "Custom Product". An integrated circuit manufactured, assembled or
otherwise fabricated or obtained by MANUFACTURER incorporating standard
characteristics defined by MANUFACTURER and the unique characteristics
of a "Pattern". Custom Products are either "Prototypes" or "Production Units" as
defined below.
(b) "Product Acceptance Specification". The written specifications which
BUYER and SELLER agree describe the functionality and physical characteristics
of the Custom Product which is developed pursuant to the Statement of Work in
Attachments A and C.
(c) "Prototype". The Custom Product fabricated pursuant to the "Statement
of Work" for the purpose of BUYER determining whether the Pattern meets the
Product Acceptance Specification.
(d) "Production Unit". A Custom Product other than a Prototype.
(e) "Pattern" The unique characteristics of a Custom Product developed
under this Agreement as provided by customer.
(f) "Design Technology". The design tools, systems and libraries of SELLER
or MANUFACTURER.
3. STATEMENT OF WORK
-----------------
SELLER, MANUFACTURER and BUYER will perform tasks as specified in the
Statement of Work. If BUYER and MANUFACTURER have entered into a separate
agreement related to this Agreement, then that agreement, if any, is set forth
in Attachment B.
4. PRICING
-------
(a) BUYER shall pay SELLER development charges for each Pattern as
specified in Attachment C ( quotation attached hereto).
(b) Price schedules, if any, for Production Units are listed in Attachment
C and are valid only for the time period specified. If no time period is
specified, then such prices are estimates only.
5. DESIGN CHANGES
--------------
(a) Requests by BUYER for design changes after the parties have agreed
upon the Product Acceptance Specification shall be at BUYER's expense (except,
however for SELLER's or MANUFACTURER's error).
(b) If it is determined, during the course of executing the Statement of
Work, that a modification of the Statement of Work is required to meet BUYER's
requirement, including but not limited to a change in array size or type, SELLER
agrees to promptly inform BUYER of the effect of such modification on the
Statement of Work, the estimated schedule, and the price. Pending written
instruction from BUYER and written agreement by SELLER (which written agreement
shall not be unreasonable withheld), SELLER may suspend its performance
hereunder without liability.
6. CUSTOM PRODUCT ACCEPTANCE
-------------------------
(a) BUYER may reject only those Prototypes that fail to meet the Product
Acceptance Specification. Notice of rejection must be in writing and include a
description of the failure and a return of the Prototype to SELLER. BUYER's
exclusive rights upon rejection of Prototypes are set forth in Section 7. Notice
and return of the Prototype to SELLER must be within four (4) weeks of delivery
of the Prototype to BUYER.
(b) BUYER may reject only those Production Units that fail to meet the
Product Acceptance Specification and any applicable MANUFACTURER's
specifications. BUYER shall be deemed to have accepted Production Units unless
notice of rejection is given within fifteen (15) calendar days of receipt.
(c) BUYER agrees to provide Seller with any other written acceptance or
rejection identified in the Statement of Work within 20 Calender days of
presentation.
7. SELLER'S LIMITED WARRANTY
-------------------------
(a) SELLER warrants to BUYER that the prototype(s) will conform to the
Product Acceptance Specification. SELLER makes no other warranty, express or
implied, with respect to Prototypes. With respect to any such Prototype which
does not conform to the Product Acceptance Specification, SELLER's liability is
limited to replacing the non-conforming Prototype(s) or, at SELLER's election
and in the case where SELLER assisted in the design, refunding to BUYER the
development charges paid by BUYER hereunder. SELLER shall have no liability
hereunder unless BUYER complies with the requirements of Paragraph 6(a).
(b) SELLER warrants to BUYER that the Production Units will conform to the
Product Acceptance Specification. SELLER makes no other warranty, express or
implied, with respect to Production Units. SELLER will further transfer to BUYER
whatever transferable warranties SELLER receives from MANUFACTURER with respect
to Production Units. With respect to Production Units which do not meet the
Product Acceptance Specification, SELLER's liability is limited (at SELLER's
election) to (i) Refund of BUYER's purchase price for such Production Units
(without interest), (ii) Repair of such Production Units, or (iii) Replacement
of such Production Units; provided, however, that such Production Units must be
returned to SELLER, along with acceptable evidence of purchase, within twenty
(20) Calendar days from date of delivery, transportation charges prepaid.
8. OWNERSHIP RIGHTS
----------------
(a) BUYER shall obtain title to a Pattern upon acceptance of the Prototype and
payment in full to SELLER, and SELLER shall thereupon furnish to BUYER the
netlist, test vectors and bonding diagrams which SELLER has furnished to
MANUFACTURER relating to the Pattern.
(b) Nothing contained in this Agreement shall grant SELLER or MANUFACTURER
any right to use for any third party any item first developed hereunder by BUYER
or for BUYER without BUYER's prior written approval.
(c) All Design Technology provided by SELLER hereunder, including all
circuit macros, shall remain the sole property of SELLER; provided, however,
that Seller shall deliver any and all netlists for Custom Products to Buyer
within fifteen (15) Calendar days of Buyer's written request.
(d) All tooling, processing technology, Design Technology, and proprietary
information of MANUFACTURER shall remain the sole property of MANUFACTURER.
9. PRODUCTION UNIT ORDERS
----------------------
(a) BUYER may place orders for Production Units upon its written acceptance of
the Prototype. Shipment of Production
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
1
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
Units will be scheduled as nearly as possible in accordance with BUYER's
requested delivery dates subject to MANUFACTURER's lead time at the time of
order acceptance. Shipment will be made against BUYER's specific purchase
orders.
(b) Each purchase order for Production Units is subject to acceptance in
writing by SELLER, which acceptance shall not be unreasonably withheld.
10. RESCHEDULING
------------
BUYER may reschedule delivery of Production Units, provided BUYER gives
SELLER written notice at least [*] Calendar days prior to the originally
scheduled shipment date and further provided SELLER accepts the new delivery
schedule. SELLER's acceptance shall not be unreasonably withheld.
11. TERMINATION
-----------
(a) This Agreement may be terminated as follows:
(i) CONVENIENCE: BUYER may at any time prior to accepting the
-----------
Prototype elect to terminate this Agreement, or thereafter cancel any Production
Units ordered hereunder, for its convenience. Such election shall be in writing
and sent to SELLER as provided herein.
(ii) NON-FEASIBILITY: This Agreement shall automatically terminate
---------------
if SELLER and BUYER are unable to complete a Product Acceptance Specification
acceptable to both parties.
(iii) CAUSE: This Agreement may be terminated and/or any orders for
-----
Production Units may be cancelled immediately for cause by either party in the
event the other party fails to perform any of its material obligations under
this Agreement so as to be in default hereunder and fails to cure such default
within thirty (30) Calendar days after written notice thereof, or if such
default cannot reasonably be cured within thirty (30) Calendar days then the
other party fails to commence such cure within thirty (30) Calender days after
written notice and fails to diligently pursue such cure to completion.
(b) In the event of termination, the following sums shall become due and
payable:
(i) PROTOTYPE PHASE: If BUYER terminates this Agreement for CAUSE
---------------
prior to BUYER accepting the Prototype, then SELLER shall refund all sums paid
by BUYER to SELLER. If this Agreement is terminated for any other reason prior
to accepting the Prototypes, then BUYER shall pay SELLER all charges due at the
time of termination together with accrued time, material and equipment charges,
if any. Charges associated with a billable event (applicable to both NRE and
Engineering Development Charges) shall be due if the work associated with any
phase following the previous billable event has been started.
(ii) PRODUCTION UNIT PHASE: If BUYER cancels any order for
---------------------
Production Units for CAUSE then BUYER may so cancel without liability therefor.
If any order for Production Units is cancelled for any other reason, BUYER
agrees to pay SELLER the full purchase price for such Production Units scheduled
for delivery within [*] Calendar days after written notice of cancellation or
other period as identified in Attachment C.
12. PATENT INDEMNITY
----------------
(a) Protection provided by MANUFACTURER to BUYER for patent and/or
copyright infringement is set forth in Attachment D.
(b) MANUFACTURER's acceptance of orders for Custom Products is subject to
BUYER's execution of a separate patent/copyright infringement provision, which
is set forth in Attachment D.
(c) SELLER will defend any suit or proceeding brought against BUYER based
on a claim that a portion of the Pattern designed and developed by SELLER of a
Custom Product constitutes an infringement of a United States patent, copyright,
trademark, trade secrets or other property right of a third party. If notified
promptly in writing and given full and complete authority, information and
assistance for the defense of same, SELLER will pay damages and costs awarded
against BUYER in an amount that shall not exceed the development charges paid by
BUYER to SELLER hereunder with respect to the alleged infringing Pattern. In
providing such defense, or in the event that such Pattern is held to constitute
infringement and the sale or use of the Custom Product containing such Pattern
is enjoying, SELLER shall, in its sole discretion, either procure for Buyer the
right to continue selling and using the Custom Product containing such Pattern,
or modify it so it becomes noninfringing, without materially altering its
conformance with the product acceptance specification provided herein.
Notwithstanding the aforesaid, SELLER (i) shall not be responsible for any
damages, costs or expenses resulting from any compromise made without its
written consent, and (ii) shall have no liability to BUYER for any alleged
infringing Custom Product which was procured by BUYER from any third party
(including direct procurement from MANUFACTURER). Seller will not settle any
claims that do not provide for complete release of Buyer.
(d) Except the extent specified in Subsections (a) and (c) above, BUYER
agrees to defend any suit or proceeding brought against SELLER based on a claim
that any Custom Product developed under this Agreement, or the combination of
any Custom Product developed hereunder with any other product, constitutes the
infringement of a patent, copyright, trade secret or other property right of a
third party. If notified promptly in writing and given full and complete
authority, information and assistance for the defense of same BUYER shall pay
all costs and damages awarded against SELLER in an amount which shall not exceed
the sums paid or to be paid by BUYER to SELLER.
13. WARRANTY EXCLUSION
------------------
EXCEPT AS EXPRESSLY SET FORTH BY THIS AGREEMENT OR ANY ATTACHMENT HERETO,
NEITHER SELLER NOR MANUFACTURER MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, WITH RESPECT TO (i) PATENT, COPYRIGHT OR TRADEMARK INFRINGEMENT, AND/OR
(ii) FITNESS FOR PURPOSE OR FOR PARTICULAR USE OR MERCHANTABILITY OF ANY CUSTOM
PRODUCT, PROTOTYPE, PRODUCTION UNIT, PATTERN OR SOFTWARE ACQUIRED OR USED BY
BUYER PURSUANT TO THIS AGREEMENT. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARE
HEREBY EXCLUDED.
14. LIMITATION OF LIABILITIES
-------------------------
ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT NOTWITHSTANDING,
NEITHER SELLER, BUYER, NOR MANUFACTURER SHALL BE ENTITLED TO OR BE LIABLE FOR,
INDIRECT, SPECIAL INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE INCLUDING,
WITHOUT BEING LIMITED TO, LOSS OF PROFIT, PROMOTIONAL, OR MANUFACTURING
EXPENSES, OVERHEAD, INJURY TO REPUTATION OR LOSS OF BUSINESS, BUYER'S RECOVERY
FROM SELLER FOR ANY CLAIM SHALL NOT EXCEED BUYER'S PURCHASE PRICE FOR THE CUSTOM
PRODUCTS IRRESPECTIVE OF THE NATURE OF THE CLAIM, WHETHER IN CONTRACT, TORT,
WARRANTY, OR OTHERWISE.
15. DEVELOPMENT SOFTWARE
--------------------
If Software used in the development of a Pattern is subject to a license,
such license shall be executed by BUYER and a copy thereof shall be attached to
this Agreement as Attachment E. The license contains the sole rights and
remedies of BUYER and neither SELLER nor MANUFACTURER shall have any liability
to BUYER for such software except as expressly set forth therein.
16. USE OF CUSTOM PRODUCTS IN LIFE SUPPORT APPLICATIONS
---------------------------------------------------
Custom Products sold by SELLER are not designed for use in life support
equipment where malfunction of such Custom Product can reasonably be expected to
result in a personal injury. BUYER uses or sells such Custom Product for use in
life support equipment at BUYER's own risk and agrees to fully indemnify SELLER
and MANUFACTURER of such Custom Product for any damages resulting from such use
or sale.
17. PAYMENT
-------
(a) Payment terms are as stated in Attachment C, subject to credit
approval and the continuation of such approval by
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
2
<PAGE>
SELLER's credit department.
(b) On any invoice not paid by maturity date, BUYER shall pay interest
from maturity date to date of payment at the annual percentage rate of 18% (or
such lower rate as may be the maximum allowable by law), together with SELLER'S
cost of collection (including reasonable attorney's fees).
18. DELIVERIES
----------
(a) Unless otherwise stated in Attachment C, all deliveries hereunder
shall be F.O.B. MANUFACTURER'S facility. Products invoiced and held by SELLER
for any reason shall be at BUYER's risk and expense. Delivery route shall be at
the election of SELLER unless specifically designated by BUYER.
(b) All delivery dates and quantities are estimates and SELLER will use
best efforts to meet BUYER'S requested delivery dates.
19. TAXES/FREIGHT
-------------
Unless otherwise stated in Attachment C, BUYER shall be responsible for
transportation charges from the F.O.B. point and for payment of any and all
Federal, state and local sales, use, and excise taxes and all other taxes and
charges assessed in connection with this Agreement.
20. ARBITRATION
-----------
Any controversy arising out of or relating to this Agreement shall be
settled by arbitration in one of the locations set forth at the end of this
Section in accordance with the commercial rules then effective of the American
Arbitration Association before a panel of three (3) arbitrators. The arbitrators
sitting in any such controversy shall have no power to alter or modify any
express provisions of this Agreement or any writing modifying or extending this
Agreement, or to render any award which by its terms effects any such alteration
or modification. The parties consent to the jurisdiction of the State and U.S.
District Courts in and for the location at which arbitration is conducted for
all purposes in connection with arbitration including the entry of judgment on
any award. The parties consent that any process or notice of motion or other
application to any of said courts, and any paper in connection with arbitration,
may be served by certified mail return receipt requested or by personal service
or in such other manner as may be permissible under the rules of the applicable
court or arbitration tribunal, provided a reasonable time for appearance is
allowed. Neither party will object to the joining of MANUFACTURER as a
participant and/or party in the arbitration proceedings. The parties further
agree that arbitration proceedings must by instituted within one (1) year after
the claimed breach occurred and that such failure to institute arbitration
proceedings within such period shall constitute an absolute bar to the
institution of any Administrative. Court or Arbitration proceedings and a waiver
of all claims. The arbitrators may award reasonable attorney's fees to the
prevailing party. The party instituting arbitration may elect to commence such
proceeding at any of the following locations: Phoenix, Arizona; or Santa Clara,
California; or New York, New York.
21. MISCELLANEOUS
-------------
(a) TERMS AND CONDITION. THE TERMS AND CONDITIONS SET FORTH HEREIN
-------------------
RELATING TO PRODUCTION UNITS APPLY TO ANY SUBSEQUENT PURCHASE ORDERS PLACED BY
BUYER WITH SELLER FOR SUBSEQUENT PURCHASE ORDERS PLACED BY BUYER WITH SELLER FOR
PRODUCTION UNITS. NOTWITHSTANDING ANY CONFLICTING TERMS AND CONDITIONS WHICH MAY
APPEAR ON BUYER'S PURCHASE ORDER OR ANY ORDER ACKNOWLEDGEMENT OF SELLER.
(b) ENTIRE AGREEMENT. This Agreement contains the entire understanding of
-----------------
the parties with respect to the subject matter hereof and supersedes all prior
agreements relating thereto, written or oral, between the parties. Amendments to
this Agreement must be in writing, signed by the duly authorized officers of the
parties, specifically stating that such amendments are made pursuant to this
section. The parties agree that the terms and conditions of this Agreement shall
prevail, notwithstanding contrary or additional terms, in any purchase order,
sales acknowledgement, confirmation or any other document issued by either party
effecting the purchase and/or sale of Custom Products.
(c) NO ASSIGNMENT. Except as specifically provided herein, this Agreement
--------------
may not be assigned by either party without the written consent of the other.
Seller agrees that such consent shall not be unreasonably withheld.
(d) NO IMPLIED WAIVERS. No delay or omission to exercise any right, power
-------------------
or remedy accruing to either party upon breach or default by the other party
under this contract shall impair any such right, power or remedy of the other
party, or shall be construed as a waiver of any such breach or default. All
waivers must be in writing.
(e) SEVERABILITY. In the event any of the provisions of this Agreement
-------------
shall, for any reason, be held void or unenforceable, the remaining provisions
shall remain in full effect and shall control.
(f) INVALIDITY. Any provisions of this Agreement prohibited by the law of
-----------
any state shall, as to said state, be ineffective to the extent of such
prohibition without invalidating the remaining provisions of this Agreement
(g) FORCE MAJEURE. Should any obligation of either party hereunder (except
-------------
with respect to timely payment of Invoices) be delayed by events beyond such
party's control, including but not limited to, natural or man-made disasters,
strikes government actions or regulations, failure of a third party to comply or
conform, or inability to obtain labor or materials through its regular sources
that party's time for performance shall be extended by the period of delay.
(h) NOTICE. Any notice required to be sent to either party under the terms
------
of this Agreement shall be either delivered personally or sent via registered or
certified mail, return receipt requested postage prepaid to the parties at the
addresses set forth on the face of this Agreement. Such notice shall be
effective upon receipt.
22. CONFIDENTIALLY
--------------
If either party hereto receives from the other party written information
which is marked "Confidential" and/or "Proprietary" the receiving party agrees
not to use such information except in the performance hereof, and to treat such
information in the same manner as it treats its own confidential information.
Confidential information that is disclosed orally or visually shall be confirmed
as confidential or proprietary in writing within ten (10) days after such
disclosure.
3
<PAGE>
The obligation to keep information confidential shall not apply to any such
information that has been disclosed in publicly available sources; is in the
rightful possession of the party receiving the confidential information without
an obligation of confidentiality; or is required to be disclosed by operation of
law. Except as otherwise provided herein, the obligation not to disclose shall
be for a period of one (1) year after the termination hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year below:
Hamilton Hallmark Fiberlane Communications, Inc.
A division of Avnet, Inc. ("Buyer")
("Seller")
By: /s/ Ty Stakley By: /s/ Ajaib Bhadare
-------------------------------------- --------------------------
Name: Ty Stakley Name: Ajaib Bhadare
----------------------------------- --------------------------
Title: Manager, Contracts Administration Title: V.P. Engineering
----------------------------------- --------------------------
Date: November 10, 1997 Date: Oct 21st 97
----------------------------------- --------------------------
4
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
ATTACHMENT A
STATEMENT OF WORK
TURNKEY SYSTEM
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTAL TREATMENT REQUESTED]
[LOGO OF HAMILTON HALLMARK APPEARS HERE]
Attachment A
Statement of Work
Hamilton Hallmark and Fiberlane Communications
BTC and SXC ASIC Designs
Quote # DWH7JJ121 09-SJW
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
ATTACHMENT B
RESERVED FOR INSERTION OF
ANY AGREEMENT BETWEEN BUYER AND MANUFACTURER
RELATED TO THIS AGREEMENT
<PAGE>
ATTACHMENT C
SELLER'S QUOTE FOR
DEVELOPMENT CHARGES
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[LOGO OF HAMILTON HALLMARK APPEARS HERE]
"Attachment C"
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[LOGO OF HAMILTON HALLMARK APPEARS HERE]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[LOGO OF HAMILTON HALLMARK APPEARS HERE]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
[LOGO OF HAMILTON HALLMARK APPEARS HERE]
[*]
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
ATTACHMENT D
MANUFACTURER'S POLICIES
(LSI LOGIC CORPORATION)
LIMITED WARRANTY AND LIMITATION OF LIABILITIES
(a) ENCAPSULATED UNITS. MANUFACTURER warrants that the products furnished
------------------
hereunder will be free from defects in material and workmanship under normal use
and service. MANUFACTURER's obligations under this warranty are limited to
replacing or repairing or giving credit for, at its option, at its factory, any
of said products which shall, within one (1) year after shipment, be returned to
MANUFACTURER's factory of origin, transportation charges prepaid, and which are,
after examination, disclosed to MANUFACTURER's factory of origin, transportation
charges prepaid, and which are, after examination, disclosed to MANUFACTURER's
satisfaction to be thus defective. THIS WARRANTY IS EXPRESSED IN LIEU OF ALL
OTHER WARRANTIES, EXPRESSED, STATUTORY, OR IMPLIED, INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND OF ALL
OTHER OBLIGATIONS OR LIABILITIES ON MANUFACTURER'S PART, AND IT NEITHER ASSUMES
NOR AUTHORIZES ANY OTHER PERSON TO ASSUME FOR MANUFACTURER ANY OTHER LIABILITIES
IN CONNECTION WITH THE SALE OF THE SAID ARTICLES. This warranty shall not apply
to any of such products which shall have been repaired or altered, except by
MANUFACTURER, or which shall have been subjected to misuse, negligence, or
accident. The aforementioned provisions do not extend the original warranty
period of any product which has either been repaired or replaced by
MANUFACTURER.
(b) UNENCAPSULATED UNITS. It is understood that if this order calls for the
--------------------
delivery of semiconductor devices which are not finished and fully encapsulated,
that NO WARRANTY, STATUTORY, EXPRESS, OR IMPLIED, INCLUDING THE IMPLIED WARRANTY
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, SHALL APPLY. All such
devices are sold "as is where is".
PATENT/TRADEMARK INDEMNIFICATION
(a) MANUFACTURER will defend any action against BUYER claiming that any
product furnished hereunder infringes any United States trade secret, copyright
or patent, and to pay all costs and damages finally awarded in any such action,
provided that MANUFACTURER is notified promptly in writing of the suit and at
MANUFACTURER's request and at its expense is given control of such action and
all requested information and assistance to settle or defend the same. Should
use or sale of any product furnished hereunder be enjoined as a result of such
action, then MANUFACTURER shall in a reasonable time either: (a) obtain for
BUYER the right to use or sell the product; (b) substitute an equivalent
product that no longer infringes; or (c) authorize the return of all products
and upon the return refund all monies paid to MANUFACTURER for such product .
(b) Notwithstanding subparagraph (a) above, BUYER shall, at his own expense,
defend any action based upon a claim that any product furnished hereunder
infringes any patent, trade secret, or copyright of a third party where such
claim is based upon (i) the use of any product furnished hereunder in
combination with products not furnished by MANUFACTURER or (ii) information or
materials furnished by BUYER and incorporated into products furnished by
MANUFACTURER or (ii) Information or materials furnished by BUYER and
incorporated into products furnished by MANUFACTURER, provided that MANUFACTURER
promptly notifies BUYER of such claim in writing and gives control of such
action and all requested information and assistance to settle or defend the same
at BUYER's expense.
(c) THE FOREGOING STATES THE SOLE LIABILITY OF MANUFACTURER FOR PATENT,
COPYRIGHT OR TRADE SECRET INFRINGEMENT OF ANY KIND EXPRESS, IMPLIED OR
STATUTORY.
COMPLIANCE WITH LAW
-------------------
Each party hereto shall be responsible for insuring its compliance with the
laws and regulations of the United States government relating to the export of
goods and technology.
BUYER ACKNOWLEDGES THAT IT HAS READ AND AGREES TO THE TERMS OF THE ABOVE
PATENT/TRADEMARK INDEMNIFICATION. BUYER UNDERSTANDS THAT THE TERM "MANUFACTURER"
REFERS TO LSI LOGIC CORPORATION.
Buyer: /s/ Ajaib Bhadare Date: 10-21-97
----------------------------- ----------------
By:Fiberlane Communications, Inc. Title: V.P. Engineering
-------------------------------- ---- -----------
<PAGE>
ATTACHMENT E
RESERVED FOR ANY
SOFTWARE SUBJECT TO A LICENSE
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
EXHIBIT 10.19
CERENT/KLSI TERMS & CONDITONS
1 DEFINITIONS: As used herein, the following terms shall have the meanings set
- ----------------
forth below.
1.1 KLSI and CERENT shall mean, respectively, Kawasaki LSI U.S.A. Inc. (KLSI),
and CERENT, or a CERENT authorized subcontractor for whose account a
Purchase Order has been placed.
1.2 "Purchase Order" shall mean a written offer to purchase products sold by
KLSI and submitted to KLSI by or on behalf of CERENT.
1.1. "Products" shall mean the products and services described on the face side
hereof
1.4 "Standard Products" shall mean Products, which are regularly inventoried by
KLSI and are not Custom Products.
1.5 "Special Order Products" shall mean Products which are not regularly
inventoried by KLSI and are not Custom Products.
1.6 "Custom Products" shall mean Products which are customized to the
specifications of CERENT, to the extent that they have little or no
economic value to another customer of KLSI and cannot be economically re-
worked for sale to another customer.
2. ACCEPTANCE OF PURCHASE ORDERS: Each Purchase Order with KLSI is subject to
- ----------------------------------
acceptance by KLSI in its sole discretion in each instance. KLSI will notify
Cerent of it's acceptance or rejection of each Purchase Order within [*] of
receipt. Failure to accept Cerent's Purchase Order within [*] shall be deemed a
rejection of said Purchase Order.
3. The terms and conditions set forth herein supersede all prior communications
between the parties concerning, and constitute their sole and exclusive
understanding with respect to the subject matter hereof. In the event of any
inconsistency between the terms and conditions herein and those of any order,
Purchase Order, acceptance or confirmation, the terms and conditions herein
shall govern and control. Acceptance by KLSI of CERENT'S Purchase Order is
expressly conditioned on, and made subject to CERENT'S assent to all of the
terms and conditions herein, and any proposal by CERENT for a modification of
any such terms or conditions, or for a term or condition inconsistent with any
term or condition herein, or for an additional term or condition will not be
binding on KLSI unless reduced to writing and executed by KLSI'S authorized
representative.
4. PRICES: KLSI shall sell Products to CERENT at prices negotiated between KLSI
- -----------
and CERENT. Prices are in US$.
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
5. TERMS OF PAYMENT AND DELIVERY: Unless KLSI has extended credit to CERENT,
- ----------------------------------
KLSI will require [*] to accompany CERENT'S Purchase Order, or a [*] acceptable
to KLSI which requires CERENT to pay any and all costs of collection, including,
without limitation, [*]. When KLSI has extended credit to CERENT, the terms
of payment hereunder shall be net cash [*] from the date of KLSI invoice without
deduction or setoff of any kind, unless the shipment is "short" or fails
inspection, then CERENT reserves the right to adjust payment accordingly. All
credit sales are subject to prior approval by KLSI in its sole discretion.
Products will be shipped to CERENT F.O.B. KLSI'S place of shipment. Unless KLSI
receives and expressly accepts other instructions from CERENT, KLSI shall be
free to select the method of shipment. KLSI will ship Products as promptly as
reasonably possible in accordance with the shipment date requested in the
Purchase Order, provided, however that all shipment and delivery dates are based
on normal expectancy and are approximate.
6. RISK OF LOSS: Anything herein or in any applicable law to the contrary
- -----------------
notwithstanding, CERENT will bear the risk of loss, deterioration or damage to
the Products from the time they are placed by KLSI in the possession of a
carrier. CERENT shall be solely responsible for filling any claims for damage
during the shipment with the carrier. After the passage to CERENT of such risk
of loss, deterioration or damage, the Products held by KLSI for whatever reason,
shall be held for CERENT'S account at CERENT'S expense, irrespective of whether
the products are within the coverage of any policy of insurance maintained by
the KLSI.
7. RESERVATION OF SECURITY INTEREST: KLSI reserves and retains a security
- -------------------------------------
interest in the Products and the proceeds thereof until payment therefor in full
has been made by CERENT. This contract constitutes a security agreement between
CERENT, as a debtor, and KLSI, as secured party, under the Uniform Commercial
Code, and KLSI shall have the rights and remedies of a secured party thereunder.
CERENT authorizes KLSI to file financing statements and to do any other act or
thing necessary or useful in perfecting KLSI'S security interest in the
Products, and agrees to execute any and all documents required to be executed on
its part to perfect said security interest.
8. WARRANTY: KLSI shall warrant all Products sold or otherwise supplied to
- -------------
CERENT hereunder against defects in material and workmanship for a period of [*]
from the date when risk of loss shall pass to CERENT pursuant to Paragraph 6
hereof. KLSI'S obligations under this warranty are limited to the price of the
Products sold (exclusive of shipping costs, insurance and taxes) and are further
limited to replacing or crediting at KLSI'S option, defective Products at no
cost to CERENT, provided, however, that CERENT shall promptly furnish KLSI with
reasonable substantiation of any allegedly defective Products in accordance with
KLSI'S instructions, and provided further that CERENT shall furnish written
notice to KLSI of the precise nature of the alleged defect within the above
described [*].
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
KLSI shall have the option, at its discretion, to require that any defective
Product be returned to KLSI. Unless otherwise expressly agreed in writing by
KLSI, CERENT shall be responsible for all insurance and shipping costs in
returning allegedly defective Products to KLSI. This warranty extends only to
CERENT and not to CERENT'S customers.
EXCEPT AS OTHERWISE SET FORTH HEREIN, THE PRODUCTS BEAR NO WARRANTIES TO CERENT,
WHETHER EXPRESS WARRANTIES OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE, AND KLSI WILL HAVE NO LIABILITY IN CONTRACT OR
TORT FOR ANY DAMAGE, LOSS, COST OR EXPENSE (WHETHER DIRECT, INDIRECT, SPECIAL OR
CONSEQUENTIAL) SUFFERED OR INCURRED BY CERENT OR CERENT'S CUSTOMERS.
THIS WARRANTY DOES NOT COVER DAMAGE WHICH RESULTS FROM ACCIDENT, MISUSE, ABUSE,
IMPROPER LINE VOLTAGE, FIRE, FLOOD, LIGHTENING, OR OTHER ACTS OF GOD OR DAMAGE
RESULTING FROM ANY MODIFICATIONS, REPAIRS, OR ALTERATIONS PERFORMED OTHER THAN
BY KLSI OR KLSI'S AUTHORIZED AGENT OR RESULTING FROM FAILURE TO STRICTLY COMPLY
WITH KLSI'S WRITTEN OPERATING AND MAINTENENCE INSTRUCTIONS. CERENT ACKNOWLEDGES
THAT THE PRODUCTS ARE HIGHLY SENSITIVE ELECTRONIC PRODUCTS REQUIRING SPECIAL
HANDLING AND THAT THIS WARRANTY DOES NOT APPLY TO IMPROPERLY HANDLED PRODUCTS.
PRODUCTS MANUFACTURED TO MEET CERENT'S SPECIFIC PERFORMANCE SPECIFICATIONS
ACCEPTED BY KLSI ARE WARRANTED ONLY TO PERFORM IN CONFORMITY WITH SUCH
SPECIFICATIONS.
PRODUCTS LIABILITY: Without limiting the provisions of Paragraph 8, KLSI shall
- -------------------
not be liable to CERENT or to third parties for liabilities, losses, expenses or
damages (including, without limitation, court costs and attorney's fees)
incurred or suffered by CERENT or third parties resulting from or caused by, the
defective or allegedly defective manufacture, assemble, storage, use or
transportation of any Products or of any goods, wares, products or services
incorporating or utilizing any Products. CERENT agrees to protect, indemnify and
hold harmless KLSI from and against all suits, claims, liabilities, losses,
expenses and damages (including, without limitation, court costs and attorneys
fees of any kind or character arising from claims) asserted by any person or
entity against KLSI in respect of any Products or goods, wares, products or
services incorporating or utilizing any Products.
9. SERVICE AND COLLECTION COSTS: Without limiting any other remedies available
- ---------------------------------
to KLSI at law or in equity or otherwise, there shall be charged to CERENT a
delinquency and service fee of [*], if less, on amounts due KLSI for any period
during which payment remains in arrears, and such discounts as may from time to
time be offered by KLSI with respects to its Products shall not be made
available to CERENT while any payment owed by CERENT to KLSI remains in arrears.
CERENT shall pay, or reimburse KLSI for, any and all expenses incurred by KLSI
in the collection of any
* Represents confidential information for which Cerent Corporation is seeking
confidential treatment with the Securities and Exchange Commission.
<PAGE>
amounts due hereunder, including, without limitation, the costs of any court
proceedings or arbitration and attorney's fees.
10. ACCELERATION: KLSI may demand immediate payment of any and all amounts owed
- -----------------
by CERENT to KLSI hereunder or under any other contract of sale between CERENT
and KLSI and/or cancel any previous accepted Purchase Order by written notice to
CERENT upon any material breach by CERENT of the terms and conditions hereof or
upon the CERENT filing a petition under any insolvency or bankruptcy law or
making a general assignment for the benefit of creditors, whether voluntary or
involuntary, or being dissolved, becoming insolvent or being adjudged bankrupt.
KLSI will make every effort to achieve a mutually agreed upon payment plan with
CERENT before implementing this condition.
11. INSPECTION: CERENT is responsible for inspecting all deliveries of Products
- ---------------
for shortage or non-conformity. All Products delivered will be deemed accepted
by CERENT as being without shortages and non-conformities unless CERENT notifies
KLSI of any discrepancies within five (5) days of delivery.
12. PATENTS, ETC.: KLSI'S sale of Products to CERENT does not convey to CERENT
- ------------------
any license or any other right, express or implied, under any patent, trademark
or proprietary right of KLSI concerning Products. If any Products are
manufactured to meet CERENT'S designs and specifications, CERENT shall defend
KLSI against any claims or actions for unfair competition, for infringement of
patents or trademarks, or for any other reason, and shall hold KLSI harmless
from damages, costs, loss or expenses, including reasonable attorney's fees,
arising from KLSI'S compliance with CERENT'S specifications.
13. NO ASSIGNMENT: CERENT shall not assign its rights or obligations hereunder
- ------------------
without the prior written consent of KLSI.
14. ASSIGNMENT: This agreement shall be binding upon and shall inure to the
- ---------------
benefit of the parties and their respective successors and assigns. CERENT may
assign any of its rights or obligations hereunder without prior written consent
of KLSI to any third party in connection with a merger, acquisition,
consolidation, or reorganization of CERENT, or to a purchaser of all or
substantially all of the assets or business or shares of CERENT.
15. FORCE MAJEURE: KLSI shall be excused from liability for unusual delays or
- ------------------
failure to deliver or fill any Purchase Order where caused by act of God, fires,
floods, strikes, work stoppages, delays by supplier(s), accidents, allocations
or other controls, or regulations including export or import regulations of any
foreign or U.S. Federal, state or local government, shortage of truck or any
other means of transportation, fuels, materials or labor, or any other cause
beyond KLSI'S reasonable control, whether or not similar in kind or class to
those mentioned.
16. MODIFICATION AND WAIVER: No modification of the terms and conditions hereof
- ----------------------------
shall be binding unless in writing and signed by KLSI. No failure or delay on
<PAGE>
the part of either party in exercising any right or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right or power preclude any other or further exercise thereof or the
exercise of any other right or power hereunder. No waiver of any provision
hereof shall be effective unless the same shall be made in writing and signed by
the party against which such waiver is sought to be enforced.
17. SEVERABILITY PROVISIONS: If any provision, clause or application hereof
- ----------------------------
shall be held unlawful or invalid by court or administrative decision, it shall
be deemed several, and such unlawfulness or invalidity shall not in any way
affect any other provisions, clauses or applications hereof which can be given
effect without the unlawful or invalid provision, clause or application.
18. CANCELLATION: CERENT'S right and obligations with respect to cancellation of
- -----------------
orders shall be governed by this Paragraph 18.
18.1 In the case of Custom Products, CERENT must cancel no less than one
hundred and twenty (120) days prior to shipment.
Notwithstanding the provisions of Paragraph 18.1, if CERENT cancels, at any
time, KLSI may, at its election, be entitled to receive from CERENT
reimbursement for the costs of all work in process at the time of
cancellation plus reasonable profit and any extra shipping or customized
charges.
If CERENT cancels any part of Purchase Order, CERENT shall be liable for the
adjustments to the purchase price on the Products actually purchased as
specified in Paragraph 3 and KLSI shall be entitled to collect such
adjustment in the manner specified herein.
19. RESCHEDULING OF DELIVERY: CERENT'S right to reschedule deliveries shall be
-------------------------
governed by this Paragraph 19.
In the case of Custom Products, CERENT may reschedule no less than one
hundred and twenty (120) days prior to the previous schedule shipment date.
CERENT may only be allowed to reschedule one time per Purchase Order line
item within the rescheduling window as set forth in Paragraph 19.
20. GOVERNING LAW: This contract shall be construed and enforced pursuant to the
--------------
laws of the State of California.
21. This agreement shall remain in effect for a period of two (2) years from
the effective date and shall automatically renew for like terms until cancelled
by CERENT with 90 days notice prior to the expiration of the current term.
<PAGE>
Note: KLSI does acknowledge that CERENT retains all ownership of CERENT
proprietary products and KLSI treats all specifications and materials related to
same as confidential and governed by the Non-Disclosure Agreement entered into
by both companies.
Signed: /s/ H. Watanabe Signed: /s/ Arthur Widen
---------------------- ----------------------
Title: Chief Financial Officer Title: Controller
------------------------ -----------------------
Kawasaki LSI CERENT
Date: 5/12/99 Date: 5/12/99
------------------------- ------------------------
<PAGE>
NONDISCLOSURE AGREEMENT
This agreement made and entered into on July 10, 1998 between CERENT Corporation
and Kawasaki LSI U.S.A., Inc., a California corporation having its principal
place of business at 2570 North First Street, Ste, #301, San Jose, California
95131, U.S.A.
The parties hereby agree as follows:
1. Definition of Proprietary Information
Proprietary information is defined as, but not limited to performance, sales,
financial, contractual, and special marketing information, ideas, technical data
and concepts originated by the dismissing party, not previously published or
otherwise disclosed to the general public, not previously available to the
receiving party or others without restriction, not normally furnished to others
without compensation, and which the disclosing party desires to protect against
unrestricted disclosure or competitive use, and which is furnished pursuant to
this Agreement and appropriately identified as being proprietary when furnished.
2. Identification of Proprietary Information
The Parties agree that any proprietary information stipulated above
("Information") shall be subject to the terms of this Agreements only if such
information is identified as follows:
a. If such information is written or other tangible form, it shall be clearly
marked or labeled "Proprietary" or "Confidential".
b. If such information is orally disclosed, the disclosing party shall
specifically state, before or during such disclosure, what portion thereof is
deemed by the disclosing party to be proprietary and submit a written summary of
the disclosure made orally to the receiving party within thirty (30) days of the
date of the oral disclosure.
3. Nondisclosure to Third Parties
The receiving party shall treat the information as the proprietary information
of the disclosing party, shall not disclose said information to any other person
except those employees of the receiving part authorized by it, and shall
safeguard such information as it would be its own proprietary information, The
receiving party shall immediately notify the disclosing party of any request by
third party that such information be disclosed and shall cooperate with the
disclosing party in its efforts to protect the information from disclosure.
4. Use of Information
The receiving party shall be and remain the property of the disclosing party,
and shall be promptly returned to the disclosing party upon written request, or
destroyed at its option.
<PAGE>
6. Publicity
Neither party shall publicly announce of disclose the existence of this
Agreement, its terms and conditions or advertise or release any publicity
regarding this Agreement, without the prior written consent of the other party.
This provision shall survive the expiration, termination or cancellation of this
Agreement.
7. Terms of Agreement
The obligations of the partied under this Agreement shall continue and remain
binding for a period of three (3) years from the date of disclosure of the
respective information.
8. Remedies for Breach or Threatened Breach
The receiving party acknowledges that the disclosing party claims the
information to be proprietary and that disclosure of the information by the
receiving party would harm the disclosing party. In the event of a breach, the
party subject to harm may seek an injunction in an appropriate court. In
addition to any other remedies available at law or in equity.
9. Exceptions
The obligations contained herein shall not apply:
a. Information which is now in or hereafter enters the public domain without a
breach of this Agreement by the receiving party;
b. Information known to the receiving party prior to the time of disclosure by
the disclosing party pr independently developed by employees of the receiving
party without access to the information.
c. Information obtained by the receiving party from other sources, provided
the receiving party has no reasonable cause to believe that such other source
received the information through a breach of this Agreement or similar agreement
of the disclosing party with such other party, or through any unlawful act or
means.
10. Miscellaneous
Nothing contained in this Agreement shall be construed as conferring by
implication, estoppel or otherwise upon the receiving party any license if any
kind under disclosing party's copyrights, patents, mask work rights, trademarks
or any other form of intellectual property, including trade secret.
This Agreement supercedes all prior agreements regarding the same subject
matter. This Agreement may be amended or modified only by a subsequent agreement
in writing. This Agreement shall be construed and enforced according to the law
of the state of California, U.S.A.
Cerent Corporation Kawasaki LSI U.S.A. Inc.
/s/ Paul Elliot /s/ H. Watanabe
- ------------------------- ------------------------------
By: Paul M. Elliot By: Hakuo Watanabe
Title: Director, Advanced Title: Chief Financial Officer
Development
<PAGE>
EXHIBIT 10.20
Mr. Carl Russo
1471 Marine Way
Oxnard, California 93035
Dear Carl,
On behalf of Fiberlane Communications, Inc. and subject to formal approval by
the Board of Directors, I am pleased to offer you the position of President and
Chief Executive Officer. For the purposes of this letter "Fiberlane
Communications, Inc." and "the Company" will be used interchangeably.
The terms of the new position with the Company are set forth below.
1. Position.
---------
You will be the President and Chief Executive Officer of Fiberlane
Communications, Inc., reporting directly to the Board of Directors. You will
have responsibility for the direction and organization of the Company. You
will also be a member of the Company's Board of Directors.
During the term of your employment, you will not render commercial or
professional services of any nature to any person or organization, whether or
not for compensation, without the prior written consent of the Board of
Directors of Fiberlane Communications, Inc.. Such permission has been granted
in the case of Xircom, Incorporated, so as to facilitate your exit from
Xircom.
Furthermore, you agree that you will not directly or indirectly engage or
participate in any business that is competitive in any manner with the
business of Fiberlane Communications, Inc. during the term of your
employment.
2. Start Date.
-----------
Subject to the fulfillment of any conditions imposed by this agreement,
you will commence this new position with Fiberlane Communications, Inc., on
May 15, 1998, on an unpaid consulting basis with option vesting beginning on
this date. Salaried employment will begin June 1, 1998, and any formal
announcement of employment will be made at that time ("Start Date").
----------
<PAGE>
3. Proof of Right to Work.
-----------------------
For purposes of Federal immigration law you will be required to provide the
Company documentary evidence of your identity and eligibility for employment
in the United States of America. Such documentation must be provided to us
within 3 business days of your date of hire or our employment relationship
with you may be terminated.
4. Compensation.
-------------
Base Salary. You will be paid an annual salary of $200,000 payable in
-----------
biweekly installments pursuant to the Company's regular payroll policy.
Bonus. You will receive a target bonus of $100,000 at the end of each
-----
complete fiscal year based on achievement of mutually agreeable milestones. A
prorated portion of the bonus will be guaranteed in the first year. For any
year that you are employed for a portion thereof you will be paid a prorated
amount.
Bank Loan. The Company will assist in obtaining a line of credit for
---------
up to $1,000,000. It is our understanding that you will secure the loan in
approximately equal portions with a second trust deed on your home and a
security interest in any stocks you may own. The Company will reimburse you
on a monthly basis for the interest payments on the loan. The reimbursement
will be grossed up such that there will be no net after tax effect of these
payments made by the Company. The Company will reimburse your interest
payments on a monthly basis for three years from the date of the loan.
Change in Control. If there is a "Change of Control" as defined in
-----------------
Addendum A, you will be paid upon the effective date of the Change of Control,
a bonus equivalent to one-half of the outstanding principal of the bank loan.
Said bonus will be grossed up to ensure no net after tax effect to you. This
bonus will only be due if a Change of Control occurs within twelve months of
your Start Date.
If your employment is terminated without "cause" or you resign for
"good reason" as those terms are defined in Addendum A - within 12 months
following a Change of Control, you will receive twelve months additional stock
vesting and a lump sum payment equal to 12 months of your salary and your
target annual bonus.
Severance during first twelve months of employment. Should you be
--------------------------------------------------
terminated without "cause," other than in connection with a Change of Control,
and within 12 months of your Start Date, you will receive an additional 12
months of stock option vesting and a payment equal to 6 months salary and 1/2
of your annual target bonus. Furthermore, the Company shall immediately upon
such termination without "cause" pay a bonus to you equivalent to one-half of
the principal remaining on the bank loan and said bonus will be grossed up to
ensure no net after tax effect to you.
<PAGE>
Annual Review. Your base salary will be reviewed at the end of each
-------------
calendar year as part of the Company's normal salary review process.
5. Put.
----
In connection with your stock or option grant, the Company will grant you a
right to "put" your vested shares to the Company for a total sum of $1 million
at the end of the vesting period to the extent legally permissible. This right
will terminate on the initial public offering ("IPO") of the Company's stock.
6. Stock Options.
--------------
In connection with the commencement of your employment the Board of
Directors of Fiberlane, Inc., I will recommend to the Board of Directors that
you be granted a stock option to purchase 900,000 shares of Common Stock of the
Company. If you elect, during the first 90 days of your employment, to forgo
the "put" option and "loan" assistance, you will be granted a stock option to
purchase that number of shares of the Company's Common Stock which would equal
6% of the Company's fully diluted capitalization. These option shares will be
granted with an exercise price equal to the fair market price per share of the
Company's Common Stock, which is expected to be $0.40 per share.
You will have the right to exercise these options at any time you would
like, subject to the Company's right to repurchase the Common Stock at your
exercise price. Vesting of these options (that is, lapsing of the Company's
repurchase right) shall be over a four year period. Initial vesting will
commence on May 1, 1999, when 12/48 of the total number of shares subject to
the option will vest. Thereafter 1/48 of such total will vest every month.
Vesting will depend upon your continued employment with the Fiberlane, Inc.
The option will be an incentive stock option to the maximum extent allowed by
the tax code and otherwise, as a non-qualified option. It will be subject to
the terms of Fiberlane Communications, Inc.'s Stock Plan and the Stock Option
Agreement between you and the Company.
The Company will provide you with an opportunity to maintain your equity
position at no less than a 5% share of the Company in terms of fully diluted
common share equivalent pursuant to the existing right of first offer between
the Company and its investors. Pursuant to this right, the Company will grant
you a pro-rata right to purchase shares at the time of any future financing on
exactly the same terms and with the same rights as all other purchasers in
order to maintain your equity position at 5%.
7. Benefits.
---------
Insurance. The Company will provide you with standard benefits
---------
package which includes medical dental, vision, life and long term disability
insurance. This insurance will also cover your unmarried partner and any
children you may have.
<PAGE>
Vacation. You will be entitled to 2 weeks paid vacation per year,
--------
prorated for the remainder of this calendar year. Vacation accrues at 6.67
hours per month.
8. Confidential Information and Invention Assignment Agreement.
------------------------------------------------------------
Your acceptance of this offer and commencement of employment with the
Company is contingent upon the execution and delivery of the Confidentiality
Agreement attached as Addendum B. This document must be read, executed and
delivered prior to your start date.
9. Confidentiality of Terms.
-------------------------
You agree to follow the Company's strict policy that employees must not
disclose, either directly or indirectly, any information, including any of the
terms of the agreement, regarding salary, bonuses, or stock purchase or option
allocations to any person, including other employees of the Company, provided,
however, that you may discuss such terms with members of your immediate family
and any legal, tax or accounting specialists who provide you with individual
legal, tax or accounting advice.
10. At-Will Employment.
-------------------
It is understood that your employment with the Company is on an at-will
basis meaning that either you or the Company may terminate your employment at
any time for any reason.
11. Expiration Date.
----------------
This offer will expire on May 15, 1998.
<PAGE>
We are delighted to extend this offer to you and look forward to your
joining the team at Fiberlane Communications, Inc. To indicate your
acceptance of the Company's offer please sign and date this letter in the
space provided below and return it to me along with a signed and dated copy of
the Confidentiality Agreement. This letter together with the Confidentiality
Agreement set forth the terms of your employment and supercede any prior
representations or agreements whether written or oral. This letter may not be
modified or amended except by written agreement signed by the Company and by
you. Because this situation has come together so rapidly, we are in the
process of obtaining formal consent of the Board of Directors of the Company,
and as a result, this letter is subject to obtaining such approval. We
anticipate that such approval will be obtained no later than May 15, 1998.
Sincerely,
Accepted:
/s/ Carl Russo /s/ Vinod Khosla
--------------------------- -------------------------------
Carl Russo Vinod Khosla, Acting CEO
Fiberlane Communications
<PAGE>
ADDENDUM A
For purposes of this Agreement, the following terms have the following
definition:
(1) "A Change of Control" will occur upon any of the following events:
(i) any "person" as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner"
(as defined in Rule 13d-3 under said Act) directly or indirectly of securities
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities;
(ii) a merger, combination or consolidation of the Company with any
other corporation or business entity, other than a merger, combination or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entities) at least (50%) of the total voting power represented by the
voting securities of the Company, or such surviving entity outstanding
immediately after such merger or consolidation; or
(iii) effectiveness of an agreement for the sale, lease or disposition
of the Company of all or substantially all of the Company's assets; or
(iv) liquidation or dissolution of the Company.
(2) A termination of employment for "Cause" will exist if your employment
is terminated due to, and you are found to have engaged in, any act of gross
misconduct or violation of the Company's Confidential Information and
Invention Assignment Agreement. A termination of employment for any other
reasons will be a termination without cause.
(3) A resignation for "good reason" will be any resignation by you
within ninety (90) days of the occurrence of any of the following events:
(i) any reduction in your base salary, target bonus or material
reduction in your fringe benefits;
(ii) any relocation of your office to more than thirty-five (35)
miles from your then-existing office; or
(iii) any material negative change in your job duties, job title or
reporting relationship.
<PAGE>
AMENDMENT NO. 1
---------------
This Amendment No. 1 (the "Amendment") to the offer letter agreement (the
"Offer Letter") between Cerent Corporation ("Cerent") and Carl Russo dated as of
May 15, 1999 is intended by the parties to (a) waive Mr. Russo's right to
purchase shares of common stock sold in Cerent's initial public offering, (b)
waive Mr. Russo's right to purchase convertible promissory notes (or securities
issued upon conversion thereof) issued by Cerent on or about July 21, 1999, and
(c) terminate, upon the closing of Cerent's initial public offering, Cerent's
obligation to grant Mr. Russo the right to purchase securities in Cerent's
future financing.
RECITALS
--------
A. Cerent entered into a Convertible Note Purchase Agreement with
entities affiliated with MSD Capital L.P. on July 21, 1999, and, in connection
with the execution thereof, Cerent issued convertible promissory notes in an
aggregate principal amount of $30,000,000, which will convert automatically into
shares of Cerent Common Stock upon the closing of Cerent's initial public
offering (the "Note Financing");
B. Section 6 of the Offer Letter contains a provision pursuant to which
Cerent is obligated to grant Mr. Russo a right to purchase such number of
securities sold in any future Cerent financing as will enable Mr. Russo to
maintain a 5% ownership interest in Cerent on a fully-diluted basis (the "Right
of Participation");
C. Cerent and Mr. Russo wish to effect a waiver by Mr. Russo of his Right
of Participation in (i) Cerent's initial public offering and (ii) the Note
Financing, and the parties wish to amend the Offer Letter to terminate Mr.
Russo's Right of Participation effective upon the closing of the initial public
offering;
The parties hereby agree as follows:
AGREEMENT
---------
1. Mr. Russo hereby waives his Right of Participation in the initial
public offering and the Note Financing; and
2. Cerent and Mr. Russo hereby amend the Offer Letter to remove the
provision providing for the Right of Participation in any future financing;
provided, however, such amendment will not be effective until the closing of
- -------- -------
Cerent's initial public offering.
In witness hereof, the parties have executed this Agreement on July 22,
1999.
CERENT CORPORATION CARL RUSSO
/s/ Carl Russo
_______________________________
BY: Carl Russo /s/ Carl Russo
____________________________ ________________________________
Carl Russo
TITLE: President and CEO
_________________________
<PAGE>
Exhibit 16.1
Securities and Exchange Commission July 20, 1999
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously the principal accountants for Cerent Corporation
(formerly known as Fiberlane Communications, Inc.) and, under the date of
February 27, 1998, we reported on the financial statements of Fiberlane
Communications Inc. as of December 31, 1997 and for the period from January 27,
1997 (inception) to December 31, 1997. On June 17, 1999, our appointment as
principal auditors was terminated. We have read the statements described herein
under the caption "Change in Independent Accountants" and we agree with such
statements, except that we are not in a position to agree or disagree with
Cerent's statements that the decision to change auditors was approved by the
Board of Directors of Cerent Corporation on June 17, 1999 or that prior to June
17, 1999, the Company had not consulted with Ernst & Young LLP on items that
involved the Company's accounting principles or the form of the audit opinion
to be issued on the Company's financial statements.
Very truly yours,
/s/ KPMG LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
July 19, 1999 except for Note 9, as to which the date is September , 1999, in
the Registration Statement (Form S-1) and related prospectus of Cerent
Corporation for the registration of shares of its common stock.
Walnut Creek, California /s/ Ernst & Young LLP
July 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-30-1999 DEC-30-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 5,794,000 0
<SECURITIES> 0 0
<RECEIVABLES> 5,827,000 0
<ALLOWANCES> 0 0
<INVENTORY> 4,418,000 0
<CURRENT-ASSETS> 16,596,000 0
<PP&E> 17,385,000 0
<DEPRECIATION> 3,206,000 0
<TOTAL-ASSETS> 33,628,000 0
<CURRENT-LIABILITIES> 15,143,000 0
<BONDS> 0 0
0 0
64,989,000 0
<COMMON> 55,868,000 0
<OTHER-SE> 107,373,000 0
<TOTAL-LIABILITY-AND-EQUITY> 33,628,000 0
<SALES> 9,917,000 0
<TOTAL-REVENUES> 9,917,000 0
<CGS> 7,943,000 0
<TOTAL-COSTS> 29,843,000 8,396,000
<OTHER-EXPENSES> 36,000 126,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,471,000 394,000
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (29,304,000) (8,664,000)
<EPS-BASIC> 0 0
<EPS-DILUTED> (0.54) (0.57)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 22,245,000 6,758,000
<SECURITIES> 0 0
<RECEIVABLES> 231,000 0
<ALLOWANCES> 0 0
<INVENTORY> 2,013,000 0
<CURRENT-ASSETS> 25,274,000 7,096,000
<PP&E> 8,086,000 3,566,000
<DEPRECIATION> 2,090,000 563,000
<TOTAL-ASSETS> 31,877,000 10,143,000
<CURRENT-LIABILITIES> 6,763,000 2,228,000
<BONDS> 0 0
0 0
49,878,000 11,124,000
<COMMON> 4,905,000 1,247,000
<OTHER-SE> 33,898,000 8,174,000
<TOTAL-LIABILITY-AND-EQUITY> 31,877,000 10,143,000
<SALES> 220,000 0
<TOTAL-REVENUES> 220,000 0
<CGS> 1,061,000 0
<TOTAL-COSTS> 21,102,000 7,629,000
<OTHER-EXPENSES> 142,000 122,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 749,000 351,000
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (22,550,000) (7,858,000)
<EPS-BASIC> 0 0
<EPS-DILUTED> (0.67) (0.82)
</TABLE>
