<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
TUT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------
CALIFORNIA 3661 94-2958543
(PENDING REINCORPORATION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INTO DELAWARE) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
2495 ESTAND WAY
PLEASANT HILL, CA 94523
(925) 682-6510
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------------
SALVATORE D'AURIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2495 ESTAND WAY
PLEASANT HILL, CA 94523
(925) 682-6510
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-----------------
COPIES TO:
STEVEN E. BOCHNER, ESQ. PATRICK A. POHLEN, ESQ.
JEFFREY A. HERBST, ESQ. COOLEY GODWARD LLP
SUSAN P. KRAUSE, ESQ. FIVE PALO ALTO SQUARE
STEPHANIE L. RUBY, ESQ. 3000 EL CAMINO REAL
WILSON SONSINI GOODRICH & ROSATI PALO ALTO, CALIFORNIA 94306
PROFESSIONAL CORPORATION (650) 843-5000
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA
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, as amended (the "Securities Act"), 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 2,875,000 shares $16.00 $46,000,000 $13,570
===============================================================================================
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase solely
to cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
-----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated July 31, 1998
PROSPECTUS
2,500,000 SHARES
[LOGO OF TUT SYSTEMS]
COMMON STOCK
-------------
All of the shares of Common Stock offered hereby are being sold by Tut
Systems, Inc. ("Tut," "Tut Systems" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market, subject to
notice of issuance, under the symbol "TUTS."
-------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery and acceptance by the Underwriters and to
certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1998.
-------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
SALOMON SMITH BARNEY
, 1998
<PAGE>
[LOGO OF TUT SYSTEMS]
FAST COPPER(TM)
SENDING DATA FASTER AND FARTHER
HOMERUN(R)
THE FIRST-GENERATION STANDARD FOR HOME NETWORKING
ADOPTED BY THE HOME PHONELINE NETWORK ALLIANCE
LICENSED BY 3COM, AMD, AT&T WIRELESS,
COMPAQ, ROCKWELL AND OTHERS
EXPRESSO GS(TM)
A COMPACT, FLEXIBLE PLATFORM
SUPPORTING MULTIPLE XDSL SPEEDS, DISTANCES
AND APPLICATIONS
EXPRESSO MDU(TM)
COMBINING HOMERUN WITH THE EXPRESSO PLATFORM
FOR MULTI-TENANT APPLICATIONS
------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------
This Prospectus contains trademarks of the Company, including
"Expresso(TM)," "Expresso GS(TM)," "Expresso MDU(TM)," "HomeRun(R),"
"FastCopper(TM)," "SmartWire(TM)" and "All-Rate DSL.(TM)" All rights reserved.
All other trade names and trademarks appearing in this Prospectus are the
property of their respective holders.
2
<PAGE>
[Gate 1 -- Graphic depicting backbone network "cloud" with multiple
- -----
applications connected to it, including "Internet", "Telecommuting", "Data Base
Access", "Corporate Intranet", "On-Line Shopping" and "Electronic Commerce".]
Captions:
[USING JUST A SINGLE PAIR OF COPPER WIRE, ADVANCED COMMUNICATION PRODUCTS FROM
TUT SYSTEMS TAKE HIGH-SPEED DATA SERVICES WHERE THEY NEED TO GO...
[arrows pointing to] ACROSS LOCAL LOOPS TO BUSINESS RESIDENTIAL CUSTOMERS
[arrows pointing to] ACROSS PRIVATE COPPER NETWORKS
- TO EVERY BUILDING ON CAMPUS
- TO EVERY TENANT WITH AN MDU
- TO EVERY RJ-11 TELEPHONE JACK IN A HOME]
[xDSL NETWORKING
---------------
Tut's Expresso GS system is used by ITOCs, ISPs, and CLECs to provide
high-speed data services over last mile telephone wires. Currently supporting
symmetric DSL (SDSL) service at 1.2 Mbps, Expresso GS has the flexibility and
bandwith to incorporate additional xDSL technologies in the future.
Key features of Expresso GS include SmartWire to maximize the transmission rate
over all distances up to 24,700 feet and All-Rate DSL that allows service
providers to offer a low bandwith, entry level service that can be expanded to
higher bandwith capabilities as a subscriber's need for speed grows.]
<PAGE>
[Gate 2 -- Graphic depicting three types of Private Copper Networks, including
------
Corporate Campus Networking, MDU Networking and Home Networking.]
Captions:
[CORPORATE CAMPUS NETWORKING
---------------------------
Tut's XL product line extends Ethernet LANs across corporate and educational
campuses from building to building, from floor to floor - at native 10 Mbps
speeds to distances of 1,500 feet - at lesser speeds up to 24,700 feet.]
[MDU NETWORKING
--------------
Located in the basement of an apartment building, hotel or dormitory, Tut's
Expresso MDU empowers every RJ-11 jack in the building with high-speed Internet
access.
With Tut's innovative HomeRun technology, a secure LAN is provided for each
living unit over the existing telephone lines.]
[HOME NETWORKING
---------------
The Company's HomeRun technology, an in-home application of FastCopper,
enables a cost-effective Ethernet LAN to be quickly implemented over the
telephone wire found in a home. PCs, PC peripherals, and high-speed Internet
access can be shared over this "no new wires" LAN.]
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Except as set forth in
the Financial Statements and the Notes thereto or as otherwise indicated, all
information in this Prospectus assumes: (i) the reincorporation of the Company
in Delaware prior to the closing of the offering; (ii) a four for one reverse
stock split of the Company's Common Stock to be effected prior to the closing
of the offering; (iii) the automatic conversion of all outstanding shares of
the Company's Preferred Stock into Common Stock upon the closing of this
offering; (iv) the filing and effectiveness upon closing of this offering of
the Company's Second Amended and Restated Certificate of Incorporation
authorizing a class of undesignated preferred stock; and (v) no exercise of the
Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting."
THE COMPANY
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of telephone
companies, as well as the copper telephone wires in homes, businesses and other
buildings. These products incorporate Tut's proprietary FastCopper technology
in a cost-effective, scalable and easy to deploy solution to exploit the
underutilized bandwidth of copper telephone wires. The Company's Expresso and
XL products include high bandwidth access multiplexers, associated modems and
routers, Ethernet extension products and integrated network management
software. The Company's HomeRun technology, an in home application of
FastCopper, has been adopted as the first generation standard for home
networking over copper telephone wires by the Home Phoneline Network Alliance
("Home PNA"), whose founding members include 3Com Corporation ("3Com"),
Advanced Micro Devices, Inc. ("AMD"), AT&T Wireless Services, Inc. ("AT&T
Wireless"), Compaq Computer Corporation ("Compaq"), Epigram Inc., International
Business Machines Corporation, Intel Corporation, Hewlett-Packard Company,
Lucent Technologies Inc., Rockwell Semiconductor Systems Inc. ("Rockwell") and
Tut Systems.
The Company's products and technologies cost-effectively meet high-speed
bandwidth requirements for a variety of users:
. Large corporations, universities and other institutions use the
Company's XL products to extend Ethernet networks between separate
buildings beyond conventional Ethernet distance and speed limitations.
. Independent telephone companies, Internet service providers and
competitive local exchange carriers use the Company's Expresso GS
systems to provide high-speed data services, including Internet access,
to business and residential customers over existing copper telephone
wires traditionally used for voice service.
. Owners and operators of multiple dwelling units ("MDUs"), including real
estate investment trusts ("REITs"), universities, hotels and independent
landlords, can utilize the Company's Expresso MDU systems to deliver
high-speed data access to their tenants over existing copper telephone
wires.
. Leading semiconductor, computer hardware and consumer electronics
manufacturers, such as 3Com, AMD, AT&T Wireless, Compaq and Rockwell,
have licensed the Company's HomeRun technology to enable the development
of HomeRun-compatible integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and
wireless), Internet telephones and television-based web browsers.
3
<PAGE>
Tut Systems' objective is to be the leading provider of advanced
communications products for high-speed data access that exploit the large
existing infrastructures of copper telephone wires which lead into and reside
within homes, businesses and other buildings. To achieve this objective, the
Company intends to: (i) penetrate high growth markets with the Company's
Expresso GS and Expresso MDU products; (ii) continue to develop innovative
technology and systems enhancements using the Company's rapid product
development capabilities and FastCopper technology; (iii) leverage the
Company's HomeRun technology and strategic partnerships in the home networking
market; (iv) participate in industry standards setting activities; and
(v) expand the Company's international presence.
The Company shipped its first XL product in 1992, its first Expresso product
in early 1997 and its first Expresso GS in the second quarter of 1998. The
Company expects to ship its Expresso MDU configured with HomeRun line cards in
the fourth quarter of 1998.
The Company's offices are located at 2495 Estand Way, Pleasant Hill,
California 94523, and its telephone number is (925) 682-6510. The Company was
incorporated in California on August 19, 1983 and began operations in August
1991. The Company intends to reincorporate in Delaware prior to the closing of
the offering. Unless the context otherwise requires, the terms "Tut," "Tut
Systems," and the "Company" refer to Tut Systems, Inc. Information contained on
the Company's web site does not constitute part of this prospectus.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 2,500,000 shares
Common Stock to be outstanding after the of- 10,175,742 shares(/1/)
fering......................................
Use of Proceeds.............................. For general corporate purposes,
including working capital and
capital expenditures, enhancing
research and development and
attracting key personnel. In
addition, $2,500,000 of the
proceeds from the offering will
be paid by the Company to a
third party to purchase certain
intellectual property
previously subject to ongoing
royalties. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... TUTS
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes:
(i) 1,048,927 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 30, 1998 at a weighted average exercise
price of $2.03 per share; (ii) 176,045 shares, 1,000,000 shares and 250,000
shares reserved for issuance under the Company's 1992 Stock Plan, 1998
Stock Plan and 1998 Employee Stock Purchase Plan, respectively; and (iii)
666,836 shares of Common Stock issuable upon exercise of an outstanding
warrant held by Microsoft Corporation ("Microsoft"), which will expire upon
the closing of the offering if not exercised earlier. See "Management--
Stock Plans", "Description of Capital Stock" and Notes 12, 14 and 17 of
Notes to Financial Statements included elsewhere in this Prospectus.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 3,445 $ 4,454 $ 6,221 $ 2,536 $ 4,513
Gross margin................... 1,757 2,256 2,993 1,305 2,110
Loss from operations........... (3,443) (4,607) (9,351) (3,467) (7,011)
Net loss....................... (3,390) (4,427) (9,157) (3,311) (6,801)
Dividend accretion on preferred
stock......................... 694 1,137 1,627 796 1,262
Net loss attributable to common
stockholders.................. $(4,084) $(5,564) $(10,784) $ (4,107) $ (8,063)
Pro forma net loss per share,
basic and diluted(/1/)........ $ (1.25) $ (0.89)
Shares used in computing pro
forma net loss per share, ba-
sic and diluted(/1/).......... 7,326 7,673
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
(UNAUDITED)
-----------------------------------------
ACTUAL PRO FORMA(/2/) AS ADJUSTED(/3/)
-------- -------------- ----------------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash, cash equivalents and short-
term investments................... $ 6,789 $ 6,789 $38,164
Working capital..................... 9,438 9,438 40,813
Total deferred revenue.............. 942 942 942
Long-term debt including current
portion............................ 411 411 411
Redeemable convertible preferred
stock and warrant.................. 44,673 -- --
Total stockholders' equity (defi-
cit)............................... (34,337) 10,336 44,211
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements included elsewhere in this
Prospectus.
(2) Pro forma to reflect the conversion upon the closing of the offering of all
outstanding shares of Preferred Stock into 7,452,714 shares of Common Stock
and excludes 666,836 shares of Common Stock issuable upon exercise of an
outstanding warrant held by Microsoft, which warrant will expire upon the
closing of the offering if not exercised earlier.
(3) As adjusted to reflect (2) and the application of the net proceeds the sale
of Common Stock offered by the Company hereby (assuming no exercise of the
Underwriters' over-allotment option) and the application of the estimated
net proceeds therefrom. Also reflects the expiration of a warrant to
purchase 666,836 shares of Common Stock held by Microsoft. See "Use of
Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
below and elsewhere in this Prospectus.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE RESULTS
The Company has incurred losses since it commenced operations in August
1991. The Company incurred net losses attributable to common stockholders of
$4.1, $5.6, $10.8 and $8.1 million in fiscal 1995, 1996, 1997 and for the six
months ended June 30, 1998, respectively. As of June 30, 1998, the Company had
an accumulated deficit of $36.2 million. To date, the Company has derived
substantially all of its revenues from the sale of its XL products and has
incurred substantial expenditures relating to the development of its HomeRun
technology as well as the development, manufacturing start up and marketing of
its Expresso products. The Company's ability to increase revenues or achieve
profitability in the future will depend primarily on its ability to increase
sales of its Expresso GS and Expresso MDU products in the service provider and
multiple dwelling unit ("MDU") markets, respectively, reduce manufacturing
costs and successfully introduce and sell enhanced versions of its existing
products and new products. In particular, the success of the Company's
Expresso MDU products will depend, in part, on the timely and widespread
adoption of the Company's HomeRun technology as an embedded technology in
integrated circuits and consumer products. The Company does not expect to
begin shipment of its Expresso MDU products incorporating HomeRun technology
until the fourth quarter of 1998. There can be no assurance that the Company
will be able to successfully produce or market these or other new products in
commercial quantities, complete product development when anticipated, increase
sales or reduce the cost of goods sold in response to pricing and competitive
pressures. There can also be no assurance that the Company will increase
revenues or achieve profitability and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLUCTUATIONS IN REVENUES AND OPERATING RESULTS
The Company's revenues and operating results have fluctuated in the past and
may fluctuate in the future as a result of several factors, some of which are
outside of the Company's control. Factors which could cause the Company's
revenues or operating results to fluctuate from period to period include:
market acceptance of the Company's products, the timing or cancellation of
orders from, or shipments to, existing and new customers, the timing of new
product and service introductions by the Company, its customers, its partners
or its competitors, lack of adequate distribution channels for the Company's
products, variations in the Company's sales or distribution channels,
variations in the mix of products offered by the Company, competitive
pressures, including pricing pressures from the Company's partners and
competitors, changes in the pricing policies of the Company's suppliers, the
availability and cost of key components and the timing of personnel hiring. In
addition, as a result of significant technical evaluations, which typically
last 60 to 90 days, the sales cycle associated with the Company's newer
products is typically lengthy. Because of the lengthy sales cycle and the
potential large size of customers' orders, if orders forecasted for a specific
customer for a particular quarter do not occur in that quarter, the Company's
operating results for that quarter could be materially adversely affected.
In recent periods, the Company has significantly increased and it intends to
continue increasing certain of its operating expenditures, including its sales
and marketing, research and development and general and administrative
expenditures, as it begins to market its Expresso GS and Expresso MDU
products, and it enhances its existing products and introduces new products to
meet the growing bandwidth demands of its customers. There can be no assurance
that the Company will generate a sufficient level of revenue to offset these
expenditures or that the Company will be able to adjust spending in a timely
manner to respond to any unanticipated decline in revenue. The Company's
expenditures for sales and marketing, research and
6
<PAGE>
development, and general administrative functions are based in part on
projections of future product revenues and, in the near term, are relatively
fixed. The Company also anticipates that orders for its products may vary
significantly from period to period. As a result, operating expenses and
inventory levels in any given period could be disproportionately high. In some
circumstances, customers may delay purchasing the Company's current products
in favor of next-generation products, which could have a material adverse
effect on the Company's business, financial condition and results of operation
in any given period.
The market for high-speed data access products and services has been
characterized, and is likely to continue to be characterized by, erosion of
average selling prices ("ASPs") due to a number of factors, including
competition and rapid technological change. The Company anticipates that ASPs
for its products will decrease over time due to competitive pressures and
volume pricing agreements. Decreasing ASPs could cause the Company to
experience decreased revenues despite an increase in the number of units sold.
In particular, sales prices of some of the Company's XL products have
decreased recently as a result of increased competition, and the Company
expects this trend to continue in the near future. As a result, the Company
does not expect that its revenues for the third quarter of 1998 will
significantly increase, if at all, from the revenues experienced during the
second quarter of 1998. Further price reductions may be necessary to remain
competitive. Moreover, as part of its Expresso MDU strategy, the Company plans
to sell a limited number of HomeRun products to accelerate the deployment and
adoption of its Expresso MDU systems. These products have lower gross margins
than the Company's other product lines and, as a result, are anticipated to
cause the Company's gross margins to be lower than they otherwise would be
over the next two quarters. There can be no assurance that the Company will be
able to sustain or improve its gross margins in the future, or that the
Company will be able to offset future price declines with cost reductions. As
a result, the Company may experience substantial period to period fluctuations
in future operating results and declines in gross margin, each of which
individually, or together with other factors, would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company recently began licensing its HomeRun technology to
semiconductor, computer hardware and consumer electronics manufacturers for
incorporation in integrated circuits and consumer products, including PCs,
peripherals, modems, Internet telephones and television-based web browsers.
Adoption of the HomeRun technology or sales of products containing the
Company's HomeRun technology cannot be predicted and, therefore, there can be
no assurance that significant license and royalty revenues will be
forthcoming. In addition, certain of the Company's licensees may sell products
based on the Company's technology to competitors or potential competitors of
the Company. There can be no assurance that the Company's HomeRun technology
will be successfully deployed on a widespread basis or that such licensing
will not result in an erosion of the potential market for the Company's
products.
The occurrence of these or other factors could materially adversely affect
the Company's business, financial condition and results of operations. As a
result, the Company believes that period to period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in the Company's revenues or operating results may
cause volatility in the price of the Company's common stock. Further, it is
likely that in some future quarter the Company's revenues or operating results
will be below the expectations of public market analysts. In such event, the
market price of the Company's common stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNPROVEN COMMERCIAL ACCEPTANCE OF CERTAIN OF THE COMPANY'S PRODUCTS
The Company's strategy involves developing high-speed data access products
for several targeted applications, including campus, service provider and MDU
applications. To date, the Company has sold a limited number of its Expresso
GS products. Sales of the Company's XL products, which are used principally in
corporate and educational campus applications, account for substantially all
of the Company's revenues. For the six months ended June 30, 1998, sales of
the Company's XL products accounted for 83.6% of the Company's total revenues.
Shipments of the Company's Expresso GS products began in May 1998, and the
Company
7
<PAGE>
expects to commence shipments of its Expresso MDU products incorporating the
Company's HomeRun technology in the fourth quarter of 1998. The Company must
devote a substantial amount of human and capital resources in order to achieve
commercial acceptance of its Expresso GS and Expresso MDU products in the
service provider and MDU markets, respectively. In addition, there can be no
assurance that the Company will be able to simultaneously or effectively
address evolving demands in these markets or that customers in any such
markets will not purchase or otherwise choose to implement competing
technologies or products.
The success of the Company's products involves several risks and
uncertainties, many of which are outside of the Company's control, including
successful completion of product trials, the Company's ability to educate
existing and potential customers and end users about the benefits of the
Company's FastCopper technology, including HomeRun, and derivative products.
The success of the Company's Expresso products will depend on the ability of
its customers to market and sell high-speed data services to end users. There
can be no assurance that any of these events will occur or that such events
will result in a meaningful or sustainable level of market acceptance of the
Company's products. Any material inability on the part of the Company to
achieve market acceptance of its products would have a material adverse effect
on the Company's business, financial condition and results of operations.
RISK OF COMPETING TECHNOLOGIES; DEPENDENCE ON CORE TECHNOLOGY
The market for high-speed data access products and services is characterized
by several competing technologies, including fiber optic cables, coaxial
cables, satellites and other wireless facilities, that offer competing
solutions which provide fast access, high reliability and are cost-effective
for certain users. Since all of the Company's products are based on the use of
copper telephone wire, and since there are physical limits to the speed and
distance over which data can be transmitted over this wire, the Company's
products may not be a viable solution for customers requiring service at
performance levels beyond the current limits of copper telephone wire.
Commercial acceptance of any one of these competing solutions or any
technological advancement or product introduction that provides faster access,
greater reliability, increased cost-effectiveness or other advantages over
technologies that utilize existing telephone copper wires could decrease the
demand for the Company's products and reduce ASPs and gross margins associated
with the Company's products. The occurrence of any one or more of these events
could materially adversely affect the Company's business, financial condition
and results of operations.
The Company's FastCopper technology is used in its XL, Expresso, Expresso
GS, Expresso MDU and HomeRun products. Any defect or deficiency in the
Company's FastCopper or other transmission technologies used by the Company
could manifest itself in one or more of the Company's products and could
reduce the functionality, effectiveness or marketability of the Company's
products. Such defects or deficiencies could cause orders for the Company's
products to be canceled or delayed, reduce revenues, or render the Company's
products obsolete. In such event, the Company would be required to devote
substantial financial and other resources for a significant period of time in
order to develop new or additional technologies to support its products. There
can be no assurance that the Company would be successful in developing such
technologies in a timely manner, if at all, or that such technologies would be
sufficient to allow the Company to remain competitive, or that such
technologies would be capable of simultaneous deployment across the Company's
products. Any of these events, individually or in the aggregate, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY OF DEMAND FOR HIGH-SPEED DATA ACCESS SERVICES; DEPENDENCE ON
INTERNET
The Internet has recently begun to develop and is rapidly evolving. As a
result, the market for high-speed data access is characterized by an
increasing number of market entrants that have introduced or developed, or are
in the process of introducing or developing, products and systems that provide
access to on-line and other data services. Further, the commercial market for
products designed for high-speed data access to the Internet has only recently
begun to develop, and the Company's success will depend in large part on the
increased use of the Internet and the need for high-speed access networks.
Critical issues concerning the increased use of the
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Internet--including security, reliability, cost, ease of access and quality of
service--remain unresolved and are likely to affect the development of the
market for the Company's products. As a result, the future growth rate, if
any, or the ultimate size of the markets for these products cannot be
accurately predicted. If such markets fail to develop, or develop more slowly
than expected, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business--Industry
Background."
RAPID TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The Company's future success will depend on its ability to develop,
introduce and market enhancements to its existing products and to introduce
new products in a timely manner to meet customer requirements. The markets for
high-speed data access products are characterized by rapid technological
developments, frequent enhancements to existing products and new product
introductions, changes in end user requirements and evolving industry
standards. The emerging nature of these products and services and their rapid
evolution will require the Company to continually improve the performance,
features and reliability of its products, particularly in response to
competitive product offerings. There can be no assurance that the Company will
be able to respond quickly and effectively to these developments. The
introduction or market acceptance of products incorporating superior
technologies or the emergence of alternative technologies and new industry
standards could render the Company's existing products, as well as products
currently under development, obsolete and unmarketable. In addition, the
Company may have only a limited amount of time to penetrate certain markets,
and there can be no assurance that the Company will be successful in achieving
widespread acceptance of its products before competitors offer products and
services similar or superior to the Company's products. Any failure by the
Company to anticipate or respond on a cost-effective and timely basis to
technological developments, changes in industry standards or end user
requirements, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any failure to
release new products or to upgrade or enhance existing products on a timely
basis could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Core
Technologies and Products."
The emergence of new industry standards, whether through adoption by
official standards committees or widespread use by telephone companies or
other service providers, could require the Company to redesign its products.
If such standards become widespread and the Company's products are not in
compliance, the Company's customers and potential customers may not purchase
the Company's products, which would materially adversely affect its business,
financial condition and results of operations. The rapid development of new
standards increases the risk that competitors could develop products that
would reduce the competitiveness of the Company's products. The failure of the
Company to develop and introduce new products or enhancements directed at new
industry standards could have a material adverse effect on its business,
financial condition and results of operations.
COMPETITION
The markets for the Company's products are intensely competitive,
continually evolving and subject to rapid technological change. The Company
believes that it and its products face the following competitive factors:
price, product features and enhancements (including improvements in product
performance, reliability, size, compatibility and scalability), breadth of
product lines, product ease of deployment, conformance to industry standards,
sales and distribution capability and technical support and service. There can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, manufacturing, distribution and support capabilities
to compete successfully. The Company expects that competition in each of its
markets will increase in the future. The Company's principal competitors
include or are expected to include PairGain Technologies, Inc., Paradyne
Corporation, Cisco Systems, Inc., Ascend Communications, Inc., Westell
Technologies Inc. and a number of other public and private companies. Many of
the Company's competitors and potential competitors have substantially greater
name recognition and technical, financial and marketing resources than the
Company. Such competitors may undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing new products than the
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Company. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive
pressures faced will not materially adversely affect the Company's business,
financial condition and results of operations. In addition, certain of the
Company's licensees may sell products based on the Company's technology to
competitors or potential competitors of the Company. Such competitors may
cause an erosion in the potential market for the Company's products. This
competition could result in price reductions, reduced profit margins and loss
of market share, which would materially adversely affect the Company's
business, financial condition and results of operations.
Tut Systems also competes with technologies using alternative transmission
media such as coaxial cable, wireless facilities and fiber optic cable. To the
extent that telecommunications service providers choose to install fiber optic
cable or other transmission media in the last mile, or to the extent that
homes and businesses install other transmission media within buildings, the
Company expects that demand for its copper telephone wire-based products will
decline. These competitive pressures from alternative transmission
technologies may further necessitate price reductions of the Company's
existing and future products.
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The success of the Company is, and will be, dependent in part upon its
strategic partnerships, including the Company's collaborative arrangement with
leading semiconductor, computer hardware and consumer electronics
manufacturers, through the Home Phoneline Network Alliance, and agreements
with certain licensees of the Company's HomeRun technology. In particular
successful or wide scale adoption of HomeRun technology is dependent on the
development and marketing of HomeRun-enabled integrated circuits and consumer
products, including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and
wireless), Internet telephones and television-based web browsers, by such
strategic partners. In addition, the success of the Company is, and will
continue to be, dependent in part on a licensing and cooperative marketing
agreement with Microsoft Corporation ("Microsoft").
The amount and timing of resources which these strategic partners devote to
these activities will not be within the control of the Company. There can be
no assurance that strategic partners will perform their obligations as
expected or that any revenue will be derived from strategic arrangements. If
any of the Company's strategic partners breaches or terminates its agreement
with the Company or otherwise fails to conduct its collaborative activities in
a timely manner, the development, commercialization or marketing of the
product which is the subject of the agreement may be delayed and the Company
may be required to undertake unforeseen additional responsibilities or to
devote additional resources to development, commercialization or marketing of
its products. The inability to enter into strategic relationships or the
failure of a strategic partner to perform its obligations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company will be able to negotiate
acceptable strategic agreements in the future, that the resulting
relationships will be successful or that the Company will continue to maintain
or develop strategic relationships or to replace strategic partners in the
event any such relationships are terminated. The Company's failure to maintain
any strategic relationship could materially and adversely affect the Company's
business, financial condition and results of operations.
DEPENDENCE ON INDEPENDENT DISTRIBUTORS
In 1997 and the first six months of 1998, the Company derived approximately
26% of its revenues from sales to Tech Data Corporation ("Tech Data") and
Merisel, Inc. ("Merisel"), two independent distributors of the Company's
products. These independent distributors are not contractually bound to
purchase the Company's products and therefore could discontinue carrying the
Company's products at any time in favor of competitive products or for any
other reason. In addition, the Company remains subject to the risk of product
returns from these distributors and other customers. The Company expects that
the sale of its products to a limited number of distributors and value-added
resellers, including Tech Data and Merisel, may continue to account for a
substantial
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percentage of revenues for the foreseeable future. Any reduction, delay or
loss of orders from Tech Data or Merisel could have a material adverse effect
on the Company's revenues and on its business, financial condition and results
of operations.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company does not manufacture any of its products, but instead relies on
contract manufacturers to assemble, test and package the Company's products.
Any interruption in the operations of one or more of these contract
manufacturers would adversely affect the Company's ability to meet its
scheduled product deliveries to customers. In addition, as the Company makes
enhancements to its existing products and introduces new products, there can
be no assurance that these manufacturers will be able to meet the
technological or delivery requirements for such products. These contract
manufacturers have had only limited experience manufacturing the Company's
Expresso products. In addition, the Company's inability to accurately forecast
the actual demand for its products could result in supply, manufacturing or
testing capacity constraints. Such constraints could result in delays in the
delivery of the Company's products or the loss of existing or potential
customers, either of which could have a material adverse effect on the
Company's business, operating results or financial condition. There can be no
assurance that the Company or any third party manufacturer will be successful
in manufacturing the Company's products in commercial quantities or in
sufficient volumes to meet anticipated demand.
Substantially all of the Company's products are assembled and tested by the
Company's contract manufacturers. Although the Company performs random spot
testing on manufactured products, the Company relies on its contract
manufacturers for assembly and primary testing of its products. Any product
shortages or quality assurance problems could increase the costs of
manufacture, assembly or testing of the Company's products and could have a
material adverse effect on the Company's business, financial condition or
results of operation.
DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company currently procures all of its raw materials from outside
suppliers through its contract manufacturers and AMS, Inc. In procuring
components, the Company, AMS, Inc. and the Company's contract manufacturers
rely on some suppliers that are the sole source of those components. For
example, all of the field programmable gate array supplies used in the
Company's products are purchased from Xilinx, Inc. In addition, ACT Networks,
Inc. is the sole supplier of a bridge router component used in certain of the
Company's XL and Expresso products. The Company's Expresso products are also
dependent on various sole source offerings from Metalink US Inc., Motorola,
Inc., Osicom Technologies, Inc., RELTEC Corporation, SaRonix, and Wind River
Systems, Inc. The Company enters into purchase orders with its suppliers for
materials based on forecasts, but has no guaranteed supply arrangements with
these suppliers. Any extended interruption in the supply of any of the key
components currently obtained from a single or limited source could affect the
Company's ability to meet its scheduled product deliveries to customers, and
thus have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that, as the
Company's demand for such parts and supplies increase, the Company or its
manufacturers will be able to obtain such parts and supplies in a timely
manner in the future. In addition, financial or other difficulties facing such
suppliers or significant worldwide demand for such components could adversely
affect the availability of such components. If the Company or its
manufacturers were unable to obtain a sufficient supply of components from
their current sources, the Company could experience difficulties in obtaining
alternative sources or in altering product designs to use alternative
components. Resulting delays or reductions in product shipments could damage
customer relationships and could adversely affect the Company's business,
financial condition or results of operations. Further, the Company may also be
subject to increases in component costs, which could also have a material
adverse effect on its gross margin or results of operations.
MANAGEMENT OF GROWTH
The Company's growth has placed, and in the future may continue to place, a
significant strain on the Company's engineering, managerial, administrative,
operational, financial and marketing resources, and increased
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demands on its systems and controls. To exploit the market for its products,
the Company must develop new and enhanced products while managing anticipated
growth in sales by implementing effective planning and operating processes. To
manage its anticipated growth, the Company must, among other things, continue
to implement and improve its operational, financial and management information
systems, hire and train additional qualified personnel, continue to expand and
upgrade core technologies and effectively manage multiple relationships with
various customers, suppliers and other third parties. There can be no
assurance that the Company's systems, procedures or controls will be adequate
to support the Company's operations or that the Company's management will be
able to achieve the rapid execution necessary to exploit fully the market for
the Company's products or systems. Any failure of the Company to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
Sales to customers outside of the United States accounted for approximately
15.8% and 16.5% of revenues in 1997 and the first six months of 1998,
respectively, and the Company expects sales to customers outside of the United
States to increase in the future. International sales are subject to a number
of risks, including changes in foreign government regulations and
communications standards, export license requirements, tariffs and taxes,
other trade barriers, difficulty in collecting accounts receivable, difficulty
in managing foreign operations, and political and economic instability. To the
extent the Company's customers may be impacted by currency devaluations or
general economic crises such as the economic crisis currently affecting many
Asian economies, the ability of such customers to purchase the Company's
products could be materially adversely affected. Payment cycles for
international customers are typically longer than those for customers in the
United States. There also can be no assurance that foreign markets for the
Company's products will not develop more slowly than currently anticipated. In
addition, if the relative value of the U.S. dollar in comparison to the
currency of the Company's foreign customers should increase, the resulting
effective price increase of the Company's products to such foreign customers
could result in decreased sales, which could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company anticipates that its foreign sales will generally be invoiced in
U.S. dollars and, accordingly, the Company currently does not plan to engage
in foreign currency hedging transactions. However, as the Company expands its
current international operations, it may allow payment in foreign currencies
and exposure to losses in foreign currency transactions may increase. The
Company may choose to limit such exposure through the purchase of forward
foreign exchange contracts or other hedging strategies. There can be no
assurance that any currency hedging strategy would be successful in avoiding
exchange related losses. See "Business--Customers and Markets."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; PROTECTION OF INTELLECTUAL PROPERTY
RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent,
copyright and trade secret laws and nondisclosure agreements to protect its
proprietary technology. The Company currently holds 11 United States patents
and has 8 United States patent applications pending. There can be no assurance
that patents will be issued with respect to pending or future patent
applications or that the Company's patents will be upheld as valid or will
prevent the development of competitive products. The Company seeks to protect
its intellectual property rights by limiting access to the distribution of its
software, documentation and other proprietary information. In addition, the
Company enters into confidentiality agreements with its employees and certain
customers, vendors and strategic partners. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company is also subject to the
risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. In this regard, there can be no
assurance that third parties will not assert infringement claims in the future
with respect to the Company's current or future products or that any such
claims will not require the Company
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to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.
REGULATION OF THE COMMUNICATIONS INDUSTRY; OTHER REGULATORY APPROVALS OR
CERTIFICATIONS
The Company and its customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the Federal Communications
Commission ("FCC") extends to the communications industry, including products
such as those sold by the Company. The FCC has promulgated regulations that,
among other things, set installation and equipment standards for
communications systems. There can be no assurance that future regulations
adopted by the FCC or other regulatory bodies will not have a material adverse
effect on the Company. Further, regulation of the Company's customers may
adversely impact the Company's business, operating results and financial
condition. For example, FCC regulatory policies affecting the availability of
data and Internet services and other terms on which telecommunications
companies conduct their business, may impede the Company's penetration of
certain markets. Changes in, or the failure by the Company to comply with,
applicable domestic and international regulations could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the increasing demand for communications systems has
exerted pressure on regulatory bodies worldwide to adopt new standards for
such products and services, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers.
In the United States, in addition to complying with FCC regulations, the
Company's products are required to meet certain safety requirements. For
example, the Company is required to have certain of its products certified by
Underwriters Laboratory in order to meet federal requirements relating to
electrical appliances to be used inside the home, and certain products must be
Network Equipment Building Standard ("NEBS") certified before they may be
deployed by certain customers. Outside of the United States, the Company's
products are subject to the regulatory requirements of each country in which
the products are manufactured or sold. These requirements are likely to vary
widely, and there can be no assurance that the Company will be able to obtain
on a timely basis or at all such regulatory approvals as may be required for
the manufacture, marketing and sale of its products. Any delay in or failure
to obtain such approvals could have a material adverse effect on the Company's
business, financial condition or results of operations.
ABILITY TO PROVIDE CUSTOMER SUPPORT
The Company's ability to achieve its planned sales growth and retain current
and future customers will depend in part upon the quality of its customer
support operations. The Company's customers generally require significant
support and training with respect to the Company's products, particularly in
the initial deployment and implementation stage. The Company has limited
experience with widespread deployment of its products to a diverse customer
base, and there can be no assurance that it will have adequate personnel to
provide the levels of support that its customers may require during initial
product deployment or on an ongoing basis. In addition, the Company relies on
a third party for a substantial portion of its customer support functions. An
inability to provide sufficient support to its customers could delay or
prevent the successful deployment of the Company's products. Failure to
provide adequate support could have an adverse impact on the Company's
reputation and relationship with its customers, could prevent the Company from
gaining new customers and could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Marketing, Sales and Customer Support."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent in part on Matthew Taylor, the
Company's Chairman of the Board and Chief Technical Officer, and Salvatore
D'Auria, the Company's President and Chief Executive
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Officer, and on other key management and technical personnel, the loss of one
or more of whom could adversely affect the Company's business. The Company
does not have employment contracts with any of its executive officers and the
Company only maintains a "key person" life insurance policy on Matthew Taylor.
The Company believes that its future success will depend in large part upon
its continued ability to attract, retain and motivate highly skilled
employees, who are in great demand. There can be no assurance that the Company
will be able to do so.
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM
In less than two years, computer systems and/or software used by many
companies may need to be upgraded to accept four digit entries to distinguish
21st century dates from 20th century dates. As is the case with most other
companies using computers in their operations, the Company recognizes the need
to ensure that its operations will not be adversely impacted by software
and/or system failures related to such "Year 2000" noncompliance. Within the
past twelve months, the Company has been upgrading components of its own
internal computer and related information and operational systems and
continues to assess the need for further system redesign and believes it is
taking the appropriate steps to ensure Year 2000 compliance. Based on
information currently available, the Company believes that the costs
associated with Year 2000 compliance, and the consequences of incomplete or
untimely resolution of the Year 2000 problem, will not have a material adverse
effect on the Company's business, financial condition and results of
operations in any given year. However, even if the internal systems of the
Company are not materially affected by the Year 2000 problem, the Company's
business, financial condition and results of operations could be materially
adversely affected through disruption in the operation of the enterprises with
which the Company interacts. There can be no assurance that third party
computer products used by the Company are Year 2000 compliant. Further, even
though the Company believes that its current products are Year 2000 compliant,
there can be no assurance that under actual conditions such products will
perform as expected or that future products will be Year 2000 compliant. Any
failure of the Company's products to be Year 2000 compliant could result in
the loss of or delay in market acceptance of the Company's products and
services, increased service and warranty costs to the Company or payment by
the Company of compensatory or other damages which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NO PRIOR PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Common Stock
offered hereby, and there can be no assurance that an active trading market
will develop or, if one does develop, that it will be maintained. The initial
public offering price, which will be established by negotiations between the
Company and the Underwriters, may not be indicative of the market price of the
shares of Common Stock after the offering. See "Underwriters."
POSSIBLE VOLATILITY OF STOCK PRICE
Equity markets, particularly the market for high-technology companies,
recently have experienced significant price and volume fluctuations that are
unrelated to the operating performance of individual companies. These broad
market fluctuations may adversely affect the market price of the Common Stock
offered hereby. In addition, the market price of the shares of common stock is
likely to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations, new products or
new services by the Company or by its partners, competitors or customers or
its competitors developments with respect to patents or proprietary rights,
announcement of litigation by or against the Company, changes in stock market
analyst recommendations regarding the Company or its competitors, and general
market conditions may have a significant effect on the market price of the
Company's Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control
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of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions provide for a classified board of
directors, eliminate cumulative voting in the election of directors and
restrict the Company's stockholders from acting by written consent. In
addition, upon completion of this offering, the Company's Board of Directors
will have the authority to issue up to 5,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible financings or
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no current plans to issue shares
of preferred stock. The Company's Bylaws and indemnification agreements
provide that the Company will indemnify officers and directors against losses
they may incur in legal proceedings resulting from their service to the
Company. These provisions may make it more difficult for stockholders to take
certain corporate actions and could have the effect of delaying or preventing
a change in control of the Company.
MANAGEMENT'S BROAD DISCRETION OVER USE OF PROCEEDS OF THE OFFERING
The Company currently has no specific plans for a significant portion of the
net proceeds of this offering. Consequently, the Company's management will
have the discretion to allocate the net proceeds to uses that stockholders may
not deem desirable, and there can be no assurance that the net proceeds can or
will be invested to yield a significant return. Substantially all of the
proceeds of the offering will be invested in short term, interest-bearing,
investment grade securities for an indefinite period of time. See "Use of
Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
and adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the closing of the offering and assuming no exercise
of options or an outstanding warrant to purchase 666,836 shares of Common
Stock held by Microsoft after July 15, 1998, the Company will have outstanding
10,182,930 shares of Common Stock, 10,557,930 shares if the Underwriters'
over-allotment option is exercised. Of these shares, the 2,500,000 shares sold
by the Company in the offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless purchased by "affiliates" of the Company as that
term is defined in Rule 144 of the Securities Act (the "Affiliates"). The
remaining 7,682,930 shares of Common Stock held by existing shareholders and
559,471 shares subject to outstanding vested options will be "restricted
securities" as that term is defined in Rule 144 of the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144 or 701 promulgated under the Securities Act. Other than the shares
offered hereby (i) no shares will be eligible for sale prior to 180 days after
the date of this Prospectus, except in certain limited exceptions, without the
prior written consent of the representative of the Underwriters, and (ii)
7,597,333 shares will be eligible for sale 180 days after the date of this
Prospectus upon expiration of the lock-up agreements with the representative
of the Underwriters. All officers, directors, stockholders and option holders
have agreed not to sell or otherwise dispose of any shares of Common Stock,
for a period of 180 days after the date of this Prospectus (the "Lock-up
Period"), without the prior written consent of the representative of the
Underwriters. Prior to the expiration of the Lock-up Period, the Company
intends to file a registration statement on Form S-8 which will permit the
resale in the public market of shares so registered, subject to compliance
with Rule 144 in the case of Affiliates of the Company. See "Shares Eligible
for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of $10.66 per share in the net tangible book value of the
Common Stock from the assumed initial public offering price of
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$15.00 per share. To the extent either outstanding options or the outstanding
warrant held by Microsoft is exercised, there will be further dilution. See
"Dilution."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" including statements
containing the words "believes," "anticipates," "expects" and words of similar
import. All statements other than statements of historical fact included in
this Prospectus, including without limitation, such statements under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and located
elsewhere herein, regarding the Company or any of the transactions described
herein, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from expectations are disclosed in this Prospectus, including,
without limitation, in conjunction with the forward-looking statements in this
Prospectus and/or under "Risk Factors." The Company does not intend to update
these forward-looking statements.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $33,875,000 ($39,106,250 if the Underwriters' over-allotment
option is exercised in full), assuming the shares offered hereby are sold at a
public offering price of $15.00 per share and after deduction of the estimated
underwriting discount and estimated offering expenses. The Company expects to
use the net proceeds of this offering for general corporate purposes,
including working capital and capital expenditures, enhancing research and
development and attracting key personnel. In addition, $2,500,000 of the
proceeds from the offering will be paid by the Company to a third party to
purchase certain intellectual property previously subject to ongoing
royalties. Pending use of such net proceeds for the foregoing purposes, the
Company intends to invest such net proceeds in investment grade interest
bearing marketable securities.
DIVIDEND POLICY
The Company has not paid dividends in the past and the Company intends to
retain earnings, if any, and will not pay cash dividends in the foreseeable
future. The Company's loan and security agreement with a commercial bank
prohibits the payment of dividends. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations,
capital requirements, general business conditions and such other factors as
the Board of Directors may deem relevant.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998: (i) on an actual basis; (ii) on a pro forma basis; and (iii) on an
as adjusted basis. This table should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA(/2/) ADJUSTED(/3/)
-------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion.. $ 164 $ 164 $ 164
Redeemable convertible preferred stock,
no par value:
Authorized 7,531,320 shares; Issued
and outstanding 6,354,786 shares (ac-
tual); no shares (pro forma and as
adjusted)............................ 42,573 -- --
Redeemable convertible preferred stock
warrant................................ 2,100 -- --
Stockholders' equity (deficit):
Convertible preferred stock, no par
value:
Authorized 1,718,680 shares; Issued
and outstanding 1,097,928 shares
(actual); no shares (pro forma and
as adjusted)....................... 1,567 -- --
Common stock, $0.001 par value:
Authorized 100,000,000 shares; Is-
sued and outstanding 223,028 shares
(actual); 7,675,742 shares (pro
forma); 10,175,742 shares (as ad-
justed)(1)......................... -- 8 11
Additional paid in capital.............. 1,917 48,149 82,021
Deferred compensation................... (1,655) (1,655) (1,655)
Accumulated deficit..................... (36,166) (36,166) (36,166)
-------- ------- -------
Total stockholders' equity (deficit).... (34,337) 10,336 44,211
-------- ------- -------
Total capitalization.................... $10,500 $10,500 $44,375
======== ======= =======
</TABLE>
- --------
(1) Excludes: (i) 1,437,500 shares of Common Stock reserved for issuance under
the Company's 1992 Stock Plan, under which options to purchase 1,048,927
shares at a weighted average exercise price of $2.03 which were
outstanding as of June 30, 1998; (ii) 176,045, 1,000,000 and 250,000
shares, available for issuance pursuant to the 1992 Stock Plan, 1998 Stock
Plan and 1998 Employee Stock Purchase Plan, respectively. See
"Management--Stock Plans," "Description of Capital Stock--Options" and
Note 14 of Notes to Financial Statements.
(2) Pro forma to reflect the conversion upon the closing of the offering of
all outstanding shares of Preferred Stock into 7,452,714 shares of Common
Stock and excludes 666,836 shares of Common Stock issuable upon exercise
of an outstanding warrant held by Microsoft, which warrant will expire
upon the closing of the offering if not exercised earlier.
(3) As adjusted to reflect (2) above and the application of the net proceeds
from the sale of Common Stock offered by the Company hereby (assuming no
exercise of the Underwriters' over-allotment option and assuming an
offering price of $15.00 per share). Also reflects the expiration of a
warrant to purchase 666,836 shares of Common Stock held by Microsoft. See
"Use of Proceeds" and "Capitalization."
18
<PAGE>
DILUTION
Pro forma net tangible book value per share represents total assets less
total liabilities, divided by the number of shares outstanding as of June 30,
1998 (assuming the conversion into Common Stock of all of the Company's
outstanding shares of Preferred Stock). The Company's pro forma net tangible
book value at June 30, 1998 was approximately $10,336,000 or approximately
$1.35 per share. Without taking into account any changes in such net tangible
book value per share after June 30, 1998, other than to give effect to the
sale of the shares of Common Stock offered hereby at an assumed initial public
offering price of $15.00 per share and the receipt of the net proceeds of such
sale, the pro forma net tangible book value at June 30, 1998 would have been
approximately $44,211,000 or approximately $4.34 per share. This represents an
immediate increase in net tangible book value per share of $2.99 to existing
stockholders and an immediate dilution of $10.66 per share to new investors.
The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share as of June 30,
1998....................................................... $1.35
Increase per share attributable to new investors............ 2.99
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 4.34
------
Dilution per share to new investors........................... $10.66
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences between existing stockholders and new investors with respect
to the total number of shares of Common Stock and Preferred Stock (all of
which Preferred Stock will be converted into Common Stock upon the closing of
the Offering) purchased from the Company, the total consideration paid and the
average price per share paid (assuming the sale of shares of Common Stock
at an initial public offering price of $15.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 7,676,742 75% $39,432,000 51% $ 5.14
New investors............... 2,500,000 25 37,500,000 49 15.00
---------- --- ----------- ---
Total..................... 10,176,742 100% $76,932,000 100% $ 7.56
========== === =========== ===
</TABLE>
The above calculations do not give effect to the exercise of outstanding
options to purchase 1,048,927 shares of Common Stock at a weighted average
exercise price of $2.03 per share outstanding on June 30, 1998 or the exercise
of an outstanding warrant held by Microsoft to purchase up to 666,836 shares
of Common Stock. To the extent that these options become exercisable or the
options or warrant are exercised, there will be further dilution to new
investors. See "Risk Factors--Immediate and Substantial Dilution,"
"Management--Stock Plans" and "Description of Capital Stock--Options."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company as of December
31, 1996 and 1997 and for each of the three years in the period ended December
31, 1997 are derived from the financial statements of the Company that have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this Prospectus. The selected financial data set forth
below for the Company as of December 31, 1993, 1994 and 1995 and for each of
the two years in the period ended December 31, 1994 are derived from the
audited financial statements not included elsewhere herein. The statement of
operations data for the six months ended June 30, 1997 and 1998 and the
balance sheet data at June 30, 1998 are derived from unaudited financial
statements included elsewhere in this Prospectus. The data set forth below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
related Notes thereto included in this Prospectus. The results of operations
for the six months ended June 30, 1998 are not necessarily indicative of
results that may be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
-------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,821 $ 3,690 $ 3,445 $ 4,454 $ 6,221 $ 2,536 $ 4,513
Cost of goods sold...... 919 2,679 1,688 2,198 3,228 1,231 2,403
-------- ------- ------- ------- -------- ------- -------
Gross margin........... 902 1,011 1,757 2,256 2,993 1,305 2,110
-------- ------- ------- ------- -------- ------- -------
Operating expenses:
Sales and marketing.... 1,437 3,361 2,645 3,068 5,147 2,325 3,928
Research and develop-
ment.................. 427 595 993 2,012 3,562 1,337 2,764
General and administra-
tive.................. 1,091 1,269 1,562 1,783 2,375 1,110 1,424
Noncash compensation
expense............... 1,260 1,005
-------- ------- ------- ------- -------- ------- -------
Total operating ex-
penses................ 2,955 5,225 5,200 6,863 12,344 4,772 9,121
-------- ------- ------- ------- -------- ------- -------
Loss from operations... (2,053) (4,214) (3,443) (4,607) (9,351) (3,467) (7,011)
Other income (expense),
net.................... 3 15 54 181 195 157 211
-------- ------- ------- ------- -------- ------- -------
Loss before income tax-
es.................... (2,050) (4,199) (3,389) (4,426) (9,156) (3,310) (6,800)
Income tax expense...... 1 1 1 1 1 1 1
-------- ------- ------- ------- -------- ------- -------
Net loss............... (2,051) (4,200) (3,390) (4,427) (9,157) (3,311) (6,801)
Dividend accretion on
preferred stock........ 55 344 694 1,137 1,627 796 1,262
-------- ------- ------- ------- -------- ------- -------
Net loss attributable to
common stockholders.... $ (2,106) $(4,544) $(4,084) $(5,564) $(10,784) $(4,107) $(8,063)
======== ======= ======= ======= ======== ======= =======
Net loss per share at-
tributable to common
stockholders, basic and
diluted................ $(101.90) $(54.13) $(32.56) $(37.51) $ (59.36) $(25.20) $(36.65)
======== ======= ======= ======= ======== ======= =======
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 21 84 125 148 182 163 220
======== ======= ======= ======= ======== ======= =======
Pro forma net loss per
share, basic and dilut-
ed(/1/)................ $ (1.25) $ (0.89)
======== =======
Shares used in computing
pro forma net loss per
share, basic and
diluted(/1/)........... 7,326 7,673
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
---------------------------------------------- -----------------------------------------
1993 1994 1995 1996 1997 ACTUAL PRO FORMA(/2/) AS ADJUSTED(/3/)
------- ------- -------- -------- -------- -------- -------------- ----------------
BALANCE SHEET DATA: (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents
and short-term
investments............ $ 441 $ 240 $ 1,531 $ 8,950 $ 10,285 $ 6,789 $ 6,789 $ 38,614
Working capital (defi-
cit)................... 408 (714) 1,771 8,357 11,066 9,438 9,438 40,813
Total assets............ 1,481 2,103 3,198 10,689 15,168 13,894 13,894 47,769
Redeemable convertible
preferred stock and
warrant................ 1,817 5,676 12,381 24,684 38,871 44,673 -- --
Long-term debt, net of
current portion........ 353 9 55 190 140 164 164 164
Accumulated deficit..... (3,127) (7,671) (11,755) (17,319) (28,103) (36,166) (36,166) (36,166)
Total stockholders' eq-
uity (deficit)......... (1,558) (6,065) (10,137) (15,694) (26,444) (34,337) 10,336 44,211
</TABLE>
- -------
(1) See Note 2 of Notes to Financial Statements included elsewhere in this
Prospectus.
(2) Pro forma to reflect the conversion upon the closing of the offering of
all outstanding shares of Preferred Stock into 7,452,653 shares of Common
Stock and excludes 666,836 shares of Common Stock issuable upon exercise
of an outstanding warrant held by Microsoft, which warrant will expire
upon the closing of the offering if not exercised earlier.
(3) As adjusted to reflect (2) above and the application of the net proceeds
from the sale of Common Stock offered by the Company hereby (assuming no
exercise of the Underwriters' over-allotment option). See "Use of
Proceeds" and "Capitalization."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward- looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this
Prospectus. See "Risk Factors."
OVERVIEW
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies, as well as the copper telephone wires in homes,
businesses and other buildings. The Company's Expresso and XL products include
high-bandwidth access multiplexers, associated modems and routers, Ethernet
extension products and integrated network management software.
The Company commenced operations in August 1991. To date, substantially all
of the Company's revenues have been derived from sales of its XL Ethernet LAN
extension products to the corporate and campus markets. In early 1997, the
Company introduced the first products in its Expresso product line. These
products were aimed at the service provider markets. By the end of 1997,
approximately 100 Expresso systems had been shipped for trials or purchase to
independent telephone companies, Internet service providers and corporate and
campus users. During the quarter ended June 30, 1998, the Company initiated
several trials and commenced selling its Expresso GS system. To facilitate the
commercial acceptance of HomeRun technology and its acceptance as a home
networking standard, the Company has entered into strategic alliances and
several licensing agreements whereby the Company's HomeRun technology is
expected to be incorporated into integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers. The Company expects to
begin shipment of its Expresso MDU products incorporating its HomeRun
technology in the fourth quarter of 1998. During the quarter ended March 31,
1998, the Company began licensing its HomeRun technology to certain leading
semiconductor, computer hardware and consumer electronics manufacturers.
The Company generates revenues primarily from the sale of products and, to a
lesser extent, through the licensing of HomeRun technology. The Company
generally recognizes revenues from product sales upon shipment. Estimated
sales returns and warranty costs, based on historical experience by product,
are recorded at the time revenues are recognized. License and royalty revenues
consist of non-refundable up-front license fees, some of which may offset
initial royalty payments, and royalties. Currently, license and royalty
revenues are comprised entirely of non-refundable license fees paid in
advance. Such revenues are recognized ratably over the period during which
post-contract customer support is expected to be provided or upon delivery and
transfer of agreed upon technical specifications in contracts where
essentially no further support obligations exist. Future license and royalty
revenues are expected to consist primarily of royalties based on products sold
by the Company's licensees. The Company does not expect that such license and
royalty revenues will constitute a substantial portion of the Company's
revenues in future periods.
Sales prices of some of the Company's XL products have decreased recently as
a result of increased competition. Further price reductions may be necessary
to remain competitive. Although the Company has been able to offset most price
declines with reductions in its manufacturing costs, there can be no assurance
that the Company will be able to offset further price declines with cost
reductions. In addition, certain of the Company's licensees may sell products
based on the Company's technology to competitors or potential competitors of
the Company. There can be no assurance that the Company's HomeRun technology
will be successfully deployed on a widespread basis or that such licensing
will not result in an erosion of the potential market for the Company's
products. See "Risk Factors."
21
<PAGE>
Sales to customers outside of the United States accounted for approximately
15.8% and 16.5% of revenues in 1997 and the first six months of 1998,
respectively, and the Company expects sales to customers outside of the United
States to increase in the future. To date, substantially all sales have been
denominated in U.S. dollars.
Tut Systems expects to continue to evaluate product line expansion and new
product opportunities, engage in extensive research, development and
engineering activities and focus on cost-effective design of its products.
Accordingly, the Company will continue to make significant expenditures on
sales and marketing and research and development activities.
The Company has generated net operating losses to date and, as of June 30,
1998, had an accumulated deficit of $36.2 million. The ability of the Company
to generate income from operations will be primarily dependent on increases in
sales volume, reductions in certain manufacturing costs and the growth of
high-speed data access solutions in the service provider and MDU markets. In
view of the Company's limited history of product revenues from new markets,
reliance on growth in deployment of high-speed data access solutions and the
unpredictability of orders and subsequent revenues, the Company believes that
period to period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. Failure to generate significant revenues from new products,
whether due to lack of market acceptance, competition, technological change or
otherwise, or the inability to reduce manufacturing costs, will have a
material adverse effect on the Company's business, financial condition and
results of operations.
In less than two years, computer systems and/or software used by many
companies may need to be upgraded to accept four digit entries to distinguish
21st century dates from 20th century dates. As is the case with most other
companies using computers in their operations, the Company recognizes the need
to ensure that its operations will not be adversely impacted by software
and/or system failures related to such "Year 2000" noncompliance. Within the
past twelve months, the Company has been upgrading components of its own
internal computer and related information and operational systems and
continues to assess the need for further system redesign and believes it is
taking the appropriate steps to ensure Year 2000 compliance. Based on
information currently available, the Company believes that the costs
associated with Year 2000 compliance, and the consequences of incomplete or
untimely resolution of the Year 2000 problem, will not have a material adverse
effect on the Company's business, financial condition and results of
operations in any given year. However, even if the internal systems of the
Company are not materially affected by the Year 2000 problem, the Company's
business, financial condition and results of operations could be materially
adversely affected through disruption in the operation of the enterprises with
which the Company interacts. There can be no assurance that third party
computer products used by the Company are Year 2000 compliant. Further, even
though the Company believes that its current products are Year 2000 compliant,
there can be no assurance that under actual conditions such products will
perform as expected or that future products will by Year 2000 compliant. Any
failure of the Company's products to be Year 2000 compliant could result in
the loss of or delay in market acceptance of the Company's products and
services, increased service and warranty costs to the Company or payment by
the Company of compensatory or other damages which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has experienced and expects to continue to experience,
fluctuations in its operating results on a quarterly and an annual basis.
Historically, the Company's quarterly and annual revenues have been and are
expected to be unpredictable due to a number of factors including: long sales
cycles for certain products; competitive pricing pressures; promotional
pricing, service, marketing or other terms offered to customers; accuracy of
customer forecasts and end-user demand; personnel changes; quality control of
products sold; and regulatory changes or delays in obtaining required
regulatory approvals; the size and timing of customer orders and subsequent
shipments; customer order deferrals in anticipation of new products or
technologies; timing of product introductions or enhancements by the Company
or its competitors; market acceptance of new products; technological changes
in the communications equipment industry; changes in the Company's operating
expenses; customers' capital spending; delays of orders by customers;
customers' delay in or failure to pay accounts receivable; and general
economic conditions. Finally, the industry in which the Company competes has
been characterized by declining prices as a result of increased competition.
There can be no assurance that the
22
<PAGE>
Company will be able to offset any future price declines with cost reductions.
See "Risk Factors--Fluctuations in Revenues and Operating Results."
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements
of operations as a percentage of total revenues for the period indicated:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------
1995 1996 1997 1997 1998
----- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............. 49.0 49.3 51.9 48.5 53.2
----- ------ ------ -------- --------
Gross margin................. 51.0 50.7 48.1 51.5 46.8
Operating expenses:
Sales and marketing.......... 76.8 68.9 82.7 91.7 87.0
Research and development..... 28.8 45.2 57.3 52.7 61.3
General and administrative... 45.3 40.0 38.2 43.8 31.6
Noncash compensation ex-
pense....................... -- -- 20.2 -- 22.3
----- ------ ------ -------- --------
Total operating expenses... 150.9 154.1 198.4 188.2 202.2
----- ------ ------ -------- --------
Loss from operations......... (99.9) (103.4) (150.3) (136.7) (155.4)
Other income (expense), net.... 1.5 4.0 3.1 6.2 4.7
----- ------ ------ -------- --------
Loss before income taxes..... (98.4) (99.4) (147.2) (130.5) (150.7)
Income tax expense............. 0.0 0.0 0.0 0.0 0.0
----- ------ ------ -------- --------
Net loss..................... (98.4)% (99.4)% (147.2)% (130.5)% (150.7)%
===== ====== ====== ======== ========
</TABLE>
Six Months Ended June 30, 1998 and 1997
Revenues. The Company generates revenues primarily from the sale of products
and, to a lesser extent, through the licensing of HomeRun technology. The
Company's total revenues increased to $4.5 million for the six months ended
June 30, 1998 from $2.5 million for the six months ended June 30, 1997. This
increase was primarily due to an increase in sales of XL products, and an
increase in sales of Expresso and initial sales of Expresso GS products.
License and royalty revenues were $0.4 million for the six months ended 1998.
There were no license and royalty revenues in periods prior to 1998. License
and royalty revenues to date consist of the currently recognized portion of
fees from total license contracts of $1.3 million. Approximately $0.9 million
of such fees have been deferred at June 30, 1998. Sales prices of some of the
Company's XL products have decreased recently as a result of increased
competition, and the Company expects that this trend will continue in the near
future. As a result, the Company does not expect that its revenues for the
third quarter of 1998 will significantly increase, if at all, from the
revenues recognized during the second quarter of 1998.
Cost of Goods Sold/Gross Margin. Cost of goods sold consists of raw
materials, contract manufacturing, personnel costs, test and quality assurance
for products, and cost of licensed technology included in the products. The
Company's cost of goods sold increased to $2.4 million for the six months
ended June 30, 1998 from $1.2 million for the six months ended June 30, 1997
primarily due to increased production of the Company's XL products, increased
production of its Expresso and initial production of its Expresso GS product
lines. The Company's gross margin increased to $2.1 million (46.8% of
revenues) for the six months ended June 30, 1998 from $1.3 million (51.5% of
revenues) for the six months ended June 30, 1997. The decrease in gross margin
as a percentage of revenues was primarily due to the change in product mix to
include Expresso and Expresso GS products which have lower average gross
margins than the XL products combined with the increased costs of raw
materials and contract manufacturing associated with initial Expresso and
Expresso GS product introductions. As part of its Expresso MDU strategy, the
Company plans to sell a limited number of HomeRun
23
<PAGE>
products to accelerate the deployment and adoption of its Expresso MDU
systems. These products have lower gross margins than the Company's other
product lines and, as a result, are anticipated to result in lower overall
gross margins over the next two quarters.
Sales and Marketing. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs related to customer support,
travel, trade-shows, promotions and outside services. The Company's sales and
marketing expenses increased to $3.9 million for the six months ended June 30,
1998 from $2.3 million for the six months ended June 30, 1997, primarily due
to additional hiring as well as attendant cost increases for travel and trade
show participation incurred to expand the Company's sales and marketing
efforts. The Company intends to increase sales and marketing expenses as it
adds personnel to support its domestic and international sales and marketing
efforts.
Research and Development. Research and development expenses primarily
consist of personnel costs related to engineering and technical support,
contract consultants, outside testing services, equipment and supplies
associated with enhancing existing products and developing new products.
Research and development costs are expensed as incurred. The Company's
research and development expenses increased to $2.8 million for the six months
ended June 30, 1998 from $1.3 million for the six months ended June 30, 1997,
primarily due to increased expenditures from further development of the
Expresso GS and Expresso MDU products, development of HomeRun-related
products, preparation of HomeRun technology for licensing and potential
standardization and enhancement of certain XL products. The Company intends to
increase investment in research and development programs in future periods for
the purpose of enhancing current products, reducing the cost of current
products and developing new products.
General and Administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
depreciation, facilities expense, legal, accounting and consulting fees. The
Company's general and administrative expenses increased to $1.4 million for
the six months ended June 30, 1998 from $1.1 million for the six months ended
June 30, 1997, primarily due to increases in personnel and other costs in
support of the expanded operations of the Company. The Company intends to
increase general and administrative expenditures as a result of additional
reporting requirements imposed on the Company as a public entity and increased
infrastructure costs as the Company expands its business.
Noncash Compensation Expense. Noncash compensation expense primarily
consists of expenses related to the grant of a warrant to purchase up to
666,836 shares of Common Stock in consideration for technology endorsement,
marketing and certain development support by Microsoft with respect to the
Company's HomeRun technology and related products. Noncash compensation
expense also consists of the recognition of expense related to certain
employee stock option grants, based on the difference between the deemed fair
value of common stock and the option exercise price at the date of grant. The
Company's noncash compensation expense was $1.0 million for the six months
ended June 30, 1998. There was no similar expense for the six months ended
June 30, 1997. The Company intends to recognize $1.7 million in additional
expenses related to employee stock options ratably over a period of four
years. Such deferred expense has been recorded as a reduction of equity in the
balance sheet.
Other Income (Expense), Net. Other income, net consists of interest income
on cash balances, offset by interest associated with equipment lines of
credit. The Company's other income, net remained constant at $0.2 million for
the six months ended June 30, 1998 and for the six months ended June 30, 1997.
Years Ended December 31, 1997, 1996, and 1995
Revenues. The Company's product revenues increased to $6.2 million for the
year ended December 31, 1997 from $4.5 million for the year ended December 31,
1996, and from $3.4 million for the year ended December 31, 1995. The increase
in 1997 was primarily due to increased sales of the Company's XL products
combined with initial sales of its Expresso products. The increase in 1996 was
primarily due to increased sales of XL products.
24
<PAGE>
Cost of Goods Sold/Gross Margin. The Company's cost of goods sold increased
to $3.2 million for the year ended December 31, 1997 from $2.2 million for the
year ended December 31, 1996, primarily due to increased production of the
Company's XL products and initial production of the Expresso product line, and
from $1.7 for the year ended December 31, 1995, primarily due to increased
production of XL products. The Company's gross margin increased to $3.0
million (48.1% of revenues) for the year ended December 31, 1997 from $2.3
million (50.7% of revenues) for the year ended December 31, 1996 and from $1.8
million (51.0% of revenues) for the year ended December 31, 1995. The decrease
in gross margin as a percent of revenues in 1997 was primarily due to the
change in product mix to include Expresso products which have lower average
gross margins than the XL products combined with the increased costs of raw
materials and contract manufacturing associated with initial Expresso product
introductions. Gross margin as a percent of revenues remained relatively
constant between 1996 and 1995.
Sales and Marketing. The Company's sales and marketing expenses increased to
$5.1 million for the year ended December 31, 1997 from $3.1 million for the
year ended December 31, 1996 and from $2.6 million for the year ended December
31, 1995. The increase in 1997 was primarily due to increased hiring of sales
and marketing personnel, expansion of travel and attendance at trade shows,
increases in personnel related to customer support activities and expanded
efforts in international markets. The increase in 1996 was primarily due to
increases in sales and marketing personnel and related costs.
Research and Development. The Company's research and development expenses
increased to $3.6 million for the year ended December 31, 1997 from $2.0
million for the year ended December 31, 1996 and from $1.0 million for the
year ended December 31, 1995. The increase in 1997 was primarily due to
increases in expenditures from further development of the Expresso GS and
Expresso MDU products, development of HomeRun technology and related product
prototypes and enhancement to various XL products. The increase in 1996 was
primarily due to initial efforts related to the development of the Expresso
platform.
General and Administrative. The Company's general and administrative
expenses increased to $2.4 million for the year ended December 31, 1997 from
$1.8 million for the year ended December 31, 1996 and from $1.6 million for
the year ended December 31, 1995. The increase in 1997 was primarily due to
additions of administrative personnel and increases in other costs related to
the Company's growth including expansion into additional facility space. The
increase in 1996 was primarily due to increases in support personnel.
Noncash Compensation Expense. Noncash compensation expense primarily
consists of expenses related to the grant of a warrant to purchase 666,836
shares of Common Stock in consideration for technology endorsement, marketing
and certain development support by Microsoft covering the Company's HomeRun
technology and related products. To a lesser extent, noncash compensation
expense consists of the recognition of expense related to certain employee
stock option grants, based on the difference between the deemed fair value of
common stock and the option exercise price at the date of grant. The Company's
noncash compensation expense was $1.3 million for the year ended December 31,
1997. There was no noncash compensation expense for the years ended December
31, 1996 and 1995.
Other Income (Expense), Net. The Company's other income, net remained
constant at $0.2 million for the year ended December 31, 1997 and for the year
ended December 31, 1996 and increased from $0.1 million for the year ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the sale of preferred equity securities for an aggregate of $39.0
million net of offering costs.
At June 30, 1998, the Company had cash and cash equivalents of $3.8 million
and short-term investments of $3.0 million. In addition, the Company has a
line of credit with the ability to borrow the lesser of $2.5 million
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or 70% of qualified accounts receivable. Under such terms, the Company had
available to borrow approximately $1.6 million at June 30, 1998 and had no
outstanding draws thereunder. The Company has approximately $0.4 million
outstanding on a separate equipment line of credit. The current portion of
such borrowings is $0.2 million.
Net decrease in cash and cash equivalents in the six months ended June 30,
1998 of $1.6 million resulted primarily from a net loss of $6.8 million, net
changes in working capital, and purchase of property and equipment, offset by
noncash compensation expense, net proceeds from maturities of short term
investments, and net proceeds from the sale of preferred securities. Net
decrease in cash and cash equivalents in the six months ended June 30, 1997 of
$30,000 resulted primarily from a net loss of $3.3 million, net changes in
working capital, and the purchase of property and equipment, offset by net
proceeds from maturities of short term investments and borrowings on a line of
credit to finance equipment purchases.
Net increase in cash and cash equivalents in 1997 of $4.0 million resulted
primarily from net proceeds from the sale of preferred securities, net
proceeds from maturities of short term investments, and noncash compensation
expense, offset by a net loss of $9.2 million, net changes in working capital,
and purchase of property and equipment. Net decrease in cash and cash
equivalents in 1996 of $0.1 million resulted primarily from a net loss of $4.4
million, the purchases of short term investments from financing proceeds, and
purchase of property and equipment, offset by net changes in working capital
and net proceeds from the sale of preferred securities. Net increase in cash
and cash equivalents in 1995 of $1.3 million resulted primarily from net
proceeds from the sale of preferred securities, offset by a net loss of $3.4
million, net changes in working capital and the purchase of property and
equipment.
In future periods, the Company generally anticipates significant increases
in working capital on a period to period basis primarily as a result of
planned increased product sales and higher relative levels of inventory. The
Company will also continue to expend significant amounts on property and
equipment related to the expansion of systems infrastructure and office
equipment to support Company growth and lab and test equipment to support on-
going research and development operations.
The Company believes that its cash and cash equivalents balances, short term
investments and funds available under its existing line of credit will be
sufficient to satisfy its cash requirements for at least the next 12 months.
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BUSINESS
The following contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth above under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies, as well as the copper telephone wires in homes,
businesses and other buildings. The Company's Expresso and XL products
incorporate Tut's proprietary FastCopper technology in a cost-effective,
scalable and easy-to-deploy solution to exploit the underutilized bandwidth of
copper telephone wires. The Company's products include high-bandwidth access
multiplexers, associated modems and routers, Ethernet extension products and
integrated network management software. HomeRun, the Company's in-home
application of FastCopper, has been adopted as the first generation standard
for home networking over copper telephone wires by the Home Phoneline Network
Alliance ("Home PNA") whose founding members are 3Com Corporation, Advanced
Micro Devices, Inc. ("AMD"), AT&T Wireless Services, Inc. ("AT&T Wireless"),
Compaq Computer Corporation ("Compaq"), Epigram Inc. ("Epigram"),
International Business Machines Corporation ("IBM"), Intel Corporation
("Intel"), Hewlett-Packard Company ("Hewlett Packard"), Lucent Technologies
Inc. ("Lucent"), Rockwell Semiconductor Systems, Inc. ("Rockwell") and Tut
Systems.
The Company's products and technologies cost-effectively meet high-speed
bandwidth requirements for a variety of users:
. Large corporations, universities and other institutions use the Company's
XL products to extend Ethernet networks between separate buildings beyond
conventional Ethernet distance limitations.
. Independent telephone companies, Internet service providers and
competitive local exchange carriers use the Company's Expresso GS systems
to provide high-speed data services, including Internet access, to
business and residential customers over existing copper telephone wires
traditionally used for voice service.
. Owners and operators of multiple dwelling units ("MDUs"), including real
estate investment trusts ("REITs"), universities, hotels and independent
landlords, can utilize the Company's Expresso MDU systems to deliver
high-speed data access to their tenants over existing copper telephone
wires.
. Leading semiconductor, computer hardware and consumer electronics
manufacturers, such as 3Com, AMD, AT&T Wireless, Compaq and Rockwell,
have licensed the Company's HomeRun technology to enable the development
of HomeRun-compatible integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and
wireless), Internet telephones and television-based web browsers.
The Company shipped its first XL product in 1992, its first Expresso product
in early 1997, and its first Expresso GS in the second quarter of 1998. The
Company expects to ship its Expresso MDU configured with HomeRun line cards in
the fourth quarter of 1998.
INDUSTRY BACKGROUND
Increasing Demand for High-Speed Data Access
In recent years, there has been a dramatic increase in demand by businesses
and consumers for high-speed data access to the Internet and to private
corporate networks. This demand is being driven by the growth in users who are
accessing networks for a variety of applications, including communications via
the Internet and corporate intranets, electronic commerce, and telecommuting.
These applications often require the transmission of large, multimedia
intensive files, necessitating the need for high-speed data access services.
International Data Corporation projects that the number of devices accessing
the Internet will grow six-fold to over 200 million by
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the year 2000. The Company believes that a substantial percentage of these
devices will be connecting to the Internet at speeds greater than 56 Kbps.
Additionally, the increase in the number of homes with multiple access devices
is fueling demand for networking capabilities at home, including the ability
to share peripherals and a single high-speed Internet access connection.
Increasingly, individuals have experienced the value of high-speed Internet
access from their work locations via 1.544 Mbps T1 access lines. These
individuals are often demanding the same level of speed from their home or
laptop connection as they experience from their work location. However, remote
access to the Internet using dial-up connections over copper telephone wires
is limited to speeds of 56 Kbps.
[Graphic depicting "The Networked Infrastructure", including the "Backbone
Network", "The Last Mile", and "Beyond the Last Mile".]
The Backbone Network
To meet this increasing need for speed, telecommunication service providers
have significantly upgraded the backbone network over the past several years
with high bandwidth fiber optic cables and high-speed switches. However, this
high bandwidth, fiber-based backbone does not extend all the way to end users.
As a result, connecting users to this backbone at high speeds remains a
limiting factor in overall data transmission performance.
The Last Mile -- Local Loop
Typically, end users are connected to the backbone network by the local loop
copper wire infrastructure built and maintained by telephone companies. This
last mile of copper telephone wire infrastructure extends to and reaches
millions of homes, businesses and other buildings. This infrastructure was
originally designed for the transport of low bandwidth, analog voice signals.
However, as advanced xDSL technologies continue to become available, it is
becoming possible to use this same infrastructure for the delivery of high-
speed digital
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signals and data services. And, as a result of recent state and federal
initiatives to deregulate many aspects of telecommunications, the local loop
is no longer intricately tied to only services provided by the incumbent local
exchange carrier ("ILEC"). The local loop is now available to CLECs, and
sometimes ISPs, on an "unbundled" tariff basis. This means that these
aggressive new service providers can now purchase individual pairs of last
mile copper wire, add xDSL-based products at each end, and leverage the huge
embedded last mile copper infrastructure to deliver high-speed services
directly to their customers.
Beyond the Last Mile -- Private Copper Networks
The need for data services of any type extends beyond the local loop all the
way to an end user, or to multiple end users located throughout a property.
The most widely available medium for delivering data services throughout a
property to end users is the copper wire already in place for telephone
service. These private copper networks ("PCNs") are found in corporate and
educational campuses, apartment buildings, hotels and single family homes.
Throughout multi-building corporate and educational campuses, a PCN of
single-pair telephone wires typically connects users and buildings to each
other and to the public switched telephone network for voice transmission.
Within each building there often exists PCNs of two-pair data-grade copper
wires for the provisioning of Ethernet local area networks ("LANs"). Although
there is typically a great need to interconnect these separate LANs, the lack
of data-grade wires between buildings and the 328-foot distance limitation of
standard 2-pair Ethernet precludes the simple interconnection of these LANs.
As a result, there is demand for innovative data technologies and products
that can use the large installed base of inter-building telephone wires to
enable high-speed Ethernet interconnections on corporate, educational and
other multi-building campuses.
Within apartments, hotels, dormitories, and other multiple dwelling units
("MDUs"), the PCN generally consists of one or two pairs of telephone wires
connecting each living unit to a central wiring location. This concentration
of wires can provide a convenient access point and significant economies of
scale to service providers and property owners for the delivery of high-speed
Internet access and other services to the many tenants of MDUs.
Within single-family homes, a PCN of telephone wire generally leads to many
RJ-11 outlets over a random tree and branch configuration. Historically, this
private copper network has been restricted to a single use at a time, either
for standard telephone service or low speed analog modem use. If residents
require simultaneous use of both voice and data service, then a second
telephone wire and service need to be installed. To the extent that new
technologies can eliminate the speed and application restrictions of home PCNs
and allow for the simultaneous use of voice telephony service and high speed
data access, single-family homes will be able to attain similar levels of
performance for sharing peripherals and high-speed Internet access as is now
common in office environments.
THE TUT SYSTEMS SOLUTION
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies and the copper telephone wires in homes, businesses and
other buildings. The Company's products utilize its proprietary FastCopper
technology to exploit the underutilized bandwidth of existing last mile and
PCN infrastructures by reducing the noise, radio frequency interference and
signal cross talk inherent in high-speed data transmission over copper
telephone wires. FastCopper technology is found in a number of the Company's
cost-effective, scalable and easy to deploy products to meet the needs of
diverse customers.
Tut's XL products extend Ethernet networks across corporate and educational
campuses, medical and hospital complexes and other multi-building or multi-LAN
premises without having to install additional wires or fiber optic cable. The
Company believes that its XL1500 product series are the only products that
transmit data at speeds up to 10Mbps over a single pair of copper telephone
wire at distances up to 1,500 feet. Other of the Company's XL products extend
Ethernet LANs at varying speeds to distances up to 24,700 feet.
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The Company's Expresso GS system is used by telecommunications service
providers, including ITOCs, ISPs and CLECs, to provide high-speed data
services, including Internet access, to both business and residential
customers over the existing copper-based last mile infrastructure
traditionally used for telephone service. Taking advantage of the Company's
proprietary SmartWire and All-Rate DSL features on Expresso GS, service
providers can reach geographically dispersed subscribers and offer a range of
bandwidth and price options to such subscribers. The Company believes that
Expresso GS offers service providers a low initial deployment cost, enabling
the delivery of high-speed services to a variety of markets throughout the
service area.
The Company will offer its Expresso MDU system, which can be integrated with
its proprietary HomeRun technology, to provide low cost, high-speed bandwidth
to multiple tenants within an MDU. Expresso MDU is a compact system including
integrated AC power, secure high-speed switching, and WAN interfaces for
deployment in the basements of apartment buildings, in wiring rooms of hotels
and in other locations where access lines are centrally concentrated. The
Company believes that Expresso MDU is the only single-box solution allowing
owners of MDUs to deliver secure high-speed data and LAN services for multiple
tenants in MDUs.
The Company's HomeRun technology enables a cost-effective Ethernet LAN to be
quickly implemented over the telephone wires found in a business or residence,
without interfering with existing telephone service that may be running over
these same wires. This proprietary technology has been adopted as the first
generation standard for home networking over copper telephone wires by the
Home PNA and is licensed to leading semiconductor, computer hardware and
consumer electronics manufacturers. HomeRun technology can be embedded in
integrated circuits and consumer products, including PCs, peripherals, modems
(56 Kbps, ISDN, xDSL, cable and wireless), Internet telephones and television-
based web browsers, thereby lowering the cost of deploying the Company's
Expresso MDU system and facilitating the commercial acceptance of the
Company's products.
STRATEGY
Tut Systems' objective is to be the leading provider of advanced
communications products for high-speed data access that exploit the large
existing infrastructures of copper telephone wires which lead into and reside
within private homes, businesses and other premises. Key elements of the
Company's business strategy are as follows:
Penetrate High Growth Markets with Expresso GS and Expresso MDU. The Company
aggressively markets its Expresso line of high-speed access products to fast
growing service providers, including ISPs and CLECs, who can benefit from
highly scalable Internet access solutions with low initial deployment costs.
The Company uses its direct sales force to target the largest service
providers and MDU owners and operators, and reaches smaller service providers
through its value added resellers ("VARS"). The Company intends to use large
regional and national service providers to sell Expresso MDU systems to
smaller MDU owners. The Company seeks to increase the demand for its Expresso
systems from service providers and MDU owners and operators by reducing the
total cost of service deployment through the licensing of its HomeRun
technology to manufacturers of integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers.
Develop Innovative Technology and Systems Enhancements. The Company uses its
rapid product development capabilities and its FastCopper technology to
enhance existing products and develop future generations of products. Tut
seeks to extend its FastCopper technology to enable higher data speeds over
longer distances. The Company plans to enhance the Expresso platform by
incorporating additional xDSL technologies such as discrete multitone ("DMT")
asynchronous digital subscriber line ("ADSL") and G.lite (a consumer focused
version of ADSL), higher speed wide area network ("WAN") interfaces and new
features for its network management software.
Leverage HomeRun Technology and Partnerships. In June 1998, the Company's
HomeRun technology was selected as the first generation home networking
standard by the Home PNA. The Company has licensed
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HomeRun to leading semiconductor, computer hardware, and consumer electronics
manufacturers including 3Com, AMD, AT&T Wireless, Compaq and Rockwell. The
Company expects that its licensees will embed HomeRun technology into
integrated circuits and consumer products, including PCs, peripherals, modems
(56 Kbps, ISDN, xDSL, cable and wireless), Internet telephones and television-
based web browsers. The Company believes that the availability of these
devices will reduce the total cost of deploying services based on HomeRun
enabled versions of Expresso MDU. The Company's relationships with its
licensees also enable the Company to better anticipate market trends,
comprehend customer requirements, gain early access to next generation
technology and accelerate product development and market acceptance of new
technologies.
Drive Industry Standards. The Company's membership in industry alliances
such as the Home PNA and the Universal ADSL Working Group, a committee that is
working to establish communications standards for G.lite, facilitates the
creation of easy to use, affordable, high-speed home networking solutions over
existing copper telephone wires. HomeRun technology and products have been
specifically designed to be compatible with, and to extend the benefits of,
G.lite implementations of ADSL. The Company believes that its participation in
standards setting activities provides valuable insight and leads to
relationships that can assist the Company in achieving early to market
advantage in the development and sale of future standards based products.
Standards participation also provides the Company with the ability to sponsor
its own intellectual property for integration in future networking standards.
Expand International Presence. The Company believes that its Expresso MDU
product line, which has been developed in conformance with international
standards, can serve a substantial market for high-speed data access products
outside of the United States. The Company markets its Expresso MDU products
through its established base of international distributors and is actively
adding new distributors who focus on the MDU market.
CORE TECHNOLOGIES AND PRODUCTS
FastCopper Technology
High-speed digital signals are severely distorted and subject to noise,
radio frequency interference, signal crosstalk and echos when transmitted over
long lengths of ordinary copper telephone wires. The Company has developed a
broad base of proprietary FastCopper technology to address noise and
distortion problems so that high-speed data access can be achieved over a
single pair of ordinary copper telephone wires used throughout the local loop,
and in corporate and educational campuses, apartment buildings, hotels and
single family homes. FastCopper technology encompasses three main areas of
expertise to maximize transmission rates at minimum costs over existing copper
telephone wires: (i) noise reduction, (ii) analog and digital signal
processing to reduce distortion, and (iii) digital modulation techniques.
The Company uses its FastCopper technology, along with commercially
available components, to build its high-speed data access products. In the
XL1500 product series, the Company applied its noise reduction and signal
processing expertise to build a 10 Mbps, 1,500 foot Ethernet LAN extension
product to operate over a single pair of copper telephone wire. For its
Expresso products, the Company pioneered the use of rate adaptive synchronous
digital subscriber line ("SDSL") technology and recently introduced SDSL
products which extend to distances up to 24,700 feet without the use of
repeaters. For HomeRun, the Company developed a proprietary modulation
technique to transmit high-speed data signals over random tree and branch
networks typically found in single family homes.
XL Products
Tut Systems' XL LAN extenders and connectivity products provide low cost,
high-speed networking across private copper networks residing in corporate and
educational campuses, medical and hospital complexes and other multi-building
or multi-LAN premises. The XL products enable Ethernet connections from 600
feet to over 24,000 feet using existing ordinary copper telephone wires. These
products connect individual LAN networks across a campus, or connect a
specific private copper network to the local loop.
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XL products include:
. The XL600 series which allows quick, economical networking of remote
workstations using a single pair of copper telephone wires and provides
10 Mbps Ethernet transmissions across distances up to 600 feet.
. The XL1500 series which provides an economic solution for interconnecting
LAN segments in a campus environment at 10 Mbps for distances up to 1,500
feet on a single pair of copper telephone wires.
. The XL12000 which supports 2 Mbps transmission rates over distances up to
12,000 feet.
. The new XL-2412 which provides transmission on campuses at speeds of 1.2
Mbps at distances up to 12,000 feet, or 192 Kbps at distances up to
24,700 feet, using a single pair of copper telephone wires and standard
10Base-T Ethernet LAN interfaces.
[Graphic depicting "The Networked Campus"]
SNMP-based management will be available for the Company's newer XL12000 and
XL-2412 products to support wide scale and remote management of XL products
across large environments.
Expresso System Platforms
The Company's Expresso GS and Expresso MDU products are designed to be used
by ITOCs, ISPs, CLECs and MDU owners and operators to provide high-speed data
services to large numbers of end users over local loop and private copper
network infrastructures. Expresso GS is DC-powered and intended for use by
service providers to serve last mile applications using xDSL technologies.
Expresso MDU is AC-powered and can be integrated with the Company's HomeRun
technology into a low cost and flexible Expresso platform. This system
provides owners of private copper networks with an easy to deploy and scalable
means to distribute high-speed data access to tenants over the copper
telephone wires found in MDUs.
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An Expresso GS or Expresso MDU system consists of a compact, modular
central-site shelf with an SNMP management card, optional switching,
multiplexing and WAN interface cards, and up to 17 xDSL or HomeRun line cards.
The 10 1/2 inch-high (6 RU) system is available with two mounting options,
either 19 inches wide (for data center and international installations) or 23
inches wide (for telephone company installations).
[Graphic depicting the Expresso GS/MDU System]
Each Expresso GS or Expresso MDU backplane supports a total bandwidth
capacity of 6.8 Gbps. Each line card slot supports 400 Mbps of bandwidth. This
high bandwidth permits the Expresso platform to accommodate future high-speed
access technologies such as very high bit rate digital subscriber line
("VDSL"). Different line technologies can be mixed and matched in any one
Expresso GS or Expresso MDU shelf on a line card by line card basis.
Each Expresso GS and Expresso MDU shelf can support up to 136 line side
subscriber connections making the Expresso GS and Expresso MDU platforms among
the highest density xDSL platforms in the industry. Multiple Expresso GS and
Expresso MDU shelves can be interconnected via 10 or 100Base-T Ethernet
connections, allowing systems to accommodate hundreds of subscribers onto a
common WAN interface.
The network management system for Expresso GS and Expresso MDU allows
efficient end to end remote network management and service configuration via
either Telnet or SNMP-based management systems. In addition to a broad range
of configuration options, the Expresso platform provides an extensive set of
diagnostic tools including such capabilities as per line bit error rate tests,
validation of copper wire connectivity and remote modem and router tests.
Customers can upgrade Tut software, both residing in the Expresso shelf as
well as in remote M-1100 series routers, as required from remote network
management centers.
Expresso GS
An Expresso GS configuration for local loop applications includes a compact
and modular system with xDSL line cards connected to remote M-1100 series
routers. The M-1100 series routers connect users' PCs or LANs to the Expresso
GS system over a local loop that may extend up to 24,700 feet using the
Company's current SDSL line technology. The Company's dynamic SmartWire SDSL
rate adaptation enables all subscribers
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to be served at the highest attainable speeds over each loop. Through
Expresso's All-Rate DSL feature, a service provider can offer tiered access
services in increments of 64 Kbps to meet the varying bandwidth and price
requirements of each subscriber. All-Rate DSL allows service providers to
offer a low cost, low bandwidth, entry level service that can expand to higher
bandwidth capabilities as a subscriber's need for bandwidth expands. The
Company's M-1100 router provides a standard 10Base-T interface for connection
to users PCs or LANs. The M-1100HR router will provide users with a HomeRun
interface enabling multiple HomeRun-enabled devices to connect to the Expresso
GS system.
[Graphic depicting "The Networked Community"]
Expresso MDU
Expresso MDU will integrate the Company's HomeRun technology with its
flexible Expresso platform to provide owners of MDUs with easy to deploy,
scalable and cost-effective solutions to distribute high-speed data access to
multiple tenants over private copper networks within MDUs. The Company expects
to ship its Expresso MDU product configured with HomeRun line cards in the
fourth quarter of 1998.
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The Expresso MDU platform shares all of the features and architecture of the
Expresso GS while adding UL-approved AC power options for deployment in
residential locations (e.g. the basement wiring room of a apartment building).
Expresso MDU can be equipped with HomeRun line cards to provide a secure
Ethernet LAN for each living unit within an MDU. The Company has developed a
HomeRun adapter that converts HomeRun signals to a standard 10Base-T Ethernet
interface. Consumer products, such as PCs, peripherals, Internet telephones
and television-based web browsers, that are HomeRun-enabled can connect to the
Expresso MDU over existing copper telephone wires within an MDU, without the
need for any separate modem or network interface card ("NIC").
[The Graphic depicting "The Networked MDU"]
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HomeRun High-Speed Home Network Technology
HomeRun creates a cost-effective Ethernet LAN over the random topology of
home telephone wires, without disturbing existing telephone service and/or
G.lite service running simultaneously over these same wires. With HomeRun,
multiple devices can share peripherals and/or a single high-speed Internet
access connection on a 1 Mbps Ethernet LAN. HomeRun supports Internet
connections through ISDN or xDSL wireline technologies, a wireless modem or a
cable modem. The Company developed its HomeRun technology using its
proprietary signal processing expertise and digital modulation technique.
Tut's products which incorporate HomeRun technology include 10Base-T adapters
and NICs. The Company has also made HomeRun technology available to third
party vendors for integration into their own products, including integrated
circuits, PCs, peripherals, modems (56Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers. HomeRun is either
licensed directly to such vendors or is available indirectly via chip sets
from the Company's semiconductor licensees. Since HomeRun is Ethernet standard
at the media access control layer, the Company's licensees can readily
incorporate HomeRun into multiple consumer device designs at a low incremental
cost.
[Graphic depicting "The Networked Home"]
CUSTOMERS AND MARKETS
The Company targets its development, marketing and sales efforts to service
providers and end users across four market categories, each characterized by a
common demand for high-speed data access:
Corporations and Campuses
Corporate and educational campuses, medical and hospital complexes, and
other multi-building and multi-LAN premises often have a need to interconnect
Ethernet LAN networks that reside in separate buildings or locations across
distances longer than the standard Ethernet limitation of 328 feet. These
connections can be made over copper wire, fiber optic cable, or wireless
radio. Most campus facilities have copper telephone wires and, if properly
equipped, these wires can be used to interconnect standard 10Base-T Ethernet
LANs at native 10 Mbps speeds. As a result, copper telephone wire solutions
for LAN extensions are a cost-effective option for corporation and campus
institutions.
The Company markets its XL products to domestic and international end users
for LAN extensions over existing copper telephone wires. The Company has more
than 500 domestic customers for the XL product line,
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including such Fortune 500 companies as AT&T Corp., Chevron Corporation,
Chrysler Corporation, Lockheed Martin Corporation and Texaco, Inc., and such
institutions as the U.S. Army and the U.S. Navy.
Service Providers
Service providers, including ITOCs, ISPs and CLECs, own, or have low cost
access to, the local loop of copper wire infrastructure and are continually
seeking additional ways to generate revenue from this infrastructure. Many
service providers view the demand for high-speed data access as a key source
of new revenue.
To address this opportunity, the Company began selling Expresso systems to
smaller ITOC customers in 1997. The newly released Expresso GS system
addresses both the ITOC market as well as the faster growing ISP and CLEC
opportunities. To date, the Company has sold over 70 Expresso and Expresso GS
systems.
Multiple Dwelling Units
MDU owners and operators can recognize economies of scale by providing high-
speed services to multiple MDU tenants from a single point of service. MDUs
include apartment complexes, hotels, college dormitories and military housing
complexes. The Company believes that the potential international MDU market is
particularly large and represents a strategic opportunity for the Company.
The Company's potential customers in the MDU market include both service
providers who seek to sell services to MDU tenants and owners of MDU complexes
who seek to offer advanced amenities to their tenants, increase property
value, and/or gain additional revenue from the property. The Company expects
to ship its Expresso MDU product configured with HomeRun line cards to owners
of apartment complexes and hotels in the fourth quarter of 1998.
Home Networking
The growth in the demand for high-speed data access, the decreasing cost of
PCs and the proliferation of Internet access devices in homes are creating an
emerging demand for home networking and access solutions. Home networks must
be designed to allow the sharing of files, the sharing of peripherals such as
printers, the simultaneous, uninterrupted use of voice service and, perhaps
most importantly, the sharing of Internet and remote corporate network access.
Home network consumers desire a low cost, easy to implement network solution
that does not require any new wires to be installed throughout the home.
The Company is actively licensing its HomeRun technology to members of the
Home PNA and others. The Home PNA recently adopted HomeRun as the first
generation standard for home networking. The founding members of the Home PNA
are 3Com, AMD, AT&T Wireless, Compaq, Epigram, Hewlett Packard, IBM, Intel,
Lucent, Rockwell and Tut Systems.
MARKETING, SALES AND CUSTOMER SUPPORT
Marketing
The Company seeks to increase demand for its products, expand company and
product visibility in the market and establish cooperative marketing programs.
The Company expects to pursue and expand market opportunities in the United
States with its strategic partners, customers and distributors. Certain of the
Company's ITOC customers are expanding their business through unregulated ISP
subsidiaries with broader market coverage, and certain of the Company's ISP
customers are expanding their market coverage by becoming CLECs. The Company
believes this evolution offers the opportunity to continue to sell Expresso-
based systems to existing customers as they expand and grow. In 1998, the
Company implemented its Express.connect cooperative marketing program. Through
the Express.connect program, the Company provides marketing support to its
service provider and MDU customers to aid them in generating demand for
services based on the
37
<PAGE>
Company's products. The Express.connect program includes direct mail
campaigns, local media support and business to business telemarketing on
behalf of the Company's customers.
In addition to customer-specific sales efforts, the Company's marketing
activities include attendance at major industry trade shows and conferences
(e.g. NetworkWorld, Interop, Hitech, Comnet and SuperComm), the distribution
of sales and product literature, operation of a web site, advertising in trade
journals and catalogs, direct marketing and ongoing communications with its
customers, the press and industry analysts.
Sales
Tut Systems sells its products through multiple sales channels in the United
States, including a select group of regional VARs, systems integrators and
distributors, data networking catalogs and directly to the largest end users.
Internationally, the Company sells and markets its products through sales
agents, VARs, systems integrators and distributors. In 1997, the Company
focused its international sales efforts on a few select areas, including Japan
and Korea. In the first half of 1998, the Company established new sales
channels in Canada, Europe, South America, Australia and Asia.
In 1997 all direct sales of the Company's products were accomplished via a
telemarketing sales organization based in Beaverton, Oregon. In late 1997 and
1998 the Company hired experienced sales and service personnel for its New
York, Atlanta, Chicago, Dallas and Denver regional sales offices. The Company
also intends to add to its existing telemarketing sales force as well as add
resources to develop additional business with the federal government. The
Company recently added a Director of International Sales to further develop
the Company's international sales channels.
Customer Support
The Company believes that consistent high-quality service and support is a
key factor in attracting and retaining customers. Service and technical
support of the Company's products is coordinated by the customer support
organization located in Pleasant Hill, California. Telecommunications and
Networking Systems Engineers provide critical technical support to its
customers. The Company's Systems Application Engineers, located in each of the
Company's sales regions, support pre- and post-sales activities. Tut Systems
also employs a nationwide third party support organization to handle inquiries
from a large number of customers and provide first level telephone technical
support and on-site installation and support services. Customers can also
access technical information and receive technical support through the
Internet.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on enhancing its
existing products and developing new products. The Company's research and
development organization emphasizes early stage system engineering. The
product development process begins with a comprehensive functional product
specification based on input from the sales and marketing organizations. The
Company incorporates feedback from end users, distribution channels, and
through participation in industry events, industry organizations and standards
development bodies such as the Home PNA in its product development process.
Key elements of the Company's research and development strategy include:
. Core Designs. The Company seeks to develop platform architectures and
core designs which allow for cost-effective deployment and flexible
upgrades that meet the needs of multiple markets and applications. These
designs emphasize quick time to market and future cost reduction
potential. The Expresso GS platform is a direct result of this strategy.
. Product Line Extensions. The Company seeks to extend its existing product
lines through product modifications and enhancements in order to meet the
needs of particular customers and markets. Products resulting from the
Company's product line extension efforts include the new XL-2412 product
derived from the M-1100 series router for Expresso GS, and the Expresso
MDU which will combine the
38
<PAGE>
Company's Expresso GS platform with AC power and the Company's HomeRun
technology for use in MDU markets.
. Use of Industry Standard Components. The Company's design philosophy
emphasizes the use of industry standard hardware and software components
whenever possible to reduce time to market, decrease the cost of goods
and lessen the risks inherent in new design. The Company maximizes the
use of third party software for operating systems and routing software,
allowing the Company's software engineers to concentrate on hardware-
specific drivers, user interface software and advanced features.
. New Technologies. The Company seeks to enhance its Expresso platform by
incorporating additional xDSL technologies (such as ADSL, VDSL and
G.lite), higher speed WAN interfaces and new network management software
features. The Company also seeks to develop new products incorporating
the Company's FastCopper expertise to meet the needs of markets with
heavily installed copper wire infrastructures.
MANUFACTURING
The Company does not manufacture any of its own products, but instead relies
on contract manufacturers to assemble, test and package the Company's
products. The Company requires ISO 9002 registration for these contract
manufacturers as a condition of qualification. The Company audits the
contractor's manufacturing process performance through audits, testing and
inspections and monitors contractor quality through incoming testing and
inspection of packaged products. In addition, the Company monitors the
reliability of its products through in house repair, reliability audit testing
and field data analysis.
The Company currently procures all of its raw materials from outside
suppliers through its contract manufacturers and AMS, Inc. In procuring
components, the Company, AMS, Inc. and its contract manufacturers rely on some
suppliers that are the sole source of those components. For example, all of
the field programmable gate array supplies used in the Company's products are
purchased from Xilinx, Inc. In addition, ACT Networks, Inc. is the sole
supplier of a bridge router component used in certain of the Company's XL and
Expresso products. The Company's Expresso products are also dependent on
various sole source offerings from Osicom Technologies, Inc., Metalink US
Inc., Motorola, Inc., RELTEC Corporation, SaRonix and Wind River Systems,
Inc. See "Risk Factors--Dependence on Sole Source Suppliers."
The Company forecasts its product requirements to maintain sufficient
product inventory to allow it to meet the short delivery times demanded by its
large and diverse customer base, typically one to four days between receipt of
order and shipment to the customer. The Company's future success will depend
in significant part on its ability to obtain manufacturing on time, at low
costs and in sufficient quantities to meet demand. See "Risk Factors--
Dependence on Contract Manufacturers."
COMPETITION
The markets for the Company's products are intensely competitive,
continually evolving and subject to rapid technological change. The Company
believes that it and its products face the following competitive factors:
conformance to industry standards, breadth of product lines, implementation of
additional product features and enhancements (including improvements in
product performance, reliability, size, and scalability), low cost and easy to
deploy and use products, sales and distribution capability, technical support
and service and general industry and economic conditions. Although the Company
believes that it currently competes favorably with respect to all of these
factors, there can be no assurance that the Company will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully in the future. The Company
expects that competition in each of its markets will increase in the future.
The Company's principal competitors include or are expected to include
PairGain Technologies, Inc., Paradyne Corporation, Cisco Systems, Inc., Ascend
Communications, Inc., Westell Technologies, Inc. and a number of other public
and private companies. Many of the Company's competitors and potential
competitors have substantially greater name recognition and technical,
financial and marketing resources than the Company. Such
39
<PAGE>
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than the Company. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced will not materially adversely
affect the Company's business, financial condition and results of operations.
In addition, certain of the Company's licensees may sell aspects of the
Company's technology to competitors or potential competitors of the Company.
Such competitors may cause an erosion in the potential market for the
Company's products. This competition could result in price reductions, reduced
profit margins and loss of market share, which would materially adversely
affect the Company's business, financial condition and results of operations.
Tut Systems also competes with technologies using alternative transmission
media such as coaxial cable, wireless facilities and fiber optic cable. To the
extent that telecommunications service providers choose to install fiber optic
cable or other transmission media in the last mile, or to the extent that
homes and businesses install other transmission media within buildings, the
Company expects that demand for its copper telephone wire-based products will
decline. These competitive pressures from alternative transmission
technologies may further necessitate price reductions of the Company's
existing and future products.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent,
copyright and trade secret laws and non-disclosure agreements to protect its
proprietary technology. The Company currently holds 11 United States patents
and has 8 United States patent applications pending. There can be no assurance
that patents will be issued with respect to pending or future patent
applications or that the Company's patents will be upheld as valid or will
prevent the development of competitive products. The Company seeks to protect
its intellectual property rights by limiting access to the distribution of its
software, documentation and other proprietary information. In addition, the
Company enters into confidentiality agreements with its employees and certain
customers, vendors and strategic partners. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company is also subject to the
risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. In this regard, there can be no
assurance that third parties will not assert infringement claims in the future
with respect to the Company's current or future products or that any such
claims will not require the Company to enter into license arrangements or
result in protracted and costly litigation, regardless of the merits of such
claims. No assurance can be given that any necessary licenses will be
available or that, if available, such licenses can be obtained on commercially
reasonable terms.
EMPLOYEES
As of June 30, 1998, the Company employed 86 persons, including 10 in
operations, 41 in marketing, sales and customer support, 25 in research and
development and 10 in finance and administration. The Company also employs a
number of contract employees, especially for software engineering and systems
verification. None of the Company's employees is represented by a labor union
and the Company has experienced no work stoppages to date. The Company does
not have any employment contracts with its executive officers.
FACILITIES
The Company's principal administrative and engineering facilities are
located in one leased building totaling approximately 23,000 square feet
located in Pleasant Hill, California. In addition, the Company leases sales
and administrative facilities totaling approximately 2,600 square feet in
Beaverton, Oregon. The current lease for the Pleasant Hill facility expires in
May 2001, with an option to renew for two years, and the lease for the Oregon
facility expires in March 2002. The Company also has sales offices in the
vicinity of New York, Atlanta, Chicago, Dallas and Denver. The Company is
currently considering the lease of additional facilities to add 4,100
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<PAGE>
additional square feet of space. The Company believes that with this additional
space, its facilities will be adequate to meet its requirements for the
foreseeable future and that suitable additional or substitute space will be
available as needed.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not involved in any
material legal proceedings.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Salvatore D'Auria....... 42 President, Chief Executive Officer and Director
Matthew Taylor.......... 39 Chairman of the Board, Chief Technical Officer and Secretary
Nelson Caldwell......... 41 Vice President of Finance and Chief Financial Officer
Allen Purdy............. 48 Vice President of Sales
Thomas Warner........... 41 Vice President of Engineering
Nicholas Berberi........ 42 Vice President of Customer Support
Craig Bender............ 56 Vice President of Market Development
Craig Stouffer.......... 35 Vice President of Marketing
Shaw Matthews........... 56 Vice President of Operations
Clifford H. Higgerson... 58 Director
Saul Rosenzweig(/1/).... 72 Director
David Spreng(/1/)....... 36 Director
George Middlemas........ 52 Director
Brion Applegate(/2/).... 44 Director
Roger Moore(/2/)........ 56 Director
Neal Douglas(/2/)....... 39 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Salvatore D'Auria has served as President, Chief Executive Officer and a
director of the Company since August 1994. He served as the Company's Chief
Operating Officer from May 1994 to August 1994. From August 1993 to May 1994,
Mr. D'Auria performed various consulting services for networking software
companies. Mr. D'Auria joined Central Point Software in October 1989 as
Director of Product Marketing and was appointed as Vice President of Marketing
in April 1990, and held various Vice President positions until August 1993.
From 1980 to 1989, Mr. D'Auria served in various marketing and management
positions at Hewlett-Packard. Mr. D'Auria holds a B.S. in Physics from
Clarkson University.
Matthew Taylor is a co-founder of the Company and has served as Chairman of
the Board of Directors, Chief Technical Officer and Secretary of the Company
since April 1989. Prior to that time, Mr. Taylor was the Vice President of
Engineering and a co-founder of Alameda Instruments, Inc., a semiconductor
company, from 1987 to 1989. Mr. Taylor holds a B.S. in Biology and an M.S. in
Engineering Science from the University of California at Berkeley.
Nelson Caldwell has served as Vice President of Finance and Chief Financial
Officer of the Company since June 1997. From May 1995 to May 1997, Mr.
Caldwell served as Chief Financial Officer of Telechips Corporation
("Telechips"), a computer telephony device company. Mr. Caldwell also served
as the interim President and Chief Executive Officer of Telechips from
February 1997 to May 1997. Telechips filed for bankruptcy under Chapter 7 of
the Federal Bankruptcy Code on June 30, 1997. Prior to that time, Mr. Caldwell
was a Manager at Coopers & Lybrand L.L.P. from 1989 through April 1995. Mr.
Caldwell holds a B.S. in Business Administration from California State
University, Chico, and is a Certified Public Accountant.
Allen Purdy has served as Vice President of Sales of the Company since
January 1997. Prior to joining the Company, Mr. Purdy was Director of Sales of
Applied Digital Access, Inc., a provider of network management tools for the
telecommunications industry, from November 1994 to January 1998, and was a
director of sales with Applied Digital Access from 1992 to 1994. Mr. Purdy
holds a B.S. in Industrial Engineering Rutgers University and an M.B.A. from
Rider University.
42
<PAGE>
Thomas Warner has served as Vice President of Engineering of the Company
since February 1997. Prior to that time, Mr. Warner served as Vice President
of Systems Management at Ericsson Fiber Access from March 1990 through
February 1997. Mr. Warner holds a B.S.E.E. from the University of Illinois at
Champaign-Urbana.
Nicholas Berberi has served as Vice President of Customer Support of the
Company since January 1996. From September 1995 until January 1996, Mr.
Berberi served as a Vice President and General Manager of the Company. From
August 1994 to September 1995, Mr. Berberi was Director of Product Marketing
of VLSI Technology, Inc. ("VLSI Technology"), a semiconductor Company, and
from July 1991 to August 1994, he was a marketing manager and director of VLSI
Technology. Mr. Berberi holds a B.S.E.E. from Syracuse University.
Craig Bender has served as Vice President of Market Development of the
Company since June 1997. Prior to that time, Mr. Bender was with Integrated
Network Corporation ("INC") where he served as Vice President of Marketing
from 1988 to 1992, as Vice President of International Business Development
from 1992 to 1996 and as Vice President of INC's DAGAZ division until 1997.
Mr. Bender holds a B.S.E.E. from Syracuse University, an M.S.E.E. from the
University of California at Los Angeles and an AT&T-sponsored Executive M.B.A.
from Pace University.
Craig Stouffer has served as Vice President of Marketing of the Company
since April 1998. Before joining the Company, Mr. Stouffer was a co-founder of
Vergent Inc., a telecommunications switching equipment company, and served as
its President from January 1997 to November 1997. From October 1989 to
December 1996, Mr. Stouffer served as President and Chief Executive Officer
and was a co-founder of Mobius Computer Corporation, a producer of network
servers. Prior to that time, Mr. Stouffer served in various technical and
marketing roles at Hewlett-Packard. Mr. Stouffer holds B.S. degrees in both
Computer Science and Theoretical Physics from Indiana University.
Shaw Matthews has served as Vice President of Operations of the Company
since June 1998. He served as the Company's Director of Operations from August
1997 to June 1998, and as a Quality Manager of the Company from February 1996
to August 1997. From October 1988 to February 1996, Mr. Matthews was a
Consulting Engineering Manager of Storage Tek Computer Peripherals ("Storage
Tek"), and from October 1982 to October 1988, Mr. Matthews served in various
engineering and operating positions at Storage Tek. Mr. Matthews holds a B.S.
in Mathematics from the University of Illinois at Chicago and an M.S. in
Operations Research from the Illinois Institute of Technology.
Clifford H. Higgerson has served as a director of the Company since July
1993. Since 1991, Mr. Higgerson has been a general partner of Vanguard Venture
Partners ("Vanguard"), a venture capital firm specializing in high technology
start-ups. Since 1986, Mr. Higgerson has also been a partner of Communications
Ventures, Inc. Mr. Higgerson also is a director of Advanced Fibre
Communications, Ciena Corporation, a manufacturer of multiplexing systems, and
Digital Microwave Corporation. Mr. Higgerson earned his B.S. in Electrical
Engineering from the University of Illinois and an M.B.A. in Finance from the
University of California at Berkeley.
Saul Rosenzweig has served as a director of the Company since July 1993. Mr.
Rosenzweig has been a general partner of Rosetree Partners, a venture
investing group, since 1982. He has also served as President of RZGroup, Inc.,
a communications management firm, since 1981. Mr. Rosenzweig holds B.S.
degrees in Naval Science and in Industrial Management from Georgia Institute
of Technology.
David Spreng has served as a director of the Company since February 1994.
Mr. Spreng has served as President of Investment Advisers, Inc. ("IAI") since
March 1996, and has served in various capacities at IAI since 1989. Mr. Spreng
is also a director of PACE Health Management. Mr. Spreng holds a B.S. in
Finance and Accounting from the University of Minnesota.
George Middlemas has served as a director of the Company since April 1995.
Mr. Middlemas has been Managing General Partner of Apex Partners, a venture
capital firm, since 1991. Prior to that time, Mr. Middlemas
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<PAGE>
served as Vice President and principal with Inco Venture Capital Management,
and a vice president and member of the investment committee of Citicorp
Venture Capital. Mr. Middlemas holds an M.B.A from Harvard University, an M.A.
in Political Science from the University of Pittsburgh and a B.A. in History
and Political Science from The Pennsylvania State University. Mr. Middlemas
serves on the Boards of Directors of e.Spire Communications, Inc., a network
company, Pure Cycle Corporation, a water and water recycling technology
company, and Security Dynamics Technologies, Inc., an enterprise network and
data security products company.
Brion Applegate has served as a director of the Company since August 1996.
Mr. Applegate was a co-founder of Spectrum and has served as a Managing
General Partner since February 1993. Prior to that time, he was a General
Partner of funds managed by Burr, Egan, Deleage & Co., a venture capital firm,
from 1982 to 1993. Mr. Applegate holds a B.A. from Colgate University and an
M.B.A. from Harvard University.
Roger Moore has served as a director of the Company since March 1997. Mr.
Moore has served as President and Chief Executive Officer of Illuminet, Inc.,
a provider of network, database and billing services to the communications
industry, since January 1996. From November 1985 to December 1995, Mr. Moore
served in various executive capacities at Northern Telecom Ltd., including
Vice President, Major Accounts and President, Northern Telecom Japan. Mr.
Moore holds a B.S. from Virginia Polytechnic Institute and State University.
Neal Douglas has served as a director of the Company since December 1997.
Since January 1993, he has been a General Partner of AT&T Ventures, a venture
capital firm. From May 1989 to January 1993, Mr. Douglas was a partner of New
Enterprise Associates, a venture capital firm. Additionally, he was a Member
of the Technical Staff at Bell Laboratories. He also serves as a director of
Cellnet Data Systems, Inc., a provider of fixed network wireless information
services, First Virtual Corporation, an Internet video applications company,
and several privately held companies. He received a B.S. degree in Electrical
Engineering from Cornell University, an M.S. in Electrical Engineering from
Leland Stanford Junior University, and an M.B.A from the University of
California at Los Angeles.
The Company's executive officers are appointed by the Board of Directors and
serve until their successors are elected or appointed.
There are no family relationships among any of the Company's directors or
executive officers.
BOARD OF DIRECTORS
Upon the closing of the offering, the Company will have authorized nine
directors. In accordance with the terms of the Company's Certificate of
Incorporation, the terms of office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 1999, Class II, whose term will expire at the
annual meeting of stockholders to be held in 2000, and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2001. The
Class I directors are Messrs. Higgerson, Spreng and Applegate, the Class II
directors are Messrs. Middlemas, Douglas and Taylor, and the Class III
directors are Messrs. D'Auria, Rosenzweig and Moore. At each annual meeting of
stockholders after the initial classification, the successors to directors
whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company. Directors may be
removed for cause by the affirmative vote of the holders of a majority of the
Common Stock.
BOARD COMMITTEES
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee. Since April 1998, the Board's Audit Committee has
consisted of Messrs. Rosenzweig and Spreng. The Audit Committee reviews the
Company's annual audit and meets with the Company's independent auditors to
review
44
<PAGE>
the Company's internal accounting procedures and financial management
practices. Since April 1998, the Compensation Committee has consisted of
Messrs. Applegate, Moore and Douglas. The Compensation Committee makes
recommendations concerning salaries, stock options, incentives and other forms
of compensation for directors, officers and other employees of the Company,
subject to ratification by the full Board of Directors. The Compensation
Committee is also empowered to administer the Company's various stock plans.
Prior to the creation of the Compensation Committee, all decisions concerning
salaries, incentives and other forms of compensation for directors, officers
and other employees of the Company required a vote by the entire Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Messrs. Applegate,
Moore and Douglas. None of the members of the Compensation Committee of the
Board of Directors is currently or has been, at any time since the formation
of the Company, an officer or employee of the Company. During the year ended
December 31, 1997, no executive officer of the Company (i) served as a member
of the compensation committee (or other board committee performing similar
functions or, in the absence of any such committee, the board of directors) of
another entity, one of whose executive officers served on the Company's
Compensation Committee, (ii) served as a director of another entity, one of
whose executive officers served on the Company's Compensation Committee, or
(iii) served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such
committee, the board of directors) of another entity, one of whose executive
officers served as a director of the Company.
DIRECTOR COMPENSATION
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out- of-pocket expenses they incur in
connection with attendance at meetings of the Board of Directors. In addition,
in the past, certain directors have been granted stock options for their
service on the Board. The Company does not intend to pay cash fees for the
services of its Board members in the immediate future, nor to provide for the
automatic grant of stock options to its directors. However, directors are
eligible to receive discretionary option grants pursuant to the 1998 Stock
Plan and employee directors will also be eligible to participate in the 1998
Employee Stock Purchase Plan. See "--Stock Plans."
45
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers during the year ended December 31, 1997 (the
Chief Executive Officer and such other executive officers are hereinafter
referred to as the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
--------------------------- SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION SALARY BONUS OTHER(/1/) OPTIONS COMPENSATION
------------------ -------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salvatore D'Auria....... $155,000 $20,000 -- -- $31,250(/2/)
President and Chief
Executive Officer
Matthew Taylor.......... 114,088 29,975 -- -- --
Chairman of the Board,
Chief Technical Officer
and Secretary
Allen Purdy............. 109,846 64,837 -- 56,250 --
Vice President of Sales
Nicholas Berberi........ 130,150 14,700 -- 6,250 --
Vice President of
Customer Support
Thomas Warner........... 115,903 21,813 -- 70,000 --
Vice President of
Engineering
</TABLE>
- --------
(1) Other annual compensation in the form of perquisite and other personal
benefits, securities or property has been omitted in those cases where the
aggregate amount of such compensation is the lesser of either $50,000 or
10% of the total of annual salary and bonus reported for the Named
Executive Officer.
(2) Represents the principal portion of certain indebtedness between the
Company and Mr. D'Auria which was forgiven during the year ended December
31, 1997. See "Certain Transactions."
46
<PAGE>
Stock Option Information. The following table sets forth certain information
for the fiscal year ended December 31, 1997 with respect to each grant of
stock options to the Named Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION
FOR OPTION
INDIVIDUAL GRANTS TERM(/4/)
--------------------------------------------- ---------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED IN PRICE PER EXPIRATION
NAME GRANTED(/1/) 1997(/2/) SHARE(/3/) DATE 5% 10%
---- ------------ ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... -- -- -- -- -- --
President and Chief
Executive Officer
Matthew Taylor.......... -- -- -- -- -- --
Chairman of the Board,
Chief Technical Officer
and Secretary
Allen Purdy............. 56,250 14.4% $0.52 1/22/07 $18,395 $46,617
Vice President of Sales
Nicholas Berberi........ 6,250 1.6 0.52 1/1/07 2,044 5,180
Vice President of
Customer Support
Thomas Warner........... 70,000 18.0 0.52 2/17/07 22,892 58,012
Vice President of
Engineering
</TABLE>
- --------
(1) The options granted to Messrs. Purdy, Berberi and Warner have vesting
schedules as follows: 25% vest on the first anniversary of the date of
grant and 1/48th per month thereafter.
(2) In 1997 the Company granted employees, consultants and directors options
to purchase an aggregate of 389,313 shares of Common Stock.
(3) The exercise price per share of each option was equal to the fair value of
the Common Stock on the date of grant as determined in good faith by the
Board of Directors on such date based upon such factors as the purchase
price paid by investors for shares of the Company's preferred stock, the
absence of a trading market for the Company's securities and the Company's
financial outlook and results of operations. Such exercise prices are
significantly lower than prices paid by investors purchasing shares of the
Company's preferred stock in transactions taking place approximately
contemporaneously with the grant of such options. In making its
determination as to the exercise price of such options, the Board
considered the fact that the Company's preferred stock carried certain
rights, preferences and privileges, including a preference upon
liquidation, sale or merger, enhanced voting rights and antidilution
rights, and purchasers of such preferred stock received additional
contractual rights, including registration rights and information rights.
(4) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
47
<PAGE>
Aggregate Option Exercises and Option Values. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended December 31, 1997 and exercisable and
unexercisable options held as of December 31, 1997:
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1997 DECEMBER 31, 1997(/1/)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... -- -- 154,375 30,000 $253,175 $49,200
President & Chief
Executive Officer
Matthew Taylor.......... -- -- -- -- -- --
Chairman of the Board,
Chief Technical Officer
and Secretary
Allen Purdy............. -- -- -- 56,250 -- 83,250
Vice President of Sales
Nicholas Berberi........ -- -- 13,672 17,578 20,781 20,316
Vice President of
Customer Support
Thomas Warner........... -- -- -- 70,000 -- 103,600
Vice President of
Engineering
</TABLE>
- --------
(1) The fair market value of the Company's Common Stock as determined by the
Board of Directors on or about December 31, 1997 was $2.00 per share.
STOCK PLANS
1992 Stock Plan
The 1992 Stock Plan, as amended (the "1992 Stock Plan"), provides for the
grant of incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), to employees of the
Company and nonstatutory stock options and stock purchase rights ("SPRs") to
employees, directors and consultants of the Company. A total of 1,437,500
shares of Common Stock have been reserved for issuance under the Company's
1992 Stock Plan. Under the 1992 Stock Plan, as of June 30, 1998, options to
purchase an aggregate of 1,048,927 shares were outstanding, 212,528 shares of
Common Stock had been purchased pursuant to exercises of stock options and
stock purchase rights and 176,045 shares were available for future grant. The
Board of Directors has determined that no further options will be granted
under the 1992 Stock Plan after the completion of this offering.
The 1992 Stock Plan is administered by the Board of Directors, or a
committee appointed by the Board of Directors, which determines the terms of
options granted, including the exercise price and the number of shares subject
to each option. The Board of Directors also determines the schedule upon which
options become exercisable. The exercise price of incentive stock options
granted under the 1992 Stock Plan must be at least equal to the fair market
value of the Company's Common Stock on the date of grant. However, for any
employee holding more than 10% of the voting power of all classes of the
Company's stock ("10% stockholder"), the exercise price may be no less than
110% of the fair market value. The exercise price of a nonstatutory stock
option may not be less than 85% of the fair market value of the Common Stock
on the date such option is granted; provided, however, the exercise price of a
nonstatutory stock option granted to a 10% stockholder may not be less than
110% of the fair market value of the Common Stock on the date such option is
granted. The maximum term of options granted under the 1992 Stock Plan is ten
years.
Options and SPRs granted under the 1992 Stock Plan are not transferable by
the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the
48
<PAGE>
1992 Stock Plan must generally be exercised within three months after the end
of optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's termination by disability or death,
respectively, to the extent optionee is vested on the date of termination, but
in no event later than the expiration of the option's term.
The 1992 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of substantially all of the
Company's assets, each outstanding option or SPR shall be assumed or an
equivalent option or SPR substituted by the successor corporation. If the
outstanding options or SPRs are not assumed or substituted, the options or
SPRs will terminate upon the closing of the merger. The Board of Directors may
amend or modify the 1992 Stock Plan at any time, except that without the
consent of the stockholders, no amendment or modification shall adversely
affect rights and obligations with respect to outstanding options. Unless
sooner terminated by the Board of Directors, the 1992 Stock Plan will
terminate in 2002.
1998 Stock Plan
The Company's 1998 Stock Plan was adopted by the Board of Directors in July
1998 and will be submitted for approval to the stockholders in August 1998. A
total of 1,000,000 shares of Common Stock, plus annual increases (beginning in
2000) equal to the lesser of: (i) 375,000 shares, (ii) 3% of the outstanding
shares, or (iii) a lesser amount determined by the Board of Directors, are
currently reserved for issuance pursuant to the 1998 Stock Plan. Unless
terminated sooner, the 1998 Stock Plan will terminate automatically in 2008.
The 1998 Stock Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Code, to employees and for
the grant of nonstatutory stock options and SPRs to employees, directors and
consultants.
The 1998 Stock Plan may be administered by the Board of Directors or a
committee of the Board (as applicable, the "Administrator"), which committee
shall, in the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, consist of two
or more "outside directors" within the meaning of Section 162(m) of the Code.
The Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price of the option or SPR, the number of
shares subject to each option or SPR, the exercisability thereof, and the form
of consideration payable upon such exercise. In addition, the Administrator
has the authority to amend, suspend or terminate the 1998 Stock Plan, provided
that no such action may affect any share of Common Stock previously issued and
sold or any option previously granted under the 1998 Stock Plan.
The exercise price of all incentive stock options granted under the 1998
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 nonstatutory stock options and
SPRs granted under the 1998 Stock Plan is determined by the Administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must be at least equal to the fair market value of
the Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must be at least equal 110% of the fair market value on the
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1998 Stock Plan may not
exceed ten years.
In the case of SPRs, 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 or consulting relationship with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to the restricted stock purchase agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Administrator.
49
<PAGE>
Options and SPRs granted under the 1998 Stock Plan are generally not
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
1998 Stock Plan must generally be exercised within three months after the end
of optionee's status as an employee, director or consultant of the Company, or
within one year after such optionee's termination by disability or death,
respectively, but in no event later than the expiration of the option's term.
The 1998 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of substantially all of the
Company's assets, each outstanding option and SPR shall be assumed or an
equivalent option substituted for by the successor corporation. If the
outstanding options and SPRs are not assumed or substituted for by the
successor corporation, the Administrator shall provide for the optionee to
have the right to exercise the option or SPR as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable. If the
Administrator makes an option or SPR exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of fifteen days from the
date of such notice, and the option or SPR will terminate upon the expiration
of such period.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was adopted by the Board of Directors in July 1998 and will be submitted for
approval to the stockholders in August 1998. A total of 250,000 shares of
Common Stock has been reserved for issuance under the 1998 Purchase Plan, plus
annual increases (beginning in 1999) equal to the lesser of: (i) 250,000
shares, (ii) 2% of the outstanding shares, or (iii) a lesser amount determined
by the Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends on
the last trading day on or before April 30, 1999.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 21 hours per week.
However, any employee who (i) immediately after grant owns stock possessing 5%
or more of the total combined voting power or value of all classes of the
capital stock of the Company, or (ii) whose rights to purchase stock under all
employee stock purchase plans of the Company accrues at a rate which exceeds
$25,000 worth of stock for each calendar year may be not be granted an option
to purchase stock under the 1998 Purchase Plan. The 1998 Purchase Plan permits
participants to purchase Common Stock through payroll deductions of up to 15%
of the participant's "compensation." Compensation is defined as the
participant's base straight time gross earnings and commissions, but exclusive
of overtime, bonuses and any other compensation. The maximum number of shares
a participant may purchase during a single offering period is 1,250 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each offering period. The price of stock
purchased under the 1998 Purchase Plan is generally 85% of the lower of the
fair market value of the Common Stock at the beginning or end of the offering
period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be
shortened and a new exercise date will be set.
50
<PAGE>
The Board of Directors has the authority to amend or terminate the 1998
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1998 Purchase Plan, provided that the Board
of Directors may terminate an offering period on any exercise date if the
Board determines that the termination of the 1998 Purchase Plan is in the best
interests of the Company and its stockholders. The 1998 Purchase Plan will
become effective on the consummation of the offering and will terminate in ten
years from such date, unless sooner terminated by the Board of Directors.
401(K) PLAN
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under the Code. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a
statutory limit, which was $10,000 in calendar year 1998). Under the 401(k)
Plan, the Company may make discretionary matching contributions. The Company
did not make any contributions to the 401(k) Plan in 1997. A matching
contribution made by the Company vests at 25% per year commencing on the first
anniversary of a participant's date of employment with the Company. All
amounts contributed by participants and earnings on such contributions are
fully vested at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides for the indemnification
of directors to the maximum extent permitted by Delaware law. Section 145 of
the Delaware General Corporation Law permits a corporation to include in its
charter documents, and in agreements between the corporation and its directors
and officers, provisions expanding the scope of indemnification beyond that
specifically provided by the current law.
The Company's Bylaws provide that the Company shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law.
The Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it 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 permit such
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company arising out of such person's services as a director, officer,
employee, agent or fiduciary of the Company, any subsidiary of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. The agreements do not provide for indemnification in
cases where (i) the claim is brought by the indemnified party; (ii) the
indemnified party has not acted in good faith; (iii) the claim arises under
Section 16(b) of the Exchange Act; or (iv) the indemnified party has engaged
in acts, omissions or transactions for which the indemnified party is
prohibited from receiving indemnification under the agreement or applicable
law. The Company believes that these provisions and agreements are necessary
to attract and retain qualified persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
51
<PAGE>
CERTAIN TRANSACTIONS
On March 31, 1995 and May 15, 1995 the Company sold an aggregate of
1,306,282 shares of Series E Preferred Stock, at a per share price of $4.60,
in a private placement equity financing with certain stockholders and
directors of the Company, including: (i) an aggregate of 207,576 shares
purchased by an entity affiliated with Apex Investment Funds ("Apex"), a
principal stockholder of the Company, of which Mr. Middlemas, a director of
the Company, is Managing General Partner; (ii) an aggregate of 490,185 shares
purchased by entities affiliated with First Analysis Corporation (including
shares purchased by Apex), a principal stockholder of the Company; (iii) an
aggregate of 108,696 shares purchased by entities affiliated with Investment
Advisers, Inc. ("IAI"), a principal stockholder of the Company, of which Mr.
Spreng, a director of the Company, is President; (iv) an aggregate of 86,957
shares purchased by Vanguard IV, L.P. ("Vanguard"), a principal stockholder of
the Company, of which Mr. Higgerson, a director of the Company is a general
partner; and (v) an aggregate of 16,305 shares purchased by Spectrum Equity
Investors, L.P., a principal stockholder of the Company and for which Brion
Applegate, a director of the Company, serves as managing general partner. See
"Principal Stockholders."
On April 17, 1995 the Company loaned to Salvatore D'Auria, the Company's
President and Chief Executive Officer, an aggregate of $125,000 pursuant to a
Loan Agreement and Secured Promissory Note (the "Loan Agreement"). The loan
does not bear interest. Pursuant to the Loan Agreement, the Company has
forgiven 25% of the principal amount of the loan each year. As of June 30,
1998, approximately $3,000 was outstanding under the Loan Agreement.
On August 9, 1996 and October 7, 1996 the Company sold an aggregate of
2,306,158 shares of Series F Preferred Stock, at a per share purchase price of
$5.00, in a private placement equity financing with certain stockholders and
directors of the Company, including: (i) an aggregate of 300,000 shares
purchased by entities affiliated with Apex, a principal stockholder of the
Company, of which Mr. Middlemas, a director of the Company, is Managing
General Partner; (ii) an aggregate of 360,000 shares purchased by entities
affiliated with First Analysis Corporation (including shares purchased by
Apex), a principal stockholder of the Company; (iii) an aggregate of 260,000
shares purchased by entities affiliated with IAI, a principal stockholder of
the Company, of which Mr. Spreng, a director of the Company, is President; and
(iv) an aggregate of 150,696 shares purchased by Vanguard, a principal
stockholder of the Company, of which Mr. Higgerson is a general partner. See
"Principal Stockholders."
On August 27, 1997 the Company and Microsoft entered into a Licensing and
Cooperative Marketing Agreement (the "Microsoft License Agreement") pursuant
to which the Company and Microsoft agreed to cooperate in the development and
marketing of future implementations of the Company's HomeRun technology. Each
party will own a half interest in the other's technology embodied in works
made jointly by them. In connection with the Microsoft License Agreement, the
Company issued Microsoft a warrant to purchase up to 666,836 shares of Series
G Preferred Stock at an exercise price of $10.00 per share. This warrant
expires, if not earlier exercised, on the closing of this offering. Microsoft
is a principal stockholder of the Company. See "Principal Stockholders."
From December 1997 through May 1998, the Company sold an aggregate of
1,250,006 shares of Series G Preferred Stock, at a per share purchase price of
$12.00, in a private placement equity financing with certain stockholders and
directors of the Company, including: (i) an aggregate of 125,000 shares
purchased by AT&T Ventures, a major stockholder of the Company and of which
Neal Douglas, a director of the Company, is a general partner; (ii) an
aggregate of 416,667 shares purchased by Microsoft; (iii) an aggregate of
28,835 shares purchased by entities affiliated with Apex, a principal
stockholder of the Company of which Mr. Middlemas, a director of the Company,
is Managing General Partner; (iv) an aggregate of 47,650 shares purchased by
entities affiliated with First Analysis Corporation (including shares
purchased by Apex); (v) an aggregate of 50,000 shares purchased by IAI, a
principal stockholder of the Company of which Mr. Spreng, a director of the
Company, is President; (vi) an aggregate of 8,334 shares purchased by
Vanguard, a principal stockholder of the Company, of which Mr. Higgerson is a
general partner; and (vii) an aggregate of 41,667 shares purchased by Spectrum
Equity Investors, L.P., a principal stockholder of the Company and for which
Brion Applegate, a director of the Company, serves as managing general
partner. See "Principal Stockholders."
52
<PAGE>
In the past, the Company has granted options to its executive officers and
directors. The Company intends to grant options to its officers and directors
in the future. See "Management--Option Grants During Year Ended December 31,
1997" and "Management--Director Compensation."
The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify its 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. The Company also intends to
execute such agreements with its future directors and executive officers. See
"Management--Limitation of Liability and Indemnification Matters."
The Company believes that all of the transactions described above were in
its best interests and on terms no less favorable to the Company than could
have been obtained from unaffiliated third parties. All of the Company's
securities referenced above were purchased or sold at prices equal to the fair
market value of such securities, as determined by the Company's Board of
Directors, on the date of issuance.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the Common Stock as to
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING(/2/)
------------------------
NUMBER OF SHARES BEFORE THE AFTER THE
BENEFICIAL OWNER BENEFICIALLY OWNED(/1/) OFFERING OFFERING(/3/)
---------------- ----------------------- ---------- -------------
<S> <C> <C> <C>
5% Beneficial Owners
Microsoft Corporation(/4/)... 1,083,503 13.0% 10.0%
First Analysis Corpora-
tion(/5/)................... 897,835 11.7 8.8
Investment Advisers,
Inc.(/6/)................... 864,098 11.2 8.5
Vanguard IV, L.P.(/7/)....... 658,592 8.6 6.5
AT&T Ventures(/8/)........... 625,000 8.1 6.1
Spectrum Equity Investors,
L.P.(/9/)................... 541,667 7.1 5.3
Apex Investment
Funds(/1//0/)............... 536,411 7.0 5.3
Officers and Directors
David Spreng(/1//1/)......... 864,098 11.2 8.5
Clifford H.
Higgerson(/1//2/)........... 658,592 8.6 6.5
Neal Douglas(/1//3/)......... 625,000 8.1 6.1
Brion Applegate(/1//4/)...... 541,667 7.1 5.3
George Middlemas(/1//5/)..... 536,411 7.0 5.3
Matthew Taylor(/1//6/)....... 368,370 4.7 3.6
Salvatore D'Auria(/1//7/).... 193,750 2.5 1.9
Saul Rosenzweig(/1//8/)...... 110,913 1.4 1.1
Thomas Warner(/1//9/)........ 27,968 * *
Allen Purdy(/2//0/).......... 23,827 * *
Nicholas Berberi(/2//1/)..... 20,935 * *
Roger Moore(/2//2/).......... 3,333 * *
All officers and directors as
a group (16 per-
sons)(/2//3/)............... 3,995,983 49.9% 38.1%
</TABLE>
- --------
* Less than 1%.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Applicable percentage ownership based on 7,675,742 shares of Common Stock
outstanding as of June 30, 1998 (excluding 666,836 shares issuable upon
exercise of a warrant to purchase Common Stock), together with applicable
options for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission
("Commission"), based on factors including voting and investment power
with respect to shares. Shares of Common Stock subject to options
currently exercisable, or exercisable within 60 days after June 30, 1998
are not deemed outstanding for computing the percentage ownership of any
other person.
(3) After giving effect to the issuance of 2,500,000 shares of Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
option).
(4) The address of record for Microsoft Corporation is One Microsoft Way,
Building 8, Redmond, WA 98502-6399. Includes 666,836 shares issuable upon
exercise of a warrant to purchase Common Stock of the Company. If not
previously exercised, such warrant will terminate upon the closing of the
offering.
(5) The address of record for First Analysis Corporation is 233 S. Wacker
Drive, Suite 9500, Chicago, IL 60606. Consists of 377,601 shares held by
Apex Investment Fund II, L.P., 158,810 shares held by Apex Investment
Fund III, L.P., 156,926 shares held by The Productivity Fund II, L.P.,
204,498 shares held by Environmental Private Equity Fund. First Analysis
Corporation disclaims beneficial ownership of these shares except to the
extent of its proportional partnership interest therein.
54
<PAGE>
(6) The address of record for each member of Investment Advisors, Inc. is
3700 First Bank Place, 601 Second Avenue South, Minneapolis, MN 55402.
Consists of 396,376 shares held by and 2,000 shares issuable pursuant to
options exercisable within 60 days of June 30, 1998 and held by IAI
Investment Funds VI, Inc. (IAI Emerging Growth Fund), 258,697 shares held
by and 2,049 shares issuable pursuant to options exercisable within 60
days of June 30, 1998 and held by IAI Investment Funds IV, Inc. (IAI
Regional Fund), 87,581 shares held by and 1,500 shares issuable pursuant
to options exercisable within 60 days of June 30, 1998 and held by IAI
Investment Funds VIII, Inc. (IAI Value Fund), 58,387 shares held by and
1,000 shares issuable pursuant to options exercisable within 60 days of
June 30, 1998 and held by IAI Investment Funds VI, Inc. (IAI Midcap
Growth Fund), and 55,556 shares held by and 952 shares issuable pursuant
to options exercisable within 60 days of June 30, 1998 and held by IAI
Investment Funds VII, Inc. (IAI Growth & Income Fund). These mutual funds
are part of an affiliated group of registered investment corporations
referred to collectively as the IAI Mutual Funds and are managed by
Investment Advisers, Inc. Investment Advisers, Inc. is a registered
investment adviser under the Investment Advisers Act of 1940 and an
affiliate of IAI Ventures.
(7) The address of record for Vanguard IV, L.P. is 555 University Avenue,
Palo Alto, CA 94301. Includes 7,500 shares issuable pursuant to options
exercisable within 60 days of June 30, 1998.
(8) The address of record for AT&T Ventures is 3000 Sand Hill Road, Building
One, Suite 285, Menlo Park, CA 94025. Consists of 312,500 shares held by
AT&T Venture Fund II, L.P. and 312,500 shares held by Venture Fund I,
L.P.
(9) The address of record for Spectrum Equity Investors, L.P. is 300 Draker
Landing Road, Suite 251, Greenbrae, CA 94904.
(10) The address of record for each member of Apex Investment Funds is 233 S.
Wacker Drive, Suite 9500, Chicago, IL 60606. Consists of 377,601 shares
held by Apex Investment Fund II, L.P. and 158,810 shares held by Apex
Investment Fund III, L.P.
(11) Consists of 856,597 held by and 7,501 shares issuable pursuant to options
exercisable within 60 days of June 30, 1998 and held by the IAI Mutual
Funds. Mr. Spreng is Senior Vice President of Investment Advisers, Inc.
and President of IAI Ventures. Mr. Spreng disclaims beneficial ownership
of these shares except to the extent of his proportional partnership
interest therein.
(12) Consists of 651,092 shares held by and 7,500 shares issuable pursuant to
options exercisable within 60 days of June 30, 1998 and held by Vanguard
IV, L.P. Mr. Higgerson is a general partner of Vanguard IV, L.P. Mr.
Higgerson disclaims beneficial ownership of these shares except to the
extent of his proportional partnership interest therein.
(13) Consists of 625,000 shares held by AT&T Ventures. Mr. Douglas is a
general partner of AT&T Ventures. Mr. Douglas disclaims beneficial
ownership of these shares except to the extent of his proportional
partnership interest therein.
(14) Consists of 541,667 shares held by Spectrum Equity Investors, L.P. Mr.
Applegate is a managing general partner of Spectrum Equity Investors,
L.P. Mr. Applegate disclaims beneficial ownership of these shares except
to the extent of his proportional partnership interest therein.
(15) Consists of 536,411 shares held by Apex Investment Funds. Mr. Middlemas
is the Managing General Partner of Apex Investment Funds. Mr. Middlemas
disclaims beneficial ownership of these shares except to the extent of
his proportional partnership interest therein.
(16) Includes 1,562 shares issuable pursuant to options exercisable within 60
days of June 30, 1998.
(17) Consists of 193,750 shares issuable pursuant to options or rights
exercisable within 60 days of June 30, 1998.
(18) Includes 12,500 shares issuable pursuant to options exercisable within 60
days of June 30, 1998. Also includes 92,413 shares held by Rosetree
Partners General Partnership. Mr. Rosenzweig is a general partner of
Rosetree Partners General Partnership. Mr. Rosenzweig disclaims
beneficial ownership of these shares except to the extent of his
proportional partnership interest therein.
(19) Consists of 27,968 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(20) Consists of 23,827 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(21) Consists of 20,935 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(22) Consists of 3,334 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(23) Includes an aggregate of 324,420 shares issuable pursuant to options
exercisable within 60 days of June 30, 1998. Also includes an aggregate
of 541,667 shares held by Spectrum Equity Investors, L.P., 536,411 shares
held by Apex Investment Funds, 651,092 shares held by Vanguard IV, L.P.,
856,596 shares held by Investment Advisers, Inc., 625,000 shares held by
AT&T Ventures, and 92,413 shares held by Rosetree Partners General
Partnership.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 100,000,000 shares
of Common Stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. As of June 30, 1998, there were 7,675,742
shares of Common Stock outstanding (assuming conversion into Common Stock of
all outstanding shares of Preferred Stock), which were held of record by 192
stockholders, and no shares of undesignated preferred stock outstanding. Upon
completion of this offering and assuming no exercise of options after June 30,
1998, the Company will have outstanding 10,175,742 shares of Common Stock,
10,550,742 shares if the Underwriter's over-allotment option is exercised.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock have no preemptive or subscription rights and there are no redemption
rights with respect to such shares. The outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further stockholder
action, to issue Preferred Stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences, of the Preferred Stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without stockholder approval, issue shares of a class or
series of Preferred Stock with voting and conversion rights which could
adversely affect the voting power or dividend rights of the holders of Common
Stock and may have the effect of delaying, deferring or preventing a change in
control of the Company.
OPTIONS
As of June 30, 1998, the Company had outstanding options to purchase a total
of 1,048,927 shares of Common Stock pursuant to the 1992 Stock Plan at a
weighted average exercise price of $2.03 per share and had issued no options
pursuant to the 1998 Stock Plan. Recommendations for option grants under the
1992 Stock Plan and the 1998 Stock Plan (collectively, the "Stock Plans") or
otherwise are made by the Compensation Committee, subject to ratification by
the full Board of Directors. The Compensation Committee may issue options with
varying vesting schedules, but all options granted pursuant to the Stock Plans
must be exercised within ten years from the date of grant.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 8,119,800 shares of Common Stock (8,786,636
shares assuming the exercise of an outstanding warrant to purchase Common
Stock of the Company) (the "Registrable Securities") or their transferees are
entitled to certain registration rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of the Fourth Amended and Restated Shareholders' Rights Agreement
between the Company and the holders of the Registrable Securities. If,
following this offering, the Company registers any of its Common Stock either
for its own account or for the account of other security holders, the holders
of Registrable Securities are entitled to include their shares of Common Stock
in the registration. A holder's right to include shares in an underwritten
registration statement is subject to the ability of the underwriters to limit
the number of shares included in the offering. Beginning 180 days after the
closing of this offering, a holder or holders of Registrable Securities may
also require the Company to register all or a
56
<PAGE>
portion of the Registrable Securities on Form S-3 when use of such form
becomes available to the Company, provided, among other limitations, that the
proposed aggregate selling price is at least $1,000,000. All registration
expenses and all selling expenses relating to Registrable Securities,
including the reasonable fees and disbursements of one counsel for the selling
holders (not to exceed $20,000), must be borne by the Company, except that the
Company shall only be responsible for the first two registrations in any
twelve-month period at the request of the holders of Registrable Securities.
If such holders, by exercising their registration rights, cause a large number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to initiate a registration and include Registrable Securities
pursuant to the exercise of piggyback registration rights, the sale of such
Registrable Securities may have an adverse effect on the Company's ability to
raise capital.
CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years following the date that such stockholder became an
interested stockholder, unless: (1) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; or (2)
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding shares owned (i) by persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (3) at subsequent to
such time the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
The Company's Certificate of Incorporation requires that any action required
or permitted to be taken by the stockholders of the Company must be effected
at a duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, as provided by the Company's
Bylaws, special meetings of the stockholders of the Company may be called only
by the Board of Directors. The Certificate of Incorporation also provides
that, beginning upon the closing of this offering, the Board of Directors will
be divided into three classes, with each class serving staggered three-year
terms. These provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of the Company. See "Risk Factors--
Certain Antitakeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
American Stock Transfer & Trust Company located at 40 Wall Street, New York,
New York 10005, and its telephone number is (212) 936-5100.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the offering and assuming no exercise of options after
July 15, 1998, the Company will have outstanding 10,182,930 shares of Common
Stock, 10,557,930 shares if the Underwriter's over-allotment option is
exercised. Of these shares, the 2,500,000 shares sold by the Company in the
offering will be freely tradable without restriction or further registration
under the Securities Act unless purchased by affiliates of the Company as that
term is defined in Rule 144 of the Securities Act (the "Affiliates"). The
remaining 7,682,930 shares of Common Stock held by existing shareholders and
559,471 shares subject to outstanding vesting options will be "restricted
securities" as that term is defined in Rule 144 (the "Restricted Shares"). All
officers and directors and the overwhelming majority of stockholders and
option holders of the Company have agreed not to offer, pledge, sell, contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly (or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of), any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of
Common Stock, for a period of 180 days after the date of this Prospectus (the
"Lock-up Period"), without the prior written consent of the representative of
the Underwriters. The representative of the Underwriters, in its sole
discretion at any time and without notice, may release any or all shares from
the lock-up agreements and permit holders of the shares to resell all or any
portion of their shares at any time prior to the expiration of the Lock-up
Period. See "Underwriting." The number of shares of Common Stock available for
sale in the public market is further limited by restrictions under the
Securities Act.
Because of the restrictions noted above, on the date of this Prospectus, no
shares other than the 2,500,000 shares (2,875,000 shares if the Underwriter's
over-allotment option is exercised) offered hereby will be eligible for sale.
Beginning 180 days after the date of this Prospectus (or earlier with the
prior written consent of the representative of the Underwriters), 8,156,804
shares, including 559,471 shares issuable upon exercise of outstanding vested
options, will be eligible for sale in the public market subject to Rule 144
and Rule 701 of the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least one year from the later of the date such
Restricted Shares are acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any three
month period, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume
in the Nasdaq National Market System during the four calendar weeks preceding
the filing of Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner and notice of sales and
the availability of public information concerning the Company. All shares,
including Restricted Shares, held by affiliates of the Company eligible for
sale in the public market under Rule 144 are subject to the foregoing volume
limitations and other restrictions. In addition, an individual that is not
deemed to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least one year the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. Prior to the expiration of
the Lock-up Period, the Company intends to register on a registration
statement on Form S-8 (i) a total of 250,000 shares of Common Stock reserved
for issuance under the 1998 Purchase Plan and (ii) assuming no exercise of
options after July 15, 1998, 1,041,739 shares of Common Stock subject to
outstanding options under the 1992 Stock Plan and 1,000,000 shares reserved
for future issuance pursuant to the 1998 Stock Plan. Such registration will
permit the resale in the public market of shares so registered by non-
affiliates without restriction under the Securities Act.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of the Common Stock offered
hereby.
58
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, the Underwriters
named below, for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and Smith Barney
Inc. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to
each Underwriter, the aggregate number of shares set forth opposite the name
of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. .............................................
Bear, Stearns & Co. Inc. .........................................
Dain Rauscher Wessels.............................................
a division of Dain Rauscher Incorporated
Smith Barney Inc. ................................................
-----
Total...........................................................
=====
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
set forth on the cover page hereof, and to certain dealers at such initial
public offering price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the initial offering to the public, the offering
price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings
for such purpose are pending before or threatened by the Commission and that
there has been no material adverse change or any development involving a
prospective material adverse change in the condition of the Company and its
subsidiaries, taken as a whole, from that set forth in the Registration
Statement, and that certain certificates, opinions and letters have been
received from the Company and its counsel and independent auditors.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities
under the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 375,000 shares of Common Stock, exercisable solely to cover over-
allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page hereof. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that such option is exercised, each Underwriter will
be committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock that is proportionate to such Underwriter's
initial commitment as indicated in the preceding table.
All of the directors, officers and substantially all of the stockholders and
optionholders of the Company have each agreed, subject to certain limited
exceptions, not to offer, sell, contract to sell, hypothecate or otherwise
dispose (or enter into any transaction which is designed to, or could be
expected to, result in the disposition by any person) of, directly or
indirectly, any shares of Common Stock (including, without limitation, shares
which may be deemed to be beneficially owned in accordance with the Rules and
Regulations of the Securities and Exchange Commission under the Securities Act
of 1933, as amended), or any security convertible into or
59
<PAGE>
exercisable for Common Stock, or any rights to purchase or acquire, Common
Stock of the Company (other than pursuant to bona fide gifts to persons who
agree in writing to be bound by the provisions of the agreement) for a period
of 180 days from the date of this Prospectus without the prior written consent
of Lehman Brothers Inc. In addition, certain of the stockholders and
optionholders are subject to separate 180-day lock-up agreements with the
Company. The Company has agreed that it will not release any of such
stockholders or optionholders from these lock-up agreements without the prior
consent of the representative of the Underwriters. Except for the Common Stock
to be sold in the offering, the Company has agreed, with certain limited
exceptions relating to the grant of options and issuance of Common Stock
pursuant to the Company's stock option plans and stock purchase plans, not to
offer for sale, sell or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of), directly or
indirectly, any shares of Common Stock or other capital stock or any
securities convertible into or exchangeable or exercisable for, or any rights
to acquire, Common Stock or other capital stock, prior to the expiration of
180 days from the date of this Prospectus without the prior written consent of
the representative of the Underwriters.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock offered hereby for sale to certain officers, directors,
employees, business associates and related parties of the Company at the
initial public offering price set forth on the cover page of this Prospectus.
Such persons must commit to purchase no later than the close of business on
the day following the date hereof. The number of shares available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares.
Until the distribution of the shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock. In addition, if the Representatives
over-allot (sell more shares of Common Stock than are set forth on the cover
page of this Prospectus), and thereby create a short position in the Common
Stock in connection with this offering, the Representatives may reduce that
short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases
of shares of Common Stock for the purpose of stabilization or to reduce a
syndicate short position could cause the price of the Common Stock to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, will be the Company's
historical performance, capital structure, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's
management, consideration of the above factors in relation to market valuation
of companies in related businesses and other factors deemed relevant.
60
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C. ("WSG&R"). WS Investment
Company, an investment fund for the benefit of certain attorneys of WSG&R,
owns an aggregate of 11,840 shares of Series C Preferred Stock of the Company.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Cooley Godward LLP.
EXPERTS
The balance sheets as of December 31, 1997 and 1996 and the statements of
operations, stockholders' deficit, and cash flows for each of the three years
in the period ended December 31, 1997, included in this prospectus, have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement, of which
this Prospectus constitutes a part, under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information
with respect to the Company and the Common Stock offered hereby. Statements
contained herein concerning the provisions of any documents are not
necessarily an exhaustive description of such documents, and reference is made
to the copy of each such document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by such reference.
The Registration Statement, including exhibits filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained from the Public Reference Section of the
Commission, Room 1034, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its public reference facilities in New York, New York and
Chicago, Illinois, at prescribed rates. In addition, the Commission maintains
a World Wide Web site that contains reports, proxy and information statements
that are filed electronically with the Commission. The address of the site is
http://www.sec.gov.
61
<PAGE>
TUT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Tut Systems, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations and stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Tut Systems, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
San Jose, California
March 16, 1998, except for Note 17,
as to which the date is July 24, 1998
------------------
To the Stockholders and Board of Directors of Tut Systems, Inc.:
The financial statements included herein have been adjusted to give effect
to the reincorporation of the Company in Delaware as described more fully in
Note 17 to the financial statements. The above report is in the form that will
be signed by PricewaterhouseCoopers LLP upon effectiveness of such
reincorporation assuming that, from March 16, 1998, except for Note 17, as to
which the date is July 24, 1998 to the effective date of such reincorporation,
no other events shall have occurred that would affect the accompanying
financial statements or notes thereto.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 24, 1998
F-2
<PAGE>
TUT SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JUNE 30, JUNE 30,
1996 1997 1998 1998
-------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 1,409 $ 5,395 $ 3,805
Short-term investments.............. 7,541 4,890 2,984
Accounts receivable, net of
allowance for doubtful accounts of
$20, $29, and $38 in 1996, 1997 and
1998, respectively................. 604 1,626 3,142
Inventories......................... 255 1,424 1,770
Prepaid expenses and other.......... 57 332 289
-------- -------- --------
Total current assets.............. 9,866 13,667 11,990
Property and equipment, net........... 774 1,345 1,676
Deferred offering costs............... -- -- 87
Other assets.......................... 49 156 141
-------- -------- --------
Total assets...................... $ 10,689 $ 15,168 $ 13,894
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND WARRANT, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................... $ 887 $ 1,640 $ 1,221
Accrued liabilities................. 416 747 984
Lines of credit..................... 206 214 247
Deferred revenue.................... -- -- 100
-------- -------- --------
Total current liabilities......... 1,509 2,601 2,552
Lines of credit, net of current
portion.............................. 190 140 164
Deferred revenue, net of current
portion.............................. -- -- 842
-------- -------- --------
Total liabilities................. 1,699 2,741 3,558
-------- -------- --------
Commitments (Notes 10 and 11).
Redeemable convertible preferred
stock, no par value, 7,531 shares
authorized, 5,105, 6,047, and 6,355
shares issued and outstanding in
1996, 1997, and 1998, respectively,
and none in pro forma (liquidation
value: $42,573 at June 30, 1998)..... 24,684 37,611 42,573 $ --
Redeemable convertible preferred stock
warrant.............................. -- 1,260 2,100 --
-------- -------- -------- --------
24,684 38,871 44,673 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock, no par
value, 1,719 shares authorized,
1,098 shares issued and outstanding
in 1996, 1997, 1998 and none in pro
forma (liquidation value: $1,567 at
June 30, 1998)..................... 1,567 1,567 1,567 --
Common stock, $0.001 par value,
100,000 shares authorized, 156,
218, 223 and 7,676 shares issued
and outstanding in 1996, 1997, 1998
and pro forma, respectively........ -- -- -- 8
Additional paid in capital............ 58 92 1,917 48,149
Deferred compensation................. -- -- (1,655) (1,655)
Accumulated deficit................... (17,319) (28,103) (36,166) (36,166)
-------- -------- -------- --------
Total stockholders' equity
(deficit)........................ (15,694) (26,444) (34,337) $ 10,336
-------- -------- -------- ========
Total liabilities and
stockholders' deficit............ $ 10,689 $ 15,168 $ 13,894
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TUT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product..................... $ 3,445 $ 4,454 $ 6,221 $ 2,536 $ 4,095
License and royalty......... -- -- -- -- 418
------- ------- -------- -------- --------
Total revenues............ 3,445 4,454 6,221 2,536 4,513
------- ------- -------- -------- --------
Cost of goods sold:
Product..................... 1,688 2,198 3,228 1,231 2,382
License and royalty......... -- -- -- -- 21
------- ------- -------- -------- --------
Total cost of goods sold.. 1,688 2,198 3,228 1,231 2,403
------- ------- -------- -------- --------
Gross margin.................. 1,757 2,256 2,993 1,305 2,110
------- ------- -------- -------- --------
Operating expenses:
Sales and marketing......... 2,645 3,068 5,147 2,325 3,928
Research and development.... 993 2,012 3,562 1,337 2,764
General and administrative.. 1,562 1,783 2,375 1,110 1,424
Noncash compensation
expense.................... -- -- 1,260 -- 1,005
------- ------- -------- -------- --------
Total operating expenses.. 5,200 6,863 12,344 4,772 9,121
------- ------- -------- -------- --------
Loss from operations...... (3,443) (4,607) (9,351) (3,467) (7,011)
Interest expense.............. (30) (40) (61) (15) (23)
Other income, net............. 84 221 256 172 234
------- ------- -------- -------- --------
Loss before income taxes.. (3,389) (4,426) (9,156) (3,310) (6,800)
Income tax expense............ 1 1 1 1 1
------- ------- -------- -------- --------
Net loss.................. (3,390) (4,427) (9,157) (3,311) (6,801)
Dividend accretion on
preferred stock.............. 694 1,137 1,627 796 1,262
------- ------- -------- -------- --------
Net loss attributable to
common stockholders.......... $(4,084) $(5,564) $(10,784) $ (4,107) $ (8,063)
======= ======= ======== ======== ========
Net loss per share
attributable to common
stockholders, basic and
diluted...................... $(32.56) $(37.51) $ (59.36) $ (25.20) $ (36.65)
======= ======= ======== ======== ========
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted...................... 125 148 182 163 220
======= ======= ======== ======== ========
Pro forma net loss per share,
basic and diluted............ $ (1.25) $ (0.89)
======== ========
Shares used in computing pro
forma net loss per share,
basic and diluted............ 7,326 7,673
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TUT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
-----------------
SERIES A-C COMMON STOCK ADDITIONAL
----------------- ------------- PAID IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------- -------- ------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 1,098 $ 1,567 108 $ 39 $ (7,671) $ (6,065)
Common stock issued for
cash upon exercise of
options................ 34 12 12
Dividend accretion...... (694) (694)
Net loss................ (3,390) (3,390)
------- -------- --- ------ ------ ------- -------- --------
Balance, December 31,
1995................... 1,098 1,567 142 51 (11,755) (10,137)
Common stock issued for
cash upon exercise of
options................ 13 6 6
Conversion of preferred
stock into common
stock.................. 1 1 1
Dividend accretion...... (1,137) (1,137)
Net loss................ (4,427) (4,427)
------- -------- --- ------ ------ ------- -------- --------
Balance December 31,
1996................... 1,098 1,567 156 58 (17,319) (15,694)
Common stock issued for
cash upon exercise of
options................ 62 34 34
Dividend accretion...... (1,627) (1,627)
Net loss................ (9,157) (9,157)
------- -------- --- ------ ------ ------- -------- --------
Balance, December 31,
1997................... 1,098 1,567 218 92 (28,103) (26,444)
Common stock issued for
cash upon exercise of
options (unaudited).... 5 5 5
Unearned compensation
related to stock
options (unaudited).... 1,820 (1,820)
Amortization related to
unearned compensation
(unaudited)............ 165 165
Dividend accretion
(unaudited)............ (1,262) (1,262)
Net loss (unaudited).... (6,801) (6,801)
------- -------- --- ------ ------ ------- -------- --------
Balance, June 30, 1998
(unaudited)............ 1,098 $ 1,567 223 $ -- $1,917 $(1,655) $(36,166) $(34,337)
======= ======== === ====== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TUT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(3,390) $(4,427) $(9,157) $ (3,311) $ (6,801)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................. 90 238 398 170 255
Provision for (reduction in)
doubtful accounts............ (103) (94) 14 -- 27
Amortization of discounts on
investments.................. -- (53) (152) (95) (144)
Noncash compensation expense.. -- -- 1,260 -- 1,005
Change in assets and
liabilities:
Accounts receivable.......... 514 49 (1,036) (310) (1,543)
Inventories.................. (45) 285 (1,169) (533) (346)
Prepaid expenses and other
assets...................... 43 14 (382) (43) 58
Accounts payable............. (1,066) 484 753 (197) (419)
Deferred revenue............. -- -- -- -- 942
Accrued liabilities.......... (101) 312 331 485 150
------- ------- ------- -------- --------
Net cash used in operating
activities................. (4,058) (3,192) (9,140) (3,834) (6,816)
------- ------- ------- -------- --------
Cash flows from investing
activities:
Purchase of property and
equipment..................... (302) (565) (969) (557) (586)
Purchase of short-term
investments................... -- (7,488) (6,543) (1,664) (1,950)
Proceeds from maturities of
short-term investments........ -- -- 9,346 5,543 4,000
------- ------- ------- -------- --------
Net cash provided by (used
in) investing activities... (302) (8,053) 1,834 3,322 1,464
------- ------- ------- -------- --------
Cash flows from financing
activities:
Payment on lines of credit..... (810) (395) (1,130) (71) (200)
Proceeds from lines of credit.. 447 344 1,088 536 257
Proceeds from issuances of
common and preferred stock,
net........................... 6,015 11,174 11,334 17 3,705
------- ------- ------- -------- --------
Net cash provided by
financing activities....... 5,652 11,123 11,292 482 3,762
------- ------- ------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. 1,292 (122) 3,986 (30) (1,590)
Cash and cash equivalents,
beginning of period............ 239 1,531 1,409 1,409 5,395
------- ------- ------- -------- --------
Cash and cash equivalents, end
of period...................... $ 1,531 $ 1,409 $ 5,395 $ 1,379 $ 3,805
======= ======= ======= ======== ========
Supplemental disclosure of cash
flow information:
Interest paid during the
period........................ $ 30 $ 40 $ 61 $ 15 $ 23
======= ======= ======= ======== ========
Income taxes paid during the
period........................ $ 1 $ 1 $ 1 $ 1 $ 1
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED JUNE
30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY:
Tut Systems, Inc. (the "Company") was founded in 1983 and began operations
in August 1991. The Company designs, develops and markets advanced
communications products which enable high-speed data access over the copper
infrastructure of telephone companies, as well as the copper telephone wires
in homes, businesses and other buildings. The Company's products incorporate
high-bandwidth access multiplexers, associated modems and routers, Ethernet
extension products and integrated network management software.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information:
The accompanying financial statements at June 30, 1998 and for the six
months ended June 30, 1998 and 1997, together with the related notes, are
unaudited but include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation, in all material respects, of the financial position and the
operating results and cash flows for the interim date and periods presented.
Results for the interim period ended June 30, 1998 are not necessarily
indicative of results for the entire fiscal year or future periods.
Cash, Cash Equivalents and Short-Term Investments:
Cash, cash equivalents, and short-term investments are stated at cost or
amortized cost, which approximates fair value, and consist primarily of money
market funds, commercial paper and debt securities. The Company includes in
cash and cash equivalents all highly liquid investments which mature within
three months of their purchase date. Investments maturing between three and
twelve months from the date of purchase are classified as short-term
investments.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. As of December 31, 1996 and 1997, debt securities were classified as
held-to-maturity as the Company intends to, and has the ability to hold these
securities to maturity. Held-to-maturity securities are stated at amortized
cost, which approximates fair market value. The estimated fair values of cash
equivalents and short-term investments are based on quoted market prices.
Inventories:
Inventories are stated at the lower of cost, using the average cost method,
or market.
Advertising Expenses:
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the years ended December 31, 1995,
1996 and 1997 was $187, $116 and $94, respectively.
F-7
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Property and equipment:
Property and equipment are carried at cost. The Company provides for
depreciation by charges to expense which are sufficient to write off the cost
of the assets over their estimated useful lives on the straight-line basis.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful life of the improvement. Useful lives by principal
classifications are as follows:
<TABLE>
<S> <C>
Office equipment.................................................. 5 years
Computers and software............................................ 3-5 years
Test equipment.................................................... 5 years
Leasehold improvements............................................ 5 years
</TABLE>
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the asset and allowance for
depreciation and amortization accounts, and any gain or loss on such sale or
disposal, is credited or charged to income.
Maintenance, repairs, and minor renewals are charged to expense as incurred.
Expenditures which substantially increase an asset's useful life are
capitalized.
Revenue Recognition:
Product Revenues:
The Company generally recognizes revenue from product sales upon shipment if
collection of the resulting receivable is probable and product returns are
reasonably estimated. The Company's products generally carry a one year to two
year warranty from the date of purchase. Estimated sales returns and warranty
costs, based on historical experience by product, are recorded at the time the
product revenue is recognized.
License and Royalty Revenues:
The Company has entered into nonexclusive technology agreements with various
licensees. These agreements provide the licensees the right to use the
Company's proprietary technology to manufacture or have products manufactured
using the proprietary technology and to receive customer support for specified
periods and any changes or improvement to the technology over the term of the
agreement.
Contract fees for the services provided under these licensing agreements are
generally comprised of license fees and nonrefundable, prepaid royalties which
are recognized when the proprietary technology is delivered if there are no
significant vendor obligations. If the licensing agreements contain post-
contract customer support, the Company recognizes the contract fees ratably
over the five year period during which the post-contract customer support is
expected to be provided. This period represents the estimated life of the
technology. The Company begins to recognize revenue under the contract, once
it has delivered the implementation package which contains all information
needed to use the Company's proprietary technology in the licensee's process.
The remaining obligations are primarily to provide the licensee with any
changes or improvements to the technology and technical advise on
specifications, testing, debugging and enhancements.
F-8
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
The Company recognizes royalties upon notification of sale by its licensees.
The terms of the royalty agreements generally require licensees to give
notification to the Company and to pay royalties within 60 days of the end of
the quarter during which the sales take place.
Research and Development:
Research and development expenditures are charged to expense as incurred.
Income Taxes:
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are
determined based on the difference between the financial statement bases and
the tax bases of assets and liabilities using enacted tax rates. A valuation
allowance is established to reduce a deferred tax asset to the amount that is
expected more likely than not to be realized.
Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity (Deficit):
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Options, warrant and
preferred stock were not included in the computation of diluted net loss per
share because the effect would be antidilutive.
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from preferred
stock that will automatically convert upon the closing of the Company's
initial public offering (using the as-if-converted method). If the offering
contemplated by this Prospectus is consummated, all of the convertible
preferred stock and redeemable convertible preferred stock outstanding as of
the closing date will automatically be converted into an aggregate of
approximately 7,453 shares of common stock based on the shares of convertible
preferred stock outstanding at June 30, 1998. Unaudited pro forma
stockholders' equity at June 30, 1998, as adjusted for the conversion of
preferred stock and redeemable preferred stock and the expiration of the
redeemable convertible preferred stock warrant, is disclosed on the balance
sheet.
F-9
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share attributable to common stockholders
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HISTORICAL NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCK-
HOLDERS, BASIC AND DILUTED:
Net loss attributable to common
stockholders................... $(4,084) $(5,564) $(10,784) $(4,107) $(8,063)
======= ======= ======== ======= =======
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted........................ 125 148 182 163 220
======= ======= ======== ======= =======
Net loss per share attributable
to common stockholders, basic
and diluted.................... $(32.56) $(37.51) $ (59.36) $(25.20) $(36.65)
======= ======= ======== ======= =======
Antidilutive securities
including options, warrant, and
preferred stock not included in
historical net loss per share
attributable to common
stockholders calculations...... 4,403 6,654 8,537 6,937 9,171
======= ======= ======== ======= =======
PRO FORMA NET LOSS PER SHARE:
Net loss attributable to common
stockholders................... $(10,784) $(8,063)
Less: dividend accretion on re-
deemable convertible preferred
stock.......................... 1,627 1,262
-------- -------
Pro forma net loss.............. $ (9,157) $(6,801)
======== =======
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted........................ 182 220
Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
redeemable convertible
preferred stock and convertible
preferred stock outstanding.... 7,144 7,453
-------- -------
Shares used in computing pro
forma net loss per share, basic
and diluted.................... 7,326 7,673
======== =======
Pro forma net loss per share,
basic and diluted.............. $ (1.25) $ (0.89)
======== =======
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires that all items that are to be required to be recognized
under accounting standards as components of comprehensive financial
statements. FAS 130 is effective for fiscal years beginning after December 31,
1998. The Company's total comprehensive loss was the same as its net loss for
the six months ended June 30, 1997 and 1998.
F-10
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
In addition, during June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (FAS 131). FAS 131 replaces
FAS 14, "Financial Reporting for Segments of a Business Enterprise" and
changes the way the public companies report segment information. FAS 131 is
effective for fiscal years beginning after December 15, 1997 and has been
adopted by the Company for the year ending December 31, 1998.
3. CONCENTRATIONS OF CREDIT RISK:
The Company operates in one business segment, designing, developing and
marketing advanced communications products which enable high-speed data access
in homes, businesses and other buildings. The markets for high-speed data
access products are characterized by rapid technological developments,
frequent new product introductions, changes in end user requirements and
evolving industry standards. The Company's future success will depend on its
ability to develop, introduce and market enhancements to its existing products
to introduce new products in a timely manner which meet customer requirements
and to respond to competitive pressures and technological advances. Further,
the emergence of new industry standards, whether through adoption by official
standards committees or widespread use by telephone companies or other service
providers, could require the Company to redesign its products.
A relatively small number of resellers account for a significant percentage
of the Company's revenues. The Company expects that the sale of its products
to a limited number of resellers may continue to account for a high percentage
of revenues for the foreseeable future.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company had significant accounts
receivable balances due from certain customers as a percentage of total
accounts receivable at December 31, 1996 and 1997, as follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1997
-------- ---- ----
<S> <C> <C>
A.................................................................. 13% 16%
B.................................................................. 28% 10%
C.................................................................. 10%
</TABLE>
Currently, the Company relies on contract manufacturers and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturers or suppliers not produce and
deliver inventory for the Company to sell on a timely basis, operating results
could be adversely impacted.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
F-11
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. INVESTMENTS:
The amortized cost and fair value of the Company's investments consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Corporate debt securities..................................... $1,520 --
Commercial paper.............................................. 5,020 $4,890
Government debt securities.................................... 1,001 --
------ ------
$7,541 $4,890
====== ======
</TABLE>
All of the Company's investments mature within one year. The cost of
marketable securities approximates fair value of the securities and the amount
of unrealized gains or losses was not significant at December 31, 1996 or
1997.
5. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods..................................... $ 206 $ 1,236 $1,451
Raw material....................................... 49 188 319
----- ------- ------
$ 255 $ 1,424 $1,770
===== ======= ======
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Office equipment............................................. $ 142 $ 226
Computers and software....................................... 607 921
Test equipment............................................... 337 570
Leasehold improvements....................................... 94 432
------ ------
1,180 2,149
Less accumulated depreciation and amortization............... (406) (804)
------ ------
$ 774 $1,345
====== ======
</TABLE>
F-12
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Compensation................................................... $ 285 $ 495
Accrued royalties.............................................. 67 56
Other.......................................................... 64 196
------ ------
$ 416 $ 747
====== ======
</TABLE>
8. LINES OF CREDIT:
Under a revolving line of credit arrangement with a commercial bank (the
Bank), the Company may borrow up to the lesser of $2,500 or 70% of qualified
trade accounts receivable. As of December 31, 1996 and 1997, no borrowings
were outstanding under this line of credit. Interest is charged at the Bank's
prime rate (8.25% and 8.5% as of December 31, 1996 and 1997, respectively),
plus 1.0% and 0.75% per annum for December 31, 1996 and 1997, respectively.
This line expires August 15, 1998.
The Company also borrowed $97 on an equipment loan from the same Bank that
expired January 2, 1998. The loan bears interest at the Bank's prime rate
(8.5% at December 31, 1997), plus 2.5% per annum and is being amortized over a
two-year period. Amortization commenced in February 1996. At December 31,
1997, $4 was outstanding under this loan.
In August 1996, the Company obtained the right to borrow an additional $500
for the purchase of equipment. Borrowings outstanding on February 15, 1997 are
being amortized over a two-year period commencing March 15, 1997. Borrowings
outstanding on August 15, 1997 are being amortized over a two-year period
commencing September 15, 1997. At December 31, 1997, $350 was outstanding
under this loan, bearing interest at the Bank's prime rate (8.5% at December
31, 1997), plus 1.5% per annum. In August 1997, the Company obtained the right
to borrow an additional $200 for the purchase of equipment. As of February 28,
1998, the Company borrowed $200 at the Bank's prime rate of 8.5% plus 1.25%
per annum. The outstanding borrowing will be amortized over a two-year period
commencing March 10, 1998.
Principal maturities at December 31, 1997 on the equipment loans are as
follows:
<TABLE>
<S> <C>
1998.................................................................. $ 214
1999.................................................................. 140
-----
Total principal amounts due........................................... 354
Less current portion.................................................. (214)
-----
Long-term portion..................................................... $ 140
=====
</TABLE>
Both agreements require the maintenance of specific ratios and a minimum
tangible net worth. The loans are collateralized by substantially all assets
of the Company. The Company is also required to maintain its primary banking
relationship with this Bank including its main operating account.
F-13
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. LINES OF CREDIT, continued:
In September, October, and November of 1997, the Company was in violation of
certain ratio covenants. All violations were cured on December 16, 1997. The
Bank waived all violations occurring in 1997.
9. INCOME TAXES:
Income tax expense for 1995, 1996 and 1997 consists of the state franchise
tax expense of $1.
The primary components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 5,455 $ 8,661
Research and experimentation credit carryforwards.......... 179 306
Other...................................................... 8 14
------- -------
Total deferred tax asset................................. 5,642 8,981
Valuation allowance........................................ (5,642) (8,981)
------- -------
Net deferred tax asset..................................... $ -- $ --
======= =======
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Because management is not
certain that unused net operating losses and research and experimentation
credits will be utilized in future periods, a valuation allowance, in the
amount equal to the net deferred tax asset as of December 31, 1996 and 1997,
has been established to reflect these uncertainties. The change in the
valuation allowance was a net valuation allowance increase of $1,204, $1,570
and $3,339 for the years ended December 31, 1995, 1996 and 1997, respectively.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $23,200 and $8,900 for federal and state income taxes purposes,
respectively. These federal and state net operating losses expire by 2013 and
2002, respectively. At December 31, 1997, the Company also has research and
experimentation tax credit carryforwards of approximately $148 and $158 for
federal and state income tax purposes, respectively. These credits expire by
2013 and 2002, respectively.
Utilization of net operating loss and tax credit carryforwards are subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended and similar state
provisions. The annual limitation may result in the expiration of net
operating loss and tax credit carryforwards before full utilization.
The reconciliation of income tax benefit attributable to continuing
operations computed at the U.S. federal statutory rates to income tax benefit
for the fiscal years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate.............. $(1,153) $(1,505) $(3,113)
Loss for which no tax benefit is currently
recognizable................................... 1,153 1,505 3,113
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-14
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. LEASE OBLIGATIONS:
The Company leases office, manufacturing and warehouse space under
noncancelable operating leases that expire through 2002.
Minimum future lease payments under operating leases at December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998.................................................................... $134
1999.................................................................... 53
2000.................................................................... 54
2001.................................................................... 56
2002.................................................................... 56
----
$353
====
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was $143,
$173 and $267, respectively.
11. ROYALTY OBLIGATION:
The Company has acquired the rights, title, and interests in two patents
from a founder and stockholder of the Company. These two patents give the
Company exclusive control of the Balun technology required in the Company's
products. As amended in March 1996, retroactive to June 1995, the agreement
states that beginning January 1, 1996, the Company will pay a 1% royalty based
on the net sales price of products sold utilizing the patented technology
until the founder has been paid an aggregate of $750, at which time the
royalty percentage reduces to .25%. If annual royalties are less than $100 in
any one year, the Company shall have the right to pay the difference between
the royalty and $100. If the Company elects not to pay the $100 minimum, the
patents will be reconveyed to the founder upon his written request. In this
event, the Company will retain a paid-up nonexclusive license to use the
patents. The royalty payments are due 30 days after each quarter-end. The
agreement will remain in effect until the patents expire.
For 1996 and 1997, respectively, the royalty owed based on 1% of net sales
was approximately $44 and $62, respectively. The Company elected to pay the
difference between the actual royalty and the $100 minimum, and made such
payment in January 1997 and 1998, respectively. Royalty expense for 1995 was
$100.
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANT:
The Company will be required to redeem its Series D, E, F, and G preferred
stock (redeemable stock) on or at any time after June 25, 2002, upon the
election of the holders of outstanding shares of the redeemable stock. Such
election requires the redeemable stockholders to vote together as one class
and requires the approval of the redemption to be at least 67% of the
outstanding shares of redeemable stock. Any such redemption of the redeemable
stock shall require the redemption of the Series D, E, F and G preferred stock
by the Company at $3.60, $4.60, $5.00 and $12.00 per share, respectively, plus
any accrued and unpaid dividends. Additional features of the redeemable stock
are described further in Note 13.
In August 1997, the Company entered into a Licensing and Cooperative
Marketing Agreement with a software company (Software Company) covering the
use and promotion of certain of the Company's technology and future products
related to in-home networking. In exchange for endorsement of the technology,
marketing,
F-15
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANT, continued
and certain development support, the Company granted the Software Company a
warrant to purchase 667 shares of Series G convertible preferred stock at an
exercise price of $10.00 per share. The warrant expires upon the earliest of
(i) August 2002, (ii) sale or merger of the company, or (iii) an initial
public offering. The warrant vests in three increments of 30%, 40% and 30%
each upon achievement of certain agreed upon milestones. As of December 31,
1997, 60% of the warrant has vested and an expense of $1,260 was recorded by
the Company.
13. STOCKHOLDERS' EQUITY:
Preferred Stock:
In 1996, the Company amended its articles of incorporation to increase the
number of authorized shares of preferred stock to 7,500. In 1997, the Company
amended the articles of incorporation to increase the number of authorized
share of preferred stock to 9,250. The Company has designated 1,719, 1,313,
2,500, and 2,000 shares as Series D, E, F, and G, respectively, which are
redeemable and reserved 667 shares for Series G warrant (see Note 12).
Authorized shares of preferred stock of 380 remain undesignated.
The following is a summary of Series A--C convertible preferred stock
authorized, issued, and outstanding:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
-------------------------
DECEMBER 31,
SHARES ------------- JUNE 30,
SERIES AUTHORIZED 1996 1997 1998
------ ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
A....................................... 500 500 500 500
B....................................... 89 89 89 89
C....................................... 750 509 509 509
----- ------ ------ -----
1,339 1,098 1,098 1,098
===== ====== ====== =====
</TABLE>
Dividends:
The Series A, B, C, D, E, F and G preferred stockholders are entitled to
$.20, $.20, $.24, $.25, $.32, $.35 and $.84 per share of noncumulative
dividends, respectively. However, the Series D, E, F and G preferred stock
dividends become cumulative in the event of liquidation of the Company or upon
a two-thirds vote of the Series D, E, F and G preferred stockholders, on or
after June 25, 2002, requiring the redemption of the Series D, E, F and G
preferred stock by the Company at $3.60, $4.60, $5.00 and $12.00 per share,
respectively, plus the cumulative dividends. As of December 31, 1996 and 1997,
the Company has accreted $2,230 and $3,857, respectively in dividends under
the terms of the Series D, E, F and G preferred stock agreements.
Conversion and Rights:
Each share of preferred stock may be converted into common stock at the
option of the stockholder. The preferred stock automatically converts to
common stock immediately prior to the public offering of shares of the
Company's common stock at a price not less than $12.00 per share and an
aggregate offering price of not less than $15,000. The preferred stock has the
same voting rights as the common stock. Generally, the Company cannot issue
stock with preferences greater than the current preferred stock or issue a
preferred or common stock dividend without the two-thirds consent of the
preferred stockholders.
F-16
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
13. STOCKHOLDERS' EQUITY, continued:
The Series A, B, C, D, E, F and G preferred stockholders have the right to
participate in any registration of Company stock subject to underwriter
restrictions and the right of first refusal on new security issuances.
Liquidation:
Upon the liquidation, dissolution, or winding up of the Company (either
voluntary or involuntary), the holders of Series B, C, D, E, F and G preferred
stock are entitled to receive out of the assets of the Company available for
distribution to its stockholders, an amount equal to $2.24, $2.68, $3.60,
$4.60, $5.00, and $12.00 per share of Series B, C, D, E, F and G,
respectively, plus any declared but unpaid dividends, including all cumulative
dividends due to the holders of the Series D, E, F and G, preferred stock. To
the extent any assets remain in the Company after such distributions, then the
holders of Series A preferred stock are entitled to receive an amount equal to
$2.24 per share, plus any declared but unpaid dividends. Thereafter, any
remaining distributions will be made ratably to all common stockholders.
Redemption:
The Series A, B, and C preferred stock may be redeemed at the option of the
Company and consent of two-thirds of the Series D, E, F and G Preferred
stockholders after September 30, 1997. The redemption may be in
whole but not in part of the Series A, B, and C preferred stock, and the
redemption value will include any accrued and unpaid dividends.
Common Stock Reserved:
The Company has reserved common stock for issuance upon conversion of
redeemable and preferred stock as follows:
<TABLE>
<CAPTION>
SHARES RESERVED
-------------------------
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
A.................................................. 500 500 500
B.................................................. 89 89 89
C.................................................. 750 750 750
D.................................................. 1,719 1,719 1,719
E.................................................. 1,313 1,313 1,313
F.................................................. 2,500 2,500 2,500
G.................................................. -- 2,000 2,000
------ ------ -----
6,871 8,871 8,871
====== ====== =====
</TABLE>
14. STOCK OPTION PLAN:
In November 1993, the Company adopted the 1992 Stock Plan (the Plan), under
which the Company may grant both incentive stock options and nonstatutory
stock options. Options issued under the Plan can have an exercise price of no
less than 85% of the fair market value, as defined under the Plan, of the
stock at the date of grant. The Plan allows for the issuance of a maximum of
750 shares of the Company's common stock. In January 1997, the Plan was
amended to increase the maximum number of shares that may be issued to 1,250.
This number of shares of common stock has been reserved for issuance under the
Plan. Generally, stock options are granted with vesting periods of four years
and have an expiration date of ten years from the date of grant.
F-17
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
14. STOCK OPTION PLAN, continued:
Activity under the 1992 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------------------
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OPTIONS OF AGGREGATE EXERCISE
FOR GRANT EXERCISED SHARES PRICE PER SHARE PRICE PRICE
--------- --------- ------ --------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 232 105 413 $0.28-$0.36 $ 149 $0.36
Options granted......... (144) -- 144 0.48 70 0.49
Options exercised....... -- 34 (34) 0.36- 0.48 (12) 0.35
Options terminated...... 17 -- (17) 0.36- 0.48 (6) 0.35
---- --- ----- ------
Balance, December 31,
1995................... 105 139 506 0.28- 0.48 201 0.40
Options granted......... (115) -- 115 0.48- 0.52 57 0.50
Options exercised....... -- 13 (13) 0.36- 0.48 (6) 0.46
Options terminated...... 157 -- (157) 0.36- 0.52 (73) 0.46
---- --- ----- ------
Balance, December 31,
1996................... 147 152 451 0.28- 0.52 179 0.40
Options authorized...... 500 -- -- -- -- --
Options granted......... (389) -- 389 0.52- 2.00 254 0.65
Options exercised....... -- 56 (56) 0.36- 0.48 (21) 0.38
Options terminated...... 59 -- (59) 0.36- 0.52 (27) 0.46
---- --- ----- ------
Balance, December 31,
1997................... 317 208 725 0.28- 2.00 385 0.53
Options authorized (un-
audited)............... 188 -- -- -- -- --
Options granted (unau-
dited)................. (334) -- 334 2.00-12.00 1,748 5.23
Options exercised (unau-
dited)................. -- 5 (5) 0.48- 2.40 (5) 1.00
Options terminated (un-
audited)............... 5 -- (5) 0.52 (2) 0.40
---- --- ----- ------
Balance, June 30, 1998
(unaudited)............ 176 213 1,049 $0.28-$12.00 $2,126 $2.03
==== === ===== ======
</TABLE>
In addition to the 1992 Plan, the Company granted an option to purchase 6
shares at $2.24. Such options were exercised in 1997.
In connection with the grant of options for the purchase of 356 shares of
common stock to employees during the period from December 1997 through June
1998, the Company recorded aggregate deferred compensation of $1,820
representing the difference between the deemed fair value of the common stock
and the option exercise price at date of grant. Such deferred compensation
will be amortized over the vesting period relating to these options.
Accordingly, the Company amortized zero and $165 for the year ended December
31, 1997 and the six month period June 30, 1998, respectively.
At December 31, 1995, 1996 and 1997, vested options to purchase 348, 267 and
288 shares of common stock, respectively were unexercised. The weighted
average exercise price of these options was $.36 per share for each of 1996
and 1997.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
--------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.28-$.52 699 6.20 $0.44 288 $0.36
$2.00 26 10.00 $2.00 -- --
</TABLE>
F-18
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
14. STOCK OPTION PLAN, continued:
The following information concerning the Company's stock option plan is
provided in accordance with SFAS 123. The Company accounts for the Plan in
accordance with APB No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method. Weighted average assumptions used in
determining the fair value for grants in 1995, 1996 and 1997 include risk-free
interest rates of 6.1%, 6.7% and 6.7%, respectively, and an expected life of 5
years, 5 years and 4 years, respectively. Volatility and dividend yields are
not factors in the Company's minimum value calculation.
The weighted average fair value of options granted in 1995, 1996 and 1997
was $.12, $.16 and $.12 per share, respectively.
Had compensation expense for the stock plans been determined based on the
fair value at the grant date for options granted in 1995, 1996 and 1997,
consistent with the provisions of SFAS 123, the pro forma net loss would have
been reported as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders--
as reported.................................. $(4,084) $(5,564) $(10,784)
Net loss attributable to common stockholders--
pro forma.................................... (4,085) (5,571) (10,798)
Net loss per share attributable to common
stockholders--
as reported.................................. (32.56) (37.51) (59.36)
Net loss per share attributable to common
stockholders--
pro forma.................................... (32.57) (37.55) (59.44)
</TABLE>
15. 401(K) PLAN:
In April 1995, the Company adopted the Tut Systems, Inc. 401(k) Plan (the
401(k) Plan) covering all eligible employees. Contributions are limited to 15%
of each employee's annual compensation. Contributions to the 401(k) Plan by
the Company are discretionary. The Company did not make any contributions for
the years ended December 31, 1995, 1996 and 1997.
16. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION:
The Company currently targets its sales efforts to both public and private
network providers and users across four related market segments. The Company
has one reportable segment. Revenue by geographic region is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1995 1996 1997 1998
------ ------ ------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States............................ $2,977 $3,489 $5,236 $3,768
Foreign.................................. 468 965 985 745
------ ------ ------ ------
$3,445 $4,454 $6,221 $4,513
====== ====== ====== ======
</TABLE>
Three reseller customers accounted for 26%, 19% and 15%, respectively, of
the Company's revenue for the year ended December 31, 1995. Three reseller
customers accounted for 16%, 14% and 11%, respectively, of the
F-19
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
16. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION, continued:
Company's revenue for the year ended December 31, 1996. Two reseller customers
accounted for 14% and 12%, respectively, of the Company's revenue for the year
ended December 31, 1997. Two reseller customers accounted for 14% and 12%,
respectively, of the Company's revenue for the six months ended June 30, 1998.
17. SUBSEQUENT EVENTS:
On March 3, 1998, the Company extended its existing lease for its
headquarters location for three years beginning June 1, 1998 to May 31, 2001.
Rental payments are $17 per month through November 1999 and $18 per month from
December 1999 through May 2001. The new lease contains an option to extend for
an additional two years at a rate to be determined.
Between January 1, 1998 and June 30, 1998 the Company issued 308 shares of
Series G redeemable convertible preferred stock, resulting in cash proceeds of
approximately $3,700 to the Company.
In March 1998, the Company increased the number of shares reserved for
issuance under the 1992 Stock Plan by 188 shares for an aggregate of 1,438
shares.
In June 1998, the remainder of the warrant to a Software Company (see Note
12) vested and an expense of $840 was recorded by the Company.
In July 1998, the Company's Board of Directors (i) authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public, (ii) approved a four for one reverse split of its common and preferred
stock which will be effected prior to the closing of the public offering,
(iii) approved the reincorporation of the Company from California to Delaware.
All share data and stock option plan information have been restated to reflect
the reverse split and the reincorporation.
In July 1998, the Company's Board of Directors (i) adopted the 1998 Stock
Plan pursuant to which 1,000 additional shares (plus annual increases
beginning in 2000 of, the lesser of an additional 3% of the outstanding common
stock, 375 shares or a lesser amount determined by the Board of Directors) of
the Company's common stock have been reserved for future issuance to selected
employees, directors and non-employee directors and consultants, (ii)
authorized the adoption of the 1998 Employee Stock Purchase Plan pursuant to
which 250 shares (plus at each year end, the lesser of 2% of the outstanding
common stock or 250 shares or a lesser amount determined by the Board of
Directors) of the Company's common stock have been reserved for issuance to
eligible employees. These actions will be given effect prior to the effective
date of the Company's Initial Public Offering and will be submitted for
approval by the Stockholders in August 1998.
In July 1998, the Company issued 37 options to employees to purchase common
stock under the 1992 plan.
F-20
<PAGE>
[Graphic depicting the Company's Expresso GS, Expresso MDU and XL products]
Caption:
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies and the copper telephone wires in homes, businesses and
other buildings. The Company's products utilize its proprietary FastCopper
technology to exploit the underutilized bandwidth of existing last mile and
PCN infrastructures by reducing the noise, radio frequency interference and
signal cross talk inherent in high-speed data transmission over copper
telephone wires. FastCopper technology is found in a number of the Company's
cost-effective, scalable and easy to deploy products to meet the needs of
diverse customers.
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECU-
RITIES TO WHICH IT RELATES OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Disclosure Regarding Forward-Looking Statements.......................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 42
Certain Transactions..................................................... 52
Principal Stockholders................................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 59
Legal Matters............................................................ 61
Experts.................................................................. 61
Available Information.................................................... 61
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
SHARES
TUT SYSTEMS, INC.
COMMON STOCK
-----------------
PROSPECTUS
, 1998
-----------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
SALOMON SMITH BARNEY
================================================================================
<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 the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee.............................................. $13,570
NASD Filing Fee................................................... 17,500
The Nasdaq National Market System Listing Fee..................... *
Printing and Shipping Fees........................................ *
Legal Fees and Expenses........................................... *
Accounting Fees and Expenses...................................... *
Registrar and Transfer Agent Fees................................. *
Miscellaneous..................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- --------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the maximum extent permissible under Delaware
law. Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the maximum extent permissible under Delaware
law.
The Company's Bylaws provide that the Company shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law.
The Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it 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 permit such
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company arising out of such person's services as a director, officer,
employee, agent or fiduciary of the Company, any subsidiary of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. The agreements do not provide for indemnification in
cases where (i) the claim is brought by the indemnified party, (ii) the
indemnified party has not acted in good faith; (iii) the claim arises under
Section 16(b) of the Exchange Act; or (iv) the indemnified party has engaged
in acts, omissions or transactions for which the indemnified party is
prohibited from receiving indemnification under the agreement or applicable
law. The Company believes that these provisions and agreements are necessary
to attract and retain qualified persons as directors and executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) In the three years prior to the date of this Registration Statement, the
Registrant has issued and sold the following unregistered securities. The
transactions set forth below do not reflect a four for one reverse split of
the Registrant's Common Stock to be effected prior to the effectiveness of the
offering.
II-1
<PAGE>
(1) During the period from June 30, 1995 to date, the Registrant has
issued options to purchase 3,791,450 shares of Common Stock to directors,
employees and consultants pursuant to the Registrant's 1992 Stock Plan.
(2) On September 9, 1995, the Registrant sold 46,750 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(3) On February 21, 1996, the Registrant sold 3,187 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(4) On April 25, 1996, the Registrant sold 16,944 shares of Common Stock
upon the exercise of options at prices ranging from $0.09 per share to
$0.12 per share.
(5) On August 9, 1996, the Registrant sold 8,699,191 shares of Series F
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 20 investors at an as-converted price of $1.25
per share, payable in cash.
(6) On October 7, 1996, the Registrant sold 475,436 shares of Series F
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 5 investors at an as-converted price of $1.25
per share, payable in cash.
(7) On October 14, 1996, the Registrant sold 29,792 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(8) On December 17, 1996, the Registrant sold 2,025 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(9) On January 2, 1997, the Registrant sold 7,500 shares of Common Stock
upon the exercise of options at a price of $0.13 per share.
(10) On February 4, 1997, the Registrant sold 11,667 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(11) On February 27, 1997, the Registrant sold 6,771 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(12) On June 16, 1997, the Registrant sold 1,500 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(13) On July 11, 1997, the Registrant sold 30,000 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(14) On August 18, 1997, the Registrant sold 9,937 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(15) On August 27, 1997, the Registrant issued a warrant to purchase up
to 2,667,343 shares of Series G Preferred Stock, which will automatically
convert to Common Stock upon the closing of this offering, exercisable at a
price of $2.50 per share to Microsoft Corporation in connection with the
licensing and marketing arrangement entered into between the two companies.
The warrant expires, if not earlier exercised, on the closing of this
offering.
(16) On September 2, 1997, the Registrant sold 9,302 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(17) On September 15, 1997, the Registrant sold 127,607 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(18) On October 21, 1997, the Registrant sold 15,625 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(19) On November 17, 1997, the Registrant sold 2,500 shares of Common
Stock upon the exercise of options at a price of $0.13 per share.
II-2
<PAGE>
(20) On December 1, 1997, the Registrant sold 822 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(21) On December 16, 1997, the Registrant sold 3,752,098 shares of Series
G Preferred Stock, which will automatically convert to Common Stock upon
the closing of this offering, to 20 investors at an as-converted price of
$3.00 per share, payable in cash.
(22) On December 31, 1997, the Registrant sold 14,500 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 3 investors at an as-converted price of $3.00
per share, payable in cash.
(23) On January 23, 1998, the Registrant sold 2,708 shares of Common
Stock upon the exercise of options at a price of $0.13 per share.
(24) On January 30, 1998, the Registrant sold 7,333 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 2 investors at an as-converted price of $3.00
per share, payable in cash.
(25) On March 10, 1998, the Registrant sold 1,600 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(26) On March 16, 1998, the Registrant sold 891,079 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 6 investors at an as-converted price of $3.00
per share, payable in cash.
(27) On April 10, 1998, the Registrant sold 5,417 shares of Common Stock
upon the exercise of options at a price of $0.13 per share.
(28) On April 16, 1998, the Registrant sold 333,333 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to one investor at an as-converted price of $3.00
per share, payable in cash.
(29) On April 19, 1998, the Registrant sold 1,042 shares of Common Stock
upon the exercise of options at a price of $0.60 per share.
(30) On May 22, 1998, the Registrant sold 1,657 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to one investor at an as-converted price of $3.00
per share, payable in cash.
(31) On June 22, 1998, the Registrant sold 5,833 shares of Common Stock
upon the exercise of options at a price of $0.13 per share.
(32) On June 30, 1998, the Registrant sold 1,000 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(33) On July 10, 1998, the Registrant sold 28,749 shares of Common Stock
upon the exercise of options at prices of $0.09, $0.12 and $0.13 per share.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.
(c) The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder (with
respect to items 5, 6, 15, 21, 22, 24, 26, 28 and 30), or Rule 701 promulgated
under Section 3(b) of the Securities Act (with respect to all other items
listed above) as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intentions to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the instruments
representing such securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of Registrant, as
amended, as currently in effect.
3.2* Form of Restated Certificate of Incorporation of Registrant, to be
in effect upon the consummation of the reincorporation of
Registrant in Delaware.
3.3 Form of Second Amended and Restated Restated Certificate of
Incorporation of Registrant, to be filed immediately following the
closing of the offering made under this Registration Statement.
3.4 Amended and Restated Bylaws of Registrant, as currently in effect.
3.5 Form of Bylaws of Registrant, to be in effect upon the consummation
of the reincorporation of Registrant in Delaware.
4.1* Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 1992 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.2 1998 Stock Plan and forms of Stock Option Agreement and Stock
Purchase Agreement thereunder.
10.3 1998 Employee Stock Purchase Plan.
10.4 American Capital Marketing, Inc. 401(k) Plan.
10.5 Fourth Amended and Restated Shareholders' Rights Agreement, dated
December 16, 1997, Between Registrant and certain stockholders.
10.6 Lease by and between Pleasant Hill Industrial Park Associates, a
California Limited Partnership, and Registrant dated April 4, 1995,
as amended.
10.7 Office Building Lease between Petula Associates, Ltd., an Iowa
corporation, and Principal Mutual Life Insurance Co., an Iowa
corporation, doing business as RC Creekside Phase VI and Registrant
dated April 25, 1997.
10.8+ Licensing and Cooperative Marketing Agreement Between Microsoft
Corporation and Registrant dated August 27, 1997, as modified and
restated on July 30, 1998.
10.9 Form of Indemnification Agreement to be entered into between
Registrant and each director and officer.
10.10 Agreement and General Release between Registrant and And Yet, Inc.
dated July 31, 1998.
10.11+ Software License Agreement between RouterWare, Inc. and Registrant
dated December 16, 1997.
10.12 Home Phoneline Promoters Agreement by and between IBM Corporation,
Hewlett-Packard Company, Compaq Computer Corporation, Advanced
Micro Devices, Inc., Intel Corporation, Epigram, Inc., AT&T
Wireless Services Inc., 3Com Corporation, Rockwell Semiconductor
Systems, Inc. and Lucent Technologies Inc. dated June 1, 1998.
10.13+ Master Agreement between Registrant and Compaq Computer Corporation
dated April 21, 1998 including supplements thereto.
10.14 Loan Agreement, General Security Agreement, and Collateral
Assignment and Patent Mortgage and Security Agreement with Imperial
Bank, each dated August 16, 1997.
11.1 Calculation of earnings per share (contained in Note 2 of Notes to
Financial Statements).
21.1 List of Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Confidential treatment requested for portions of these agreements. Omitted
portions have been filed separately with the Securities and Exchange
Commission.
* To be filed by amendment.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S> <C>
Schedule II --Valuation and Qualifying Accounts...................... S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the 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 Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, 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 to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PLEASANT
HILL, STATE OF CALIFORNIA, ON THE 31ST DAY OF JULY, 1998.
Tut Systems, Inc.
/s/ Salvatore D'Auria
By:
-----------------------------------
SALVATORE D'AURIA
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Salvatore
D'Auria and Nelson Caldwell, each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her any and
all capacities, to sign any and all amendments (including, without limitation,
post-effective Amendments and any amendments or abbreviated registration
statements increasing the amount of securities for which registration is being
sought) to this Registration Statement, with all exhibits and any and all
documents required to be filed with respect thereto, with the Securities and
Exchange Commission or any regulatory authority, granting unto such attorneys-
in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
order to effectuate the same as fully to all intents and purposes as he or she
might or could do if personally present, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Salvatore D'Auria President, Chief Executive July 31, 1998
______________________________________ Officer and Director
SALVATORE D'AURIA
/s/ Nelson Caldwell Vice President, Finance and July 31, 1998
______________________________________ Chief Financial Officer
NELSON CALDWELL
/s/ Matthew Taylor Chairman of the Board, Chief July 31, 1998
______________________________________ Technical Officer and
MATTHEW TAYLOR Secretary
/s/ Clifford H. Higgerson Director July 31, 1998
______________________________________
CLIFFORD H. HIGGERSON
/s/ Saul Rosenzweig Director July 31, 1998
______________________________________
SAUL ROSENZWEIG
/s/ David Spreng Director July 31, 1998
______________________________________
DAVID SPRENG
/s/ George Middlemas Director July 31, 1998
______________________________________
GEORGE MIDDLEMAS
/s/ Brion Applegate Director July 31, 1998
______________________________________
BRION APPLEGATE
/s/ Roger Moore Director July 31, 1998
______________________________________
ROGER MOORE
/s/ Neal Douglas Director July 31, 1998
______________________________________
NEAL DOUGLAS
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Tut Systems, Inc.
In connection with our audits of the financial statements of Tut Systems,
Inc. as of December 31, 1996 and 1997, and for each of the three years in the
period ended December 31, 1997, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in
Item 16(b) herein. In our opinion, this financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 16, 1998
S-1
<PAGE>
SCHEDULE II
TUT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT (REDUCTIONS) BALANCE AT
BEGINNING TO COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995.. $ 261 $ (103) $ (25) $ 133
Year ended December 31, 1996.. 133 (94) (19) 20
Year ended December 31, 1997.. 20 14 (5) 29
Valuation allowance for deferred
tax assets:
Year ended December 31, 1995.. $2,868 $1,204 $ -- $4,072
Year ended December 31, 1996.. 4,072 1,570 -- 5,642
Year ended December 31, 1997.. 5,642 3,339 -- 8,981
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of Registrant,
as amended, as currently in effect.
3.2* Form of Restated Certificate of Incorporation of Registrant, to
be in effect upon the consummation of the reincorporation of
Registrant in Delaware.
3.3 Form of Second Amended and Restated Restated Certificate of
Incorporation of Registrant, to be filed immediately following
the closing of the offering made under this Registration
Statement.
3.4 Amended and Restated Bylaws of Registrant, as currently in
effect.
3.5 Form of Bylaws of Registrant, to be in effect upon the
consummation of the reincorporation of Registrant in Delaware.
4.1* Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 1992 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.2 1998 Stock Plan and forms of Stock Option Agreement and Stock
Purchase Agreement thereunder.
10.3 1998 Employee Stock Purchase Plan.
10.4 American Capital Marketing, Inc. 401(k) Plan.
10.5 Fourth Amended and Restated Shareholders' Rights Agreement,
dated December 16, 1997, Between Registrant and certain
stockholders.
10.6 Lease by and between Pleasant Hill Industrial Park Associates,
a California Limited Partnership, and Registrant dated April 4,
1995, as amended.
10.7 Office Building Lease between Petula Associates, Ltd., an Iowa
corporation, and Principal Mutual Life Insurance Co., an Iowa
corporation, doing business as RC Creekside Phase VI and
Registrant dated April 25, 1997.
10.8+ Licensing and Cooperative Marketing Agreement Between Microsoft
Corporation and Registrant dated August 27, 1997, as modified
and restated on July 30, 1998.
10.9 Form of Indemnification Agreement to be entered into between
Registrant and each director and officer.
10.10 Agreement and General Release between Registrant and And Yet,
Inc. dated July 31, 1998.
10.11+ Software License Agreement between RouterWare, Inc. and
Registrant dated December 16, 1997.
10.12 Home Phoneline Promoters Agreement by and between IBM
Corporation, Hewlett-Packard Company, Compaq Computer
Corporation, Advanced Micro Devices, Inc., Intel Corporation,
Epigram, Inc., AT&T Wireless Services Inc., 3Com Corporation,
Rockwell Semiconductor Systems, Inc. and Lucent Technologies
Inc. dated June 1, 1998.
10.13+ Master Agreement between Registrant and Compaq Computer
Corporation dated April 21, 1998 including supplements thereto.
10.14 Loan Agreement, General Security Agreement, and Collateral
Assignment and Patent Mortgage and Security Agreement with
Imperial Bank, each dated August 16, 1997.
11.1 Calculation of earnings per share (contained in Note 2 of Notes
to Financial Statements).
21.1 List of Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
- --------
+ Confidential treatment requested for portions of these agreements. Omitted
portions have been filed separately with the Securities and Exchange
Commission.
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
TUTANKHAMON ELECTRONICS, INC.
Matthew H. Taylor and Edward Spivak certify that:
1. They are the President and Secretary, respectively, of TUTANKHAMON
ELECTRONICS, INC. a California corporation (the "Corporation").
2. The Articles of Incorporation of this Corporation shall be amended and
restated to read in their entirety as follows:
III
The name of this Corporation is TUTANKHAMON ELECTRONICS, INC.
IV
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
V
This Corporation is authorized to issue two classes of shares of stock
which shall be designated, respectively, "Common" and "Preferred." The total
number of shares that this Corporation is authorized to issue is thirty million
(30,000,000) shares. The number of shares of Common Stock authorized is twenty
million (20,000,000) shares, no par value. The number of shares of Preferred
Stock authorized is ten million (10,000,000) shares, no par value.
The shares of Preferred Stock authorized by these Articles of Incorporation
may be issued from time to time in one or more series. For any wholly unissued
series of Preferred Stock, the Board of Directors is hereby authorized to fix
and alter the rights, preferences, privileges and restrictions thereof,
including but not limited to the dividend rights, dividend rates, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption prices, and liquidation preferences, the number of
shares constituting any such series and the designation thereof, or any of them.
Without limitation of the generality of the foregoing, the Board of Directors
shall have the power to fix the number of authorized but undesignated shares
comprising any wholly unissued series of Preferred Stock, and to fix and alter
the rights, preferences, privileges and restrictions of any such unissued series
of Preferred Stock (including, but not limited to the dividend
<PAGE>
rights, dividend rates, conversion rights, voting rights, rights and terms of
redemption and sinking fund provisions, redemption prices, and liquidation
preferences of such series), in such manner as the Board of Directors
determines, which rights, preferences, privileges and restrictions may, in the
sole discretion of the Board of Directors, be superior to, on a parity with, or
junior to the rights preferences, privileges and restrictions of any other
series of Preferred Stock.
The Board of Directors is hereby authorized to increase or decrease the
number of shares of any series of Preferred Stock when the number of shares of
such series was originally fixed by designation of the Board of Directors. The
Board of Directors is authorized to decrease the number of shares of any series
of Preferred Stock when the number of shares was not originally fixed by
designation of the Board of Directors. Any such increase or decrease shall be
subject to the limitations and restrictions stated in the resolution of the
Board of Directors originally fixing the number of shares of such series, or in
the Articles of Incorporation, as the case may be; provided, that the number of
shares of any series shall not be decreased below the number of shares of such
series then outstanding. If the number of shares of any series is so decreased,
then the shares constituting such decrease shall resume the status of authorized
but undesignated shares of Preferred Stock.
Upon the effectiveness of these Amended and Restated Articles of
Incorporation, each one outstanding share of Common Stock shall split into ten
shares of Common Stock.
1. Title of Series and Number of Shares. The first series of Preferred
------------------------------------
Stock shall be comprised of 2,000,000 shares and shall be designated Series A
Preferred Stock (the "Series A Preferred"). The second series of Preferred
Stock shall be comprised of 356,080 shares and shall be designated Series B
Preferred Stock (the "Series B Preferred"). The third series of Preferred Stock
shall be comprised of 3,000,000 shares and shall be designated Series C
Preferred Stock (the "Series C Preferred"). The Board of Directors may issue
the remaining undesignated Preferred Stock in one or more series as permitted by
the Articles of Incorporation. As used herein, the term "Preferred Stock"
without designation shall refer to shares of Series A Preferred, Series B
Preferred and Series C Preferred.
2. Dividend Rights of Preferred Stock. The holders of the outstanding
----------------------------------
Preferred Stock shall be entitled, when, as and if declared by the Board of
Directors of the Corporation, to non cumulative dividends out of funds legally
available therefor of $0.05 for each share of Series A Preferred, $0.05 for each
share of Series B Preferred, and $0.06 for each share of Series C Preferred held
by them. No dividend or distribution shall be declared or paid on any shares of
Common Stock (other than dividends payable solely in Common Stock of the
Corporation) unless at the same time an equivalent dividend or distribution is
paid or declared and set aside for payment on the Preferred Stock (on an as-if
converted to Common Stock basis). The right to dividends on shares of Preferred
Stock under this Section shall not be cumulative, and no right shall accrue to
the holders of Preferred Stock under this Section by reason of the fact that
dividends on such shares are not declared in any prior period.
3. Liquidation Preference. In the event of any liquidation, dissolution,
----------------------
or winding up of the Corporation, either voluntary or involuntary, distributions
to the shareholders of the Corporation shall be made in the following manner:
-2-
<PAGE>
(a) The holders of the Series B Preferred and Series C Preferred shall
be entitled to receive, prior and in preference to any distribution of any of
the assets or surplus funds of the Corporation to the holders of the Series A
Preferred or Common Stock by reason of their ownership of such stock, the sum of
$0.56 plus declared and unpaid dividends, if any, for each share of Series B
Preferred and the sum of $0.67 plus declared and unpaid dividends, if any, for
each share of Series C Preferred then held by them. If upon the occurrence of
such event, the assets and funds available for distribution among the holders of
the Series B Preferred and Series C Preferred shall be insufficient to permit
the payment to such holders of the full preferential amounts, then the entire
assets and funds of the Corporation legally available for distribution to the
shareholders shall be distributed among the holders of the Series B Preferred
and Series C Preferred pro rata to the full preferential amount each such holder
is entitled to receive.
(b) After payment of the full preferential amounts to the holders of the
Series B Preferred and Series C Preferred as aforesaid, the holders of the
Series A Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock by reason of their ownership of such stock, the sum
of $0.56 plus declared and unpaid dividends, if any, for each share of the
Series A Preferred then held by them. If upon the occurrence of such event, the
assets and funds available for distribution among the holders of the Series A
Preferred shall be insufficient to permit the payment to such holders of the
full preferential amount, then the entire remaining assets and funds of the
Corporation legally available for distribution to the shareholders shall be
distributed among the holders of the Series A Preferred pro rata to the full
preferential amount each such holder is entitled to receive.
(c) After payment has been made to the holders of the Preferred Stock of
the full preferential amounts as to which they shall be entitled as aforesaid,
then the entire remaining assets and funds of the Corporation legally available
for distribution to the shareholders shall be distributed among the holders of
the Common Stock pro rata to the number of shares of Common Stock held by each
such holder.
(d) For purposes of this Section 3, a merger or consolidation of the
Corporation with or into any other corporation or corporations as a result of
which consolidation or merger the shareholders of the Corporation hold
securities representing less than fifty percent (50%) of the voting securities
of the surviving corporation, or a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation.
(e) Any securities to be delivered to the holders of the Preferred Stock
pursuant to Section 3(d) above shall be valued as follows:
(i) Securities not subject to investment letter or other similar
restrictions on free marketability:
(A) If traded on a national securities exchange or the National
Market System of the National Association of Securities Dealers, Inc. ("NMS"),
the value shall be deemed to be the average of the closing prices of the
securities on such exchange or the NMS over the 30-day period ending three (3)
days prior to the closing;
-3-
<PAGE>
(B) If actively traded over-the-counter (but not on the
NMS), the value shall be deemed to be the average of the closing bid or sale
prices (whichever are applicable) over the 30-day period ending three (3) days
prior to the closing; and
(ii) In all other cases the fair market value of securities shall
be determined by the Board of Directors acting in good faith, provided that if
such value is objected to in writing received by the Corporation from holders of
at least sixty-seven percent (67%) of the outstanding shares of Preferred Stock
within twenty (20) days after written notice is sent to the holders of Preferred
Stock, then the value shall be determined by an independent appraiser selected
by the Board of Directors and paid for by the Corporation.
(f) In the event the requirements of Section 3(d) are not complied
with, the Corporation shall forthwith either:
(i) cause such closing to be postponed until such time as the
requirements of this Section 3 have been complied with, or
(ii) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the 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 5(j) hereof.
(g) As authorized by Section 402.5(c) of the California Corporations
Code, the provisions of Sections 502 and 503 of the California Corporations Code
shall not apply with respect to repurchase by the Corporation of shares of
Common Stock issued to or held by employees, directors, independent contractors
or consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase.
4. Voting Rights. Except as otherwise required by law, the holders of
-------------
Common Stock and Preferred Stock shall vote together as a single class. Each
holder of shares of Common Stock shall be entitled to one vote for each share of
Common Stock held by such holder. Each holder of Preferred Stock shall be
entitled to such number of votes for the Preferred Stock held by him on the
record date fixed for such meeting, or on the effective date of such written
consent, as shall be equal to the whole number of shares of the Corporation's
Common Stock into which his shares of Preferred Stock are convertible, in
accordance with the terms of these Amended and Restated Articles of
Incorporation, immediately after the close of business on the record date fixed
for such meeting or the effective date of such written consent.
5. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
----------------
convertible into Common Stock, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Corporation or any
transfer agent for the Preferred Stock. Each share of
-4-
<PAGE>
Preferred Stock shall be convertible into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the Conversion
Price (as hereinafter defined) per share in effect for such series at the time
of conversion into the per share Conversion Value (as hereinafter defined) of
such series. The Conversion Values of the Preferred Stock shall be $0.56 per
share of Series A Preferred, $0.56 per share of Series B Preferred and $0.67 per
share of Series C Preferred. The initial Conversion Prices of the Preferred
Stock shall be $0.56 per share of Series A Preferred, $0.56 per share of Series
B Preferred and $0.67 per share of Series C Preferred. The initial Conversion
Price of the Preferred Stock shall be subject to adjustment from time to time as
provided below. The number of shares of Common Stock into which a share of a
series of Preferred Stock is convertible is hereinafter referred to as the
"Conversion Rate" of each such series.
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at its then effective
Conversion Rate immediately prior to the closing of the sale of Common Stock of
the Corporation in an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, an amended. Each share
of a series of Preferred Stock shall be automatically converted into shares of
Common Stock at its then effective Conversion Rate upon the affirmative vote of
the holders of at least sixty-seven percent (67%) of the shares of such series
of Preferred Stock, voting as a separate series or at such time after June 30,
1993, as there are less than 100,000 shares of such series outstanding. Each
share of Preferred Stock shall be automatically converted into shares of Common
Stock at the respective Conversion Rates then in effect upon the affirmative
vote of the holders of at least seventy-five percent (75%) of the voting power
of the outstanding shares of Preferred Stock, voting together as a single class.
In the event of the automatic conversion of the Preferred Stock upon a public
offering as described above, the person(s) entitled to receive the Common Stock
issuable upon such conversion of Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
(c) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock and receive
certificates therefor, 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 such office that such holder elects to convert the same; provided, however,
that in the event of an automatic conversion pursuant to Section 5(b), the
outstanding shares of the series of Preferred Stock so converted shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the Corporation or its
transfer agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled as aforesaid and a check payable to the holder in the amount of any
cash
-5-
<PAGE>
amounts payable as the result of a conversion into fractional shares of Common
Stock. 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, or in the case of automatic conversion as provided in
Section 5(b), 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 on such date.
(d) Fractional Shares. In lieu of any fractional shares to which the
-----------------
holder of Preferred Stock would otherwise be entitled, the Corporation shall pay
cash equal to such fraction multiplied by the fair market value of one share of
Common Stock, as determined by the Board of Directors of the Corporation.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Preferred Stock of each
holder at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
(e) Adjustments to the Series C Preferred Conversion Price With
-----------------------------------------------------------
Respect to Certain Diluting Issuances.
- -------------------------------------
(i) Special Definitions. For purposes of this Section 5(e) of
-------------------
Article III, the following definitions apply:
(A) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common or Convertible
Securities (defined below).
(B) "Original Issue Date" shall mean the date on which
these Amended and Restated Articles of Incorporation are filed with the
California Secretary of State.
(C) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities convertible into or exchangeable for
Common.
(D) "Additional Shares of Common" shall mean all shares of
Common issued (or, pursuant to Section 5(e)(iii) of this Article III, deemed to
be issued) by the Corporation after the Original Issue Date, other than shares
of Common issued or issuable:
(1) up to 2,000,000 shares of Series A Preferred and
356,080 shares of Series B Preferred issued in connection with the capital
reorganization of the Corporation on or about the Original Issue Date, and the
shares of Common Stock issuable upon conversion of such shares of Series A
Preferred and Series B Preferred.
(2) up to 3,000,000 shares of Common Stock issued or
issuable to officers, directors or employees of the Corporation pursuant to
stock option or stock purchase plans or agreements on terms approved by the
Board of Directors of the Corporation, or those independent contractors or
consultants with which the Corporation shall have an agreement approved by a
resolution of the Board of Directors pursuant to which such independent
contractor or consultant shall perform services for the Corporation;
-6-
<PAGE>
(3) as a dividend or distribution on the Preferred
Stock.
(4) by reason of a stock split, reverse stock split,
stock dividend or other adjustment covered by Section 5(f) hereof; or
(5) which are otherwise excluded by the affirmative
vote or written consent of the holders of at least sixty-seven percent (67%) of
the shares of Series C Preferred then outstanding.
(E) "Common" shall mean Common Stock of the corporation.
(ii) No Adjustment for Conversion Price. Any provision herein to
----------------------------------
the contrary notwithstanding, no adjustment in the Series C Conversion Price
shall be made in respect of the issuance of Additional Shares of Common if the
consideration per share (determined pursuant to Section 5(e)(vi) of this Article
III) for an Additional Share of Common issued or deemed to be issued by the
Corporation is greater than the Series C Conversion Price in effect on the date
of, and immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common. In the event
-------------------------------------------
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common issued as of the
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that in any such case in
which Additional Shares of Common are deemed to be issued:
(A) no further adjustments in the Series C Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or decrease or
increase in the number of shares of Common issuable, upon the exercise,
conversion or exchange thereof, the Series C Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities (provided, however, that no such
adjustment of the Series C Conversion Price shall affect Common previously
issued upon conversion of the Series C Preferred);
-7-
<PAGE>
(C) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not have
been exercised, the Series C Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(1) in the case of Convertible Securities or options
for Common, the only Additional Shares of Common issued were the shares of
Common, if any, actually issued upon the exercise of such Options or the
Conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange; and
(2) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of Common deemed to have
been then issued was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Corporation (determined pursuant to Section
5(e)(vi) of this Article III) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to clause (B) or (C) above
shall have the effect of increasing the Series C Conversion Price to an amount
which exceeds the lower of (a) the Series C Conversion Price on the original
adjustment date, or (b) the Series C Conversion Price that would have resulted
from any issuance of Additional Shares of Common between the original adjustment
date and such readjustment date.
(E) in the case of any Options which expire by their terms
not more than 30 days after the date of issue thereof, no adjustment of the
Series C Conversion Price shall be made until the expiration or exercise of all
such Options, whereupon such adjustment shall be made in the same manner
provided in clause (C) above.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common. In the event the Corporation, at any time after the Original
- ----------------
Issue Date shall issue Additional Shares of Common (including Additional Shares
of Common deemed to be issued pursuant to Section 5(e)(iii) of this Article III)
without consideration or for consideration per share less than the Series C
Conversion Price in effect on the date of and immediately prior to such issue,
then and in such event, (I) until such time as the Corporation shall have issued
and sold equity securities having an aggregate purchase price of $1,500,000 at a
price per share equivalent to at least $0.67 per share of Common, the Series C
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest one-hundredth of a cent) equal to the price at which
the Additional Shares of Common were so issued and, (II) at such time as the
preceding clause (I) is no
-8-
<PAGE>
longer in effect, the Series C Preferred Conversion Price shall be reduced,
concurrently with such issue, to the Conversion Price (calculated to the nearest
one-hundredth of a cent) determined by dividing (X) an amount equal to the sum
of (1) the product derived by multiplying the Conversion Price of the Series C
Preferred in effect immediately prior to such issue or sale times the number of
shares of Common Stock Outstanding (as hereinafter defined) immediately prior to
such issue or sale, plus (2) the consideration, if any, received by the
Corporation upon such issue or sale, by (Y) an amount equal to the sum of (3)
the number of shares of Common Stock Outstanding immediately prior to such issue
or sale, plus (4) the number of shares of Common Stock issued or deemed to have
been issued in such issue and sale. For the purposes of the calculations set
forth in this paragraph, the number of shares of Common Stock Outstanding at any
time shall be equal to the number of shares of Common Stock outstanding at such
time plus the number of shares of Common Stock issuable upon the conversion of
all Convertible Securities then outstanding.
(v) Determination of Consideration for Options and Convertible
----------------------------------------------------------
Securities. The consideration per share received by the Corporation for
- ----------
Additional Shares of Common deemed to have been issued pursuant to Section
5(e)(iii) of this Article III, relating to Options and Convertible Securities
shall be determined by dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common (as set forth in
the instruments relating thereto, without regard to any provision contained
therein designed to protect against the dilution) issuable upon the exercise of
such Options or conversion or exchange of such Convertible Securities.
(f) Adjustments for Subdivisions, Combinations or Consolidation of
--------------------------------------------------------------
Preferred Stock and Common Stock. In the event the outstanding shares of
- --------------------------------
Preferred Stock or Common Stock shall be subdivided (by stock split, stock
dividend, reclassification or otherwise) into a greater number of shares of
Preferred Stock or Common Stock, the Conversion Prices of the effected series
then in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Preferred
Stock or Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Preferred Stock or Common Stock,
the Conversion Prices of the effected series then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased.
(g) Adjustments for Reorganization, Reclassification, Exchange and
--------------------------------------------------------------
Substitution. If the shares of Common Stock issuable upon conversion of any
- ------------
shares of Preferred Stock shall be changed into the same or a different number
of shares of any other class or classes of stock or other
-9-
<PAGE>
securities or property, whether by reorganization, reclassification or otherwise
(other than a subdivision or combination of shares provided for in Section 5(f)
of this Article III), the Conversion Prices of the effected series of Preferred
Stock then in effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such that the
shares of Preferred Stock shall be convertible into, in lieu of the number of
shares of Common Stock which the holders thereof would otherwise have been
entitled to receive upon such conversion, a number of shares of such other class
or classes of stock or other securities or property equivalent to the number of
shares of Common Stock that would have been issuable to the holders of Preferred
Stock if their shares of Preferred Stock had been converted immediately before
such change; and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interest thereafter of the holders of
Preferred Stock, to the end that the provisions set forth herein (including the
provisions with respect to changes in and other adjustments of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Preferred Stock.
(h) No Impairment. The Corporation will not 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 5 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. This
provision shall not restrict the Corporation's right to amend its Articles of
Incorporation with the requisite shareholder consent.
(i) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
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 Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon written request at any time
of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) all such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) 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 such holder's shares of
Preferred Stock.
(j) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
-10-
<PAGE>
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
holders of the Preferred Stock:
(A) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto and the amount and character of such dividend, distribution or
right) or for determining rights to vote in respect of the matters referred to
in (iii) and (iv) above; and
(B) in the case of the matters referred to in (iii) and
(iv) above, at least 20 days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event or the record date for
the determination of such holders if such record date is earlier).
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Preferred Stock at
the address for each such holder as shown on the books of the Corporation.
(k) 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 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 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 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 purpose.
(l) Reissuance of Converted Shares. Shares of Preferred Stock which
------------------------------
have been converted into Common Stock after the original issuance thereof shall
revert to the status of authorized unissued shares of undesignated Preferred
Stock.
6. Redemption.
----------
(a) The Corporation, at the option of the Board of Directors, may at
any time it may lawfully do so, but in no event prior to September 30, 1997,
redeem in whole but not in part the Preferred Stock by paying in cash for each
such share of Preferred Stock to be redeemed a price equal to the Conversion
Value of each share of the Preferred Stock (as appropriately adjusted for any
-11-
<PAGE>
stock dividends, stock splits, recapitalization or consolidation of the
Preferred Stock) together with any declared and unpaid dividend with respect
thereto. The amount payable upon the redemption of the Preferred Stock is
hereinafter referred to as the "Redemption Price" of the respective series of
Preferred Stock.
(b) At least thirty (30) days prior to the date fixed for any
redemption of Preferred Stock, written notice shall be mailed, postage prepaid
to each holder of record of Preferred Stock to be redeemed at the post office
address last shown on the records of the Corporation, notifying such holder of
the election of the Corporation to redeem such shares, specifying the Redemption
Date, the applicable Redemption Price, and the date on which such holders'
Conversion Rights (as defined in Section 5) as to such shares terminate and
calling upon such holder to surrender to the Corporation, in the manner and at
the place designated, the certificate or certificates representing the shares to
be redeemed (such notice is hereinafter referred to as the "Redemption Notice").
On or after the Redemption Date, each holder of Preferred Stock to be redeemed
shall surrender the certificate or certificates representing such shares to the
Corporation, in the manner and at the place designated in the Redemption Notice,
and thereupon the Redemption Price of such shares shall be payable to the order
of the person whose name appears on such certificate or certificates as the
owner of such shares and each surrendered certificate shall be cancelled. From
and after the Redemption Date, all rights of the holders of the Preferred Stock
designated for redemption in the Redemption Notice as holders of such series of
Preferred Stock of the Corporation (except the right to receive the Redemption
Price without interest upon surrender of their certificate or certificates)
shall cease and terminate with respect to such shares, and such shares shall not
subsequently be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
(c) On or prior to the Redemption Date, the Corporation shall deposit
the Redemption Price of all shares of Preferred Stock designated for redemption
in the Redemption Notice and not yet redeemed with a bank or trust company
having an aggregate capital and surplus in excess of twenty million
($20,000,000) as a trust fund for the benefit of the respective holders of the
shares designated for redemption and not yet redeemed, with irrevocable
instructions and authority to the bank or trust company to pay the applicable
Redemption Price for such shares to their respective holders on or after the
Redemption Date upon receipt of notification from the Corporation that such
holder has surrendered his share certificate to the Corporation pursuant to
Section 6(b). Such instructions shall also provide that any funds deposited by
the Corporation pursuant to Section 6(c) for the redemption of shares
subsequently converted into shares of Common Stock pursuant to Section 5 no
later than the first day preceding the Redemption Date shall be returned to the
Corporation forthwith upon such conversion. The balance of any funds deposited
by the Corporation pursuant to this subparagraph 6(c) remaining unclaimed at the
expiration of one year following the Redemption Date shall be returned to the
Corporation upon its request expressed in the resolution of its Board of
Directors.
7. Protective Covenants.
--------------------
(a) So long as there remains outstanding a number of shares of Series
B Preferred and Series C Preferred equal to 20% of the aggregate number of
shares of such series issued by the Corporation, the Corporation shall not,
without the affirmative vote or written consent of the holders
-12-
<PAGE>
of at least sixty-seven percent (67%) of the voting power of the outstanding
shares of Series B Preferred and Series C Preferred, voting together as a single
class, (i) authorize or issue any shares of capital stock having rights,
preferences and privileges senior to the Series B Preferred or the Series C
Preferred; or (ii) declare any dividend on the Preferred Stock or Common Stock.
(b) So long as there remains outstanding a number of shares of Series
B Preferred equal to 20% of the aggregate number of shares of such series issued
by the Corporation, the Corporation shall not increase the number of shares or
alter the rights, preferences, privileges or restrictions of the Series B
Preferred without the affirmative vote or written consent of the holders of at
least sixty-seven percent (67%) of the voting power of the outstanding shares of
Series B Preferred, voting together as a single class.
(c) So long as there remains outstanding a number of shares of Series
C Preferred equal to 20% of the aggregate number of shares of such series issued
by the Corporation, the Corporation shall not increase the number of shares or
alter the rights, preferences, privileges or restrictions of the Series C
Preferred without the affirmative vote or written consent of the holders of at
least sixty-seven percent (67%) of the voting power of the outstanding shares of
Series C Preferred, voting together as a single class.
VI
1. Limitation of Directors' Liability. The liability of the directors of
----------------------------------
the Corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
2. Indemnification of Directors and Officers. This Corporation is
-----------------------------------------
authorized to indemnify the directors and officers of the Corporation to the
fullest extent permissible under California law.
3. Repeal or Modification. Any repeal or modification of the foregoing
----------------------
provisions of this Article IV by the shareholders of the Corporation shall not
adversely affect any right of indemnification or limitation of liability of an
agent of the Corporation relating to acts or omissions occurring prior to such
repeal or modification.
3. The foregoing amendment and restatement of this Corporation's
Articles of Incorporation has been duly approved by the Board of Directors of
this Corporation.
4. The foregoing amendment and restatement of this Corporation's
Articles of Incorporation has been duly approved by the required vote of
shareholders in accordance with Sections 902 and 903 of the Corporations Code.
The total number of outstanding shares of the Corporation is 434,429 shares of
Common Stock. The number of shares voting in favor of the
-13-
<PAGE>
amendment equaled or exceeded the vote required. The percentage vote required
was more than fifty percent (50%) of the shares of Common Stock.
The undersigned further declare under penalty of perjury that the matters
set forth in this certificate are true of their own knowledge. Executed in
Pleasant Hill, California on April 23, 1993.
/s/ Matthew H. Taylor
_______________________________________
Matthew H. Taylor, President
/s/ Edward Spivak
_______________________________________
Edward Spivak, Secretary
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<PAGE>
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
TUTANKHAMON ELECTRONICS, INC.
Matthew H. Taylor and Steven Bochner certify that:
1. They are the President and Assistant Secretary, respectively, of
TUTANKHAMON ELECTRONICS, INC., a California corporation (the "Corporation").
2. That Article I of the Articles of Incorporation of this Corporation is
amended to read in full as follows:
The name of this Corporation is TUT SYSTEMS, INC.
3. The foregoing amendment of this Corporation's Articles of
Incorporation has been duly approved by the Board of Directors of this
Corporation.
4. The foregoing amendment of this Corporation's Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The total
number of outstanding shares of the Corporation is 2,000,000 shares of Series A
Preferred Stock, 356,080 shares of Series B Preferred Stock, 2,035,580 shares of
Series C Preferred Stock and 1,957,475 shares of Series D Preferred Stock.
There are no shares of Common Stock outstanding as of the date hereof. The
number of shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was at least a majority of the
outstanding Common Stock, Series A Preferred, Series B Preferred, Series C
Preferred, and Series D Preferred, all voting together as a class.
-15-
<PAGE>
The undersigned further declare under penalty of perjury that the matters
set forth in this certificate are true of their own knowledge. Executed in
Pleasant Hill, California on October 8, 1993.
/s/ Matthew H. Taylor
______________________________________
Matthew H. Taylor, President
/s/ Steven Bochner
_______________________________________
Steven Bochner, Assistant Secretary
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<PAGE>
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
TUT SYSTEMS, INC.
Matthew H. Taylor certifies that:
1. He is the Chairman of the Board and Secretary of TUT SYSTEMS,
INC., a California corporation (the "Corporation").
2. Article III of the Articles of Incorporation of this Corporation
shall be amended to read in full as follows:
III
This Corporation is authorized to issue two classes of shares of stock
which shall be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares that this Corporation is authorized to issue is
eighty-seven million (87,000,000) shares. The number of shares of Common Stock
authorized is fifty million (50,000,000) shares, no par value. The number of
shares of Preferred Stock authorized is thirty-seven million (37,000,000)
shares, no par value.
The shares of Preferred Stock authorized by these Articles of Incorporation
may be issued from time to time in one or more series. For any wholly unissued
series of Preferred Stock, the Board of Directors is hereby authorized to fix
and alter the rights, preferences, privileges and restrictions thereof,
including but not limited to the dividend rights, dividend rates, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption prices, and liquidation preferences, the number of
shares constituting any such series and the designation thereof, or any of them.
Without limitation of the generality of the foregoing, the Board of Directors
shall have the power to fix the number of authorized but undesignated shares
comprising any wholly unissued series of Preferred Stock, and to fix and alter
the rights, preferences, privileges and restrictions of any such unissued series
of Preferred Stock (including, but not limited to the dividend rights, dividend
rates, conversion rights, voting rights, rights and terms of redemption and
sinking fund provisions, redemption prices, and liquidation preferences of such
series) in such manner as the Board of Directors determines, which rights,
preferences, privileges and restrictions may, in the sole discretion of the
Board of Directors, subject to Section 8 hereof, be superior to, on a parity
with, or junior to the rights, preferences, privileges and restrictions of any
other series of Preferred Stock.
-17-
<PAGE>
The Board of Directors is hereby authorized to increase or decrease the
number of shares of any series of Preferred Stock when the number of shares of
such series was originally fixed by designation of the Board of Directors. The
Board of Directors is authorized to decrease the number of shares of any series
of Preferred Stock when the number of shares was not originally fixed by
designation of the Board of Directors. Any such increase or decrease shall be
subject to the limitations and restrictions stated in the resolution of the
Board of Directors originally fixing the number of shares of such series, or in
the Articles of Incorporation, as the case may be; provided, that the number of
shares of any series shall not be decreased below the number of shares of such
series then outstanding. If the number of shares of any series is so decreased,
then the shares constituting such decrease shall resume the status of authorized
but undesignated shares of Preferred Stock.
1. Title of Series and Number of Shares. The first series of Preferred
------------------------------------
Stock shall be comprised of 2,000,000 shares and shall be designated Series A
Preferred Stock (the "Series A Preferred"). The second series of Preferred
Stock shall be comprised of 356,080 shares and shall be designated Series B
Preferred Stock (the "Series B Preferred"). The third series of Preferred Stock
shall be comprised of 3,000,000 shares and shall be designated Series C
Preferred Stock (the "Series C Preferred"). The fourth series of Preferred
Stock shall be comprised of 6,875,277 shares and shall be designated Series D
Preferred Stock (the "Series D Preferred"). The fifth series of Preferred Stock
shall be comprised of 5,250,000 shares and shall be designated Series E
Preferred Stock (the "Series E Preferred"). The sixth series of Preferred Stock
shall be comprised of 10,000,000 shares and shall be designated Series F
Preferred Stock (the "Series F Preferred"). The seventh series of Preferred
Stock shall be comprised of 8,000,000 shares and shall be designated Series G
Preferred Stock (the "Series G Preferred"). The Board of Directors may issue the
remaining undesignated Preferred Stock in one or more series as permitted by the
Articles of Incorporation. As used herein, the term "Preferred Stock" without
designation shall refer to shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred.
2. Dividend Rights of Preferred Stock. The holders of the outstanding
----------------------------------
Series A Preferred, Series B Preferred and Series C Preferred shall be entitled,
when, as and if declared by the Board of Directors of the Corporation, to
noncumulative dividends out of funds legally available therefor of $0.05 for
each share of Series A Preferred, $0.05 for each share of Series B Preferred,
and $0.06 for each share of Series C Preferred held by them. The right to
dividends on shares of Series A Preferred, Series B Preferred and Series C
Preferred under this Section shall not be cumulative, and no right shall accrue
to the holders of Series A Preferred, Series B Preferred and Series C Preferred
under this Section by reason of the fact that dividends on such shares are not
declared in any prior period. The holders of the outstanding Series D
Preferred, Series E Preferred, Series F Preferred and Series G Preferred shall
be entitled, when, as and if declared by the Board of Directors of the
Corporation, to dividends out of funds legally available therefor of $0.063 for
each share of Series D Preferred, $0.081 for each share of Series E Preferred,
$0.088 for each share of Series F Preferred, and $0.21 for each share of Series
G Preferred held by them, which dividends shall be cumulative only in the event
of: (i) the mandatory redemption of the Series D Preferred, Series E Preferred,
Series F Preferred and Series G Preferred by the Corporation pursuant to Section
7 hereof; or (ii) a liquidation, dissolution or winding up of the Corporation
under Section 3 hereof, either voluntary or
-18-
<PAGE>
involuntary. Except as described in the immediately preceding sentence, the
right to dividends on shares of Series D Preferred, Series E Preferred, Series F
Preferred or Series G Preferred under this Section shall not be cumulative, and
no right shall otherwise accrue to the holders of Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred under this Section by reason
of the fact that dividends on such shares are not declared in any prior period.
No dividend or distribution shall be declared or paid on any shares of Common
Stock (other than dividends payable solely in Common Stock of the Corporation)
unless at the same time an equivalent dividend or distribution is paid or
declared and set aside for payment on the Preferred Stock (on an as-if converted
to Common Stock basis).
3. Liquidation Preference. In the event of any liquidation, dissolution,
----------------------
or winding up of the Corporation, either voluntary or involuntary, distributions
to the shareholders of the Corporation shall be made in the following manner:
(a) The holders of the Series B Preferred, Series C Preferred, Series
D Preferred, Series E Preferred, Series F Preferred and Series G Preferred shall
be entitled to receive, prior and in preference to any distribution of any of
the assets or surplus funds of the Corporation to the holders of the Series A
Preferred or Common Stock by reason of their ownership of such stock, the sum of
$0.56 plus declared and unpaid dividends, if any, for each share of Series B
Preferred then held by them, the sum of $0.67 plus declared and unpaid
dividends, if any, for each share of Series C Preferred then held by them, the
sum of $0.90 plus accrued and unpaid dividends, if any, for each share of Series
D Preferred then held by them, the sum of $1.15 plus accrued and unpaid
dividends, if any, for each share of Series E Preferred then held by them, the
sum of $1.25 plus accrued and unpaid dividends, if any, for each share of Series
F Preferred then held by them, and the sum of $3.00 plus accrued and unpaid
dividends, if any, for each share of Series G Preferred then held by them. If
upon the occurrence of such event, the assets and funds available for
distribution among the holders of the Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, Series F Preferred and Series G
Preferred shall be insufficient to permit the payment to such holders of the
full preferential amounts, then the entire assets and funds of the Corporation
legally available for distribution to the shareholders shall be distributed
among the holders of the Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, Series F Preferred and Series G Preferred pro
rata to the full preferential amount each such holder is entitled to receive.
(b) After payment of the full preferential amounts to the holders of
the Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred and Series G Preferred as aforesaid, the holders
of the Series A Preferred shall be entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the Corporation to
the holders of the Common Stock by reason of their ownership of such stock, the
sum of $0.56 plus declared and unpaid dividends, if any, for each share of the
Series A Preferred then held by them. If upon the occurrence of such event, the
assets and funds available for distribution among the holders of the Series A
Preferred shall be insufficient to permit the payment to such holders of the
full preferential amount, then the entire remaining assets and funds of the
Corporation legally available for distri-
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<PAGE>
bution to the shareholders shall be distributed among the holders of the Series
A Preferred pro rata to the full preferential amount each such holder is
entitled to receive.
(c) After payment has been made to the holders of the Preferred Stock
of the full preferential amounts as to which they shall be entitled as
aforesaid, then the holders of Common Stock shall be entitled to share in the
remaining assets and funds of the Corporation legally available for
distribution, pro rata to the number of shares of Common Stock held by each such
holder.
(d) For purposes of this Section 3, a merger or consolidation of the
Corporation with or into any other corporation as a result of which
consolidation or merger the shareholders of the Corporation hold securities
representing less than fifty percent (50%) of the voting securities of the
surviving corporation (a "Merger"), or a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation.
(e) Any securities to be delivered to the holders of the Preferred
Stock pursuant to Section 3(d) above shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a national securities exchange or the
National Market System of the National Association of Securities Dealers, Inc.
("NMS"), the value shall be deemed to be the average of the closing prices of
the securities on such exchange or the NMS over the 30-day period ending three
(3) days prior to the closing;
(B) If actively traded over-the-counter (but not on
the NMS), the value shall be deemed to be the average of the closing bid or sale
prices (whichever are applicable) over the 30-day period ending three (3) days
prior to the closing; and
(ii) In all other cases the fair market value of securities
shall be determined by the Board of Directors acting in good faith, provided
that if such value is objected to in writing received by the Corporation from
holders of more than fifty percent (50%) of the outstanding shares of Preferred
Stock within twenty (20) days after written notice is sent to the holders of
Preferred Stock, then the value shall be determined by an independent appraiser
selected by the Board of Directors and paid for by the Corporation.
(f) In the event the requirements of Section 3(d) are not complied
with, the Corporation shall forthwith either:
(i) cause such closing to be postponed until such time as
the requirements of this Section 3 have been complied with, or
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<PAGE>
(ii) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the 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 5(j) hereof.
(g) As authorized by Section 402.5(c) of the California Corporations
Code, the provisions of Sections 502 and 503 of the California Corporations Code
shall not apply with respect to repurchase by the Corporation of shares of
Common Stock issued to or held by employees, directors, independent contractors
or consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase.
4. Voting Rights.
-------------
(a) General. Except as otherwise required by law and except as
-------
required in Sections 4(b) and 8 hereof, the holders of Common Stock and
Preferred Stock shall vote together as a single class. Each holder of shares of
Common Stock shall be entitled to one vote for each share of Common Stock held
by such holder. Each holder of Preferred Stock shall be entitled to such number
of votes for the Preferred Stock held by him on the record date fixed for such
meeting, or on the effective date of such written consent, as shall be equal to
the whole number of shares of the Corporation's Common stock into which his
shares of Preferred Stock are convertible, in accordance with the terms of the
Corporation's Amended and Restated Articles of Incorporation, as amended,
immediately after the close of business on the record date fixed for such
meeting or the effective date of such written consent.
(b) Board Seats. The number of directors constituting the Board of
-----------
Directors shall be fixed at ten (10). The holders of the Common Stock, voting
as a separate class, shall be entitled to elect one (1) director of the
Corporation. The holders of the Series A Preferred, voting as a separate class,
shall be entitled to elect one (1) director of the Corporation. The holders of
the Series B Preferred and Series C Preferred, voting together as a single
class, shall be entitled to elect one (1) director of the Corporation. The
holders of the Series D Preferred, voting as a separate class, shall be entitled
to elect two (2) directors of the Corporation. The holders of the Series G
Preferred, voting as a separate class, shall be entitled to elect one (1)
director of the Corporation. The holders of the Common Stock, the Series A
Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred, the Series E Preferred, the Series F Preferred, and the Series G
Preferred, voting together as a single class, shall be entitled to elect four
(4) directors of the Corporation.
5. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
----------------
convertible into Common Stock, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Corporation or any
transfer agent for the Preferred Stock. Each share of
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<PAGE>
Preferred Stock shall be convertible into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the Conversion
Price (as hereinafter defined) per share in effect for such series at the time
of conversion into the per share Conversion Value (as hereinafter defined) of
such series. The Conversion Values of the Preferred Stock shall be $0.56 per
share of Series A Preferred, $0.56 per share of Series B Preferred, $0.67 per
share of Series C Preferred, $0.90 per share of Series D Preferred, $1.15 per
share of Series E Preferred, $1.25 per share of Series F Preferred and $3.00 per
share of Series G Preferred. The initial Conversion Prices of the Preferred
Stock shall be $0.56 per share of Series A Preferred, $0.56 per share of Series
B Preferred, $0.67 per share of Series C Preferred, $0.90 per share of Series D
Preferred, $1.15 per share of Series E Preferred, $1.25 per share of Series F
Preferred and $3.00 per share of Series G Preferred The initial Conversion Price
of the Preferred Stock shall be subject to adjustment from time to time as
provided below. The number of shares of Common Stock into which a share of a
series of Preferred Stock is convertible is hereinafter referred to as the
"Conversion Rate" of each such series.
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at its then effective
Conversion Rate immediately prior to the closing of the sale of Common Stock of
the Corporation in an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offering and sale of Common Stock for the account of the Corporation to the
public at a price per share (prior to underwriter commissions and offering
expenses) of not less than $3.00 (appropriately adjusted for stock splits,
combinations and similar events) and an aggregate offering price to the public
of not less than $15,000,000. Each share of a series of Preferred Stock shall
be automatically converted into shares of Common Stock at its then effective
Conversion Rate upon the affirmative vote of the holders of at least sixty-seven
percent (67%) of the shares of such series of Preferred Stock, voting as a
separate series, or at such time after June 30, 1993 as there are less than
100,000 shares of such series outstanding. Each share of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred
and Series F Preferred shall be automatically converted into shares of Common
Stock at the respective Conversion Rates then in effect upon the affirmative
vote of the holders of at least eighty percent (80%) of the voting power of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred and Series F Preferred, voting together as a single class.
In addition, each share of Preferred Stock shall be automatically converted into
shares of Common Stock at the respective Conversion Rates then in effect upon
the affirmative vote of the holders of at least ninety-three percent (93%) of
the voting power of the outstanding shares of Preferred Stock, voting together
as a single class. In the event of the automatic conversion of the Preferred
Stock upon a public offering as described above, the person(s) entitled to
receive the Common Stock issuable upon such conversion of Preferred Stock shall
not be deemed to have converted such Preferred Stock until immediately prior to
the closing of such sale of securities.
(c) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock and receive
certificates therefor, 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 such
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<PAGE>
office that such holder elects to convert the same; provided, however, that in
the event of an automatic conversion pursuant to Section 5(b), the outstanding
shares of the series of Preferred Stock so converted shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the Corporation or its
transfer agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock. 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, or in the case of automatic conversion as
provided in Section 5(b), 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 on such
date.
(d) Fractional Shares. In lieu of any fractional shares to which the
-----------------
holder of Preferred Stock would otherwise be entitled, the Corporation shall pay
cash equal to such fraction multiplied by the fair market value of one share of
Common Stock, as determined by the Board of Directors of the Corporation.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Preferred Stock of each
holder at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
(e) Adjustments to the Series C, D, E, F and G Conversion Prices With
-----------------------------------------------------------------
Respect to Certain Diluting Issuances.
- -------------------------------------
(i) Special Definitions. For purposes of this Section 5(e)
-------------------
of Article III, the following definitions apply:
(A) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common or Convertible
Securities (defined below).
(B) "Original Issue Date" shall mean the date on which
the first share of Series G Preferred is first issued.
-23-
<PAGE>
(C) "Convertible Securities" shall mean any evidences
of indebtedness, shares or other securities convertible into or exchangeable for
Common.
(D) "Additional Shares of Common" shall mean all
shares of Common issued (or, pursuant to Section 5(e)(iii) of this Article III,
deemed to be issued) by the Corporation after the Original Issue Date, other
than:
(1) shares of Common Stock issued or issuable to
officers, directors or employees of the Corporation pursuant to stock option or
stock purchase plans or agreements on terms approved by the Board of Directors
of the Corporation, or those independent contractors or consultants with which
the Corporation shall have an agreement approved by a resolution of the Board of
Directors pursuant to which such independent contractor or consultant shall
perform services for the Corporation;
(2) as a dividend or distribution on the
Preferred Stock;
(3) by reason of a stock split, reverse stock
split, stock dividend or other adjustment covered by Section 5(f) hereof;
(4) by reason of a reorganization,
reclassification, exchange, substitution or other adjustment covered by Section
5(g) hereof; or
(5) which are otherwise excluded by the
affirmative vote or written consent of (i) the holders of at least sixty-seven
percent (67%) of the shares of Series C Preferred then outstanding, with respect
to issuances which would affect the Series C Conversion Price, (ii) the holders
of at least sixty-seven percent (67%) of the shares of Series D Preferred then
outstanding, with respect to issuances which would affect the Series D
Conversion Price, (iii) the holders of at least sixty-seven percent (67%) of the
shares of Series E Preferred then outstanding, with respect to issuances which
would affect the Series E Conversion Price; (iv) the holders of at least sixty-
seven percent (67%) of the shares of Series F Preferred then outstanding, with
respect to issuances which would affect the Series F Conversion Price; and (v)
the holders of at least sixty-seven percent (67%) of the shares of Series G
Preferred then outstanding, with respect to issuances which would affect the
Series G Conversion Price.
(E) "Common" shall mean Common Stock of the
Corporation.
(ii) No Adjustment for Conversion Price. Any provision
----------------------------------
herein to the contrary notwithstanding, no adjustment in the Series C Conversion
Price, the Series D Conversion Price, the Series E Conversion Price, the Series
F Conversion Price or the Series G Conversion Price shall be made in respect of
the issuance of Additional Shares of Common if the consideration per share for
an Additional Share of Common issued or deemed to be issued by the
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<PAGE>
Corporation is equal to or greater than the Series C Conversion Price, the
Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price or the Series G Conversion Price, respectively, in effect on
the date of, and immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common. In the
-------------------------------------------
event the Corporation at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities then entitled
to receive any such Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common issued as of the
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that in any such case in
which Additional Shares of Common are deemed to be issued:
(A) no further adjustments in the Series C Conversion
Price, the Series D Conversion Price, the Series E Conversion Price, the Series
F Conversion Price or the Series G Conversion Price shall be made upon the
subsequent issue of Convertible Securities or shares of Common upon the exercise
of such Options or conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or decrease or
increase in the number of shares of Common issuable, upon the exercise,
conversion or exchange thereof, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, the Series F Conversion Price
and the Series G Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the Series
C Conversion Price, the Series D Conversion Price, Series E Conversion Price,
the Series F Conversion Price and the Series G Conversion Price shall affect
Common previously issued upon conversion of the Series C Preferred, the Series D
Preferred, Series E Preferred, Series F Preferred or Series G Preferred,
respectively);
(C) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Series C Conversion Price, the Series D Conversion
Price, the Series E Conversion Price, the Series F Conversion Price and the
Series G Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
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<PAGE>
(1) in the case of Convertible Securities or
Options for Common, the only Additional Shares of Common issued were the shares
of Common, if any, actually issued upon the exercise of such Options or the
Conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange; and
(2) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Corporation (determined
pursuant to Section 5(e)(v) of this Article III) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Series C Conversion Price, the
Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price or the Series G Conversion Price to an amount which exceeds the
lower of (a) the Series C Conversion Price, the Series D Conversion Price, the
Series E Conversion Price, the Series F Conversion Price or the Series G
Conversion Price, respectively, on the original adjustment date, or (b) the
Series C Conversion Price, the Series D Conversion Price, Series E Conversion
Price, the Series F Conversion Price or the Series G Conversion Price that would
have resulted from any issuance of Additional Shares of Common between the
original adjustment date and such readjustment date.
(E) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no adjustment of
the Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price or the Series G Conversion Price
shall be made until the expiration or exercise of all such Options, whereupon
such adjustment shall be made in the same manner provided in clause (C) above.
(iv) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common.
- ---------------------------
(A) Series C Preferred, Series D Preferred, Series E
------------------------------------------------
Preferred, Series F Preferred and Series G Preferred. In the event the
- ----------------------------------------------------
Corporation, at any time after the Original Issue Date, shall issue Additional
Shares of Common (including Additional Shares of Common deemed to be issued
pursuant to Section 5(e)(iii) of this Article III) without consideration or for
consideration per share less than the Series C Conversion Price, Series D
Conversion Price, Series E Conversion Price, Series F Conversion Price or Series
G Conversion Price in effect on the
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<PAGE>
date of and immediately prior to such issue, then and in such event, the Series
C Conversion Price, Series D Conversion Price, the Series E Conversion Price
Series F Conversion Price or Series G Conversion Price, as the case may be,
shall be reduced, concurrently with such issue, to the Conversion Price
(calculated to the nearest one-hundredth of a cent) determined by dividing (X)
an amount equal to the sum of (1) the product derived by multiplying the
Conversion Price of the Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred, as the case may be, in
effect immediately prior to such issue or sale times the number of shares of
Common Stock Outstanding (as defined below) immediately prior to such issue or
sale, plus (2) the consideration, if any, received by the Corporation upon such
issue or sale, by (Y) an amount equal to the sum of (3) the number of shares of
Common Stock Outstanding immediately prior to such issue or sale, plus (4) the
number of shares of Common Stock issued or deemed to have been issued in such
issue and sale; provided, however, that the application of the provisions of
this Section 5(e)(iv) may be waived by any holder of Series C Preferred, Series
D Preferred, Series E Preferred, Series F Preferred or Series G Preferred. For
the purposes of the calculations set forth in this Section 5(e)(iv), the number
of shares of Common Stock Outstanding at any time shall be equal to the number
of shares of Common Stock outstanding at such time plus the number of shares of
Common Stock issuable upon the conversion of all Convertible Securities then
outstanding.
(v) Determination of Consideration for Options and
----------------------------------------------
Convertible Securities. The consideration per share received by the
- ----------------------
Corporation for Additional Shares of Common deemed to have been issued pursuant
to Section 5(e)(iii) of this Article III, relating to Options and Convertible
Securities shall be determined by dividing:
(A) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common (as set
forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against the dilution) issuable upon the
exercise of such Options or conversion or exchange of such Convertible
Securities.
(f) Adjustments for Subdivisions, Combinations or Consolidation of
--------------------------------------------------------------
Preferred Stock and Common Stock. In the event the outstanding shares of
- --------------------------------
Preferred Stock or Common Stock shall be subdivided (by stock split, stock
dividend, reclassification or otherwise) into a greater number of shares of
Preferred Stock or Common Stock, the Conversion Prices of the affected series
then in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Preferred
Stock or Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of
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<PAGE>
Preferred Stock or Common Stock, the Conversion Prices of the affected series
then in effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(g) Adjustments for Reorganization, Reclassification, Exchange and
--------------------------------------------------------------
Substitution. If the shares of Common Stock issuable upon conversion of any
- ------------
shares of Preferred Stock shall be changed into the same or a different number
of shares of any other class or classes of stock or other securities or
property, whether by reorganization, reclassification or otherwise (other than a
sub division or combination of shares provided for in Section 5(f) of this
Article III), the Conversion Prices of the effected series of Preferred Stock
then in effect shall, concurrently with the effectiveness of such reorganization
or reclassification, be proportionately adjusted such that the shares of
Preferred Stock shall be convertible into, in lieu of the number of shares of
Common Stock which the holders thereof would otherwise have been entitled to
receive upon such conversion, a number of shares of such other class or classes
of stock or other securities or property equivalent to the number of shares of
Common Stock that would have been issuable to the holders of Preferred Stock if
their shares of Preferred Stock had been converted immediately before such
change; and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interest thereafter of the holders of
Preferred Stock, to the end that the provisions set forth herein (including the
provisions with respect to changes in and other adjustments of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Preferred Stock.
(h) No Impairment. The Corporation will not 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 5 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.
This provision shall not restrict the Corporation's right to amend its Articles
of Incorporation with the requisite shareholder consent.
(i) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
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 Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon written request at any time
of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) all such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) 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 such holder's shares of
Preferred Stock.
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<PAGE>
(j) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
holders of the Preferred Stock:
(A) at least 20 days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto and the amount and character of such dividend,
distribution or right) or for determining rights to vote in respect of the
matters referred to in (iii) and (iv) above; and
(B) in the case of the matters referred to in (iii)
and (iv) above, at least 20 days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event or the record date for
the determination of such holders if such record date is earlier).
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Preferred Stock at
the address for each such holder as shown on the books of the Corporation.
(k) 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 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 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 Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be
-29-
<PAGE>
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
(l) Reissuance of Converted Shares. Shares of Preferred Stock which
------------------------------
have been converted into Common Stock after the original issuance thereof shall
be canceled.
6. Redemption of Series A, Series B and Series C Preferred.
-------------------------------------------------------
(a) The Corporation, at the option of the Board of Directors and with
the consent of sixty-seven percent (67%) of the outstanding shares of Series D
Preferred, Series E Preferred, Series F Preferred and Series G Preferred, voting
as a single class, may at any time it may lawfully do so, but in no event prior
to September 30, 1997, redeem in whole but not in part the Series A Preferred,
Series B Preferred and Series C Preferred by paying in cash for each such share
of Series A Preferred, Series B Preferred and Series C Preferred to be redeemed
a price equal to the Conversion Value of each share of the Series A Preferred,
Series B Preferred and Series C Preferred (as appropriately adjusted for any
stock dividends, stock splits, recapitalization or consolidation of the Series A
Preferred, Series B Preferred and Series C Preferred) together with any declared
and unpaid dividend with respect thereto. The amount payable upon the
redemption of the Series A Preferred, Series B Preferred and Series C Preferred
is hereinafter referred to as the "Redemption Price" of the respective series of
Preferred Stock.
(b) At least thirty (30) days prior to the date fixed for any
redemption of Series A Preferred, Series B Preferred and Series C Preferred,
written notice shall be mailed, postage prepaid to each holder of record of
Series A Preferred, Series B Preferred and Series C Preferred to be redeemed at
the post office address last shown on the records of the Corporation, notifying
such holder of the election of the Corporation to redeem such shares, specifying
the Redemption Date, the applicable Redemption Price, and the date on which such
holders' Conversion Rights (as defined in Section 5) as to such shares terminate
and calling upon such holder to surrender to the Corporation, in the manner and
at the place designated, the certificate or certificates representing the shares
to be redeemed (such notice is hereinafter referred to as the "Redemption
Notice"). On or after the Redemption Date, each holder of Series A Preferred,
Series B Preferred and Series C Preferred to be redeemed shall surrender the
certificate or certificates representing such shares to the Corporation, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner of such
shares and each surrendered certificate shall be canceled. From and after the
Redemption Date, all rights of the holders of the Series A Preferred, Series B
Preferred and Series C Preferred designated for redemption in the Redemption
Notice as holders of Series A Preferred, Series B Preferred and Series C
Preferred of the Corporation (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease and terminate with respect to such shares, and such shares shall not
subsequently be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
-30-
<PAGE>
(c) On or prior to the Redemption Date, the Corporation shall deposit
the Redemption Price of all shares of Series A Preferred, Series B Preferred and
Series C Preferred designated for redemption in the Redemption Notice and not
yet redeemed with a bank or trust company having an aggregate capital and
surplus in excess of fifty million ($50,000,000) as a trust fund for the benefit
of the respective holders of the shares designated for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
company to pay the applicable Redemption Price for such shares to their
respective holders on or after the Redemption Date upon receipt of notification
from the Corporation that such holder has surrendered his share certificate to
the Corporation pursuant to Section 6(b). Such instructions shall also provide
that any funds deposited by the Corporation pursuant to Section 6(c) for the
redemption of shares subsequently converted into shares of Common Stock pursuant
to Section 5 no later than the first day preceding the Redemption Date shall be
returned to the Corporation forthwith upon such conversion. The balance of any
funds deposited by the Corporation pursuant to this Section 6(c) remaining
unclaimed at the expiration of one year following the Redemption Date shall be
returned to the Corporation upon its request expressed in the resolution of its
Board of Directors.
7. Mandatory Redemption of Series D, Series E Preferred Stock, Series F
--------------------------------------------------------------------
Preferred and Series G Preferred. On or at any time after June 25, 2002, upon
- --------------------------------
the election of the holders of at least sixty-seven percent 67% of the
outstanding shares of Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred, voting together as a class, such holders may require the
Corporation to redeem their shares to the extent legally permissible. Such
redemption shall be made in two equal installments. One-half of the number of
shares of Series D Preferred, Series E Preferred, Series F Preferred and Series
G Preferred outstanding on the date of the first scheduled redemption (the
"First Redemption Date") shall be redeemed on such date and on the first
anniversary thereof (the First Redemption Date and the first anniversary thereof
being referred to herein as a "Redemption Date") to the extent funds are legally
available therefor.
Any such redemption of Series D Preferred shall be effected at a redemption
price equal to $0.90 per share plus any accrued and unpaid dividends (the total
of such amount and such dividends being referred to herein as the "Redemption
Price" applicable to such series). Any such redemption of Series E Preferred
shall be effected at a redemption price equal to $1.15 per share plus any
accrued and unpaid dividends (the total of such amount and such dividends being
referred to herein as the "Redemption Price" applicable to such series). Any
such redemption of Series F Preferred shall be effective at a redemption price
equal to $1.25 per share plus any accrued and unpaid dividends (the total of
such amount and such dividends being referred to herein as the "Redemption
Price" applicable to such series). Any such redemption of Series G Preferred
shall be effective at a redemption price equal to $3.00 per share plus any
accrued and unpaid dividends (the total of such amount and such dividends being
referred to herein as the "Redemption Price" applicable to such series).
At least thirty (30) days but not more than sixty (60) days prior to each
Redemption Date, a notice shall be mailed by the Corporation (the "Redemption
Notice") to the holders of Series D Preferred, Series E Preferred, Series F
Preferred and Series G Preferred by means of first class mail,
-31-
<PAGE>
postage paid, addressed to the holders of record of the shares to be redeemed,
at their respective addresses then appearing on the books of the Corporation.
Each such notice shall specify (i) the number of shares as to which such holder
has the right to request redemption, (ii) the Redemption Date, and (iii) the
Redemption Price applicable to such series. The number of shares as to which
each holder shall have the right to request redemption on each Redemption Date
shall be determined by multiplying the total number of shares to be redeemed on
that Redemption Date by a fraction, (x) the numerator of which shall be the
aggregate number of shares of Series D Preferred, Series E Preferred, Series F
Preferred Stock and Series G Preferred held by such holder immediately prior to
the First Redemption Date and (y) the denominator of which shall be the
aggregate number of shares of Series D Preferred, Series E Preferred, Series F
Preferred and Series G Preferred outstanding immediately prior to the First
Redemption Date.
Each holder who desires to have his or her shares redeemed pursuant to this
Section 7 shall so request by written notice to the Corporation within twenty-
five (25) days after delivery of the Redemption Notice. The holder of any
shares of Series D Preferred, Series E Preferred, Series F Preferred and Series
G Preferred so redeemed shall not be entitled to receive payment of the
Redemption Price for such shares until such holder shall cause to be delivered,
to the place specified in the Redemption Notice, (i) the certificates
representing such shares of Preferred Stock or affidavits of lost certificates
and (ii) transfer instrument(s) satisfactory to the corporation and sufficient
to transfer such shares to the Corporation free of any adverse interest.
Upon the redemption of any share, pursuant to this Section 7, such share
shall (provided the Redemption Price of such shares, plus any accrued and unpaid
dividends to the Redemption Date has been paid or properly provided for) be
deemed to cease to be outstanding, and all rights of any person other than the
Corporation in such share shall be extinguished on the Redemption Date for such
share (plus all rights to receive future dividends with respect to such share),
except for the right to receive the Redemption Price, without interest, in
accordance with the provisions of this Section 7.
Any shares of Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred as to which the holder does not affirmatively elect to
have redeemed as set forth herein shall remain outstanding with all rights,
preferences, privileges and restrictions set forth herein.
8. Protective Covenants.
--------------------
(a) So long as there remains outstanding a number of shares of Series
B Preferred and Series C Preferred equal to 20% of the aggregate number of
shares of such series issued by the Corporation, the Corporation shall not,
without the affirmative vote or written consent of the holders of at least
sixty-seven percent (67%) of the voting power of the outstanding shares of
Series B Preferred and Series C Preferred, voting together as a single class,
(i) authorize or issue any shares of capital stock having rights, preferences
and privileges senior to the Series B Preferred or the Series C Preferred
(where, for this purpose, a security equivalent to the Series B Preferred or
Series C Preferred in all respects, other than with respect to the price of such
security and items directly
-32-
<PAGE>
related thereto (including without limitation a liquidation preference or
dividend right calculated as a percentage thereof), shall not be considered
senior to the Series B Preferred or Series C Preferred, as applicable); or (ii)
declare any dividend on the Preferred Stock or Common Stock.
(b) So long as there remains outstanding a number of shares of Series
B Preferred equal to 20% of the aggregate number of shares of such series issued
by the Corporation, the Corporation shall not increase the number of shares or
alter the rights, preferences, privileges or restrictions of the Series B
Preferred without the affirmative vote or written consent of the holders of at
least sixty-seven percent (67%) of the voting power of the outstanding shares of
Series B Preferred, voting as a separate class.
(c) So long as there remains outstanding a number of shares of Series
C Preferred equal to 20% of the aggregate number of shares of such series issued
by the Corporation, the Corporation shall not increase the number of shares or
alter the rights, preferences, privileges or restrictions of the Series C
Preferred without the affirmative vote or written consent of the holders of at
least sixty-seven percent (67%) of the voting power of the outstanding shares of
Series C Preferred, voting as a separate class.
(d) So long as there remains outstanding a number of shares of Series
D Preferred equal to twenty percent (20%) of the aggregate number of such series
issued by the Corporation, the Corporation shall not, without the affirmative
vote or written consent of the holders of at least sixty-seven percent (67%) of
the voting power of the outstanding shares of Series D Preferred, voting as a
separate class, (i) authorize or issue any shares of capital stock having
rights, preferences and privileges senior to the Series D Preferred (where, for
this purpose, a security equivalent to the Series D Preferred in all respects,
other than with respect to the price of such security and items directly related
thereto (including without limitation a liquidation preference or dividend right
calculated as a percentage thereof), shall not be considered senior to the
Series D Preferred); (ii) increase the number of shares or alter the rights,
preferences, privileges or restrictions of the Series D Preferred; or (iii)
declare any dividend on the Preferred Stock or Common Stock.
(e) So long as there remains outstanding a number of shares of Series
E Preferred equal to twenty percent (20%) of the aggregate number of such series
issued by the Corporation, the Corporation shall not, without the affirmative
vote or written consent of the holders of at least sixty-seven percent (67%) of
the voting power of the outstanding shares of Series E Preferred, voting as a
separate class, (i) authorize or issue any shares of capital stock having
rights, preferences and privileges senior to the Series E Preferred (where, for
this purpose, a security equivalent to the Series E Preferred in all respects,
other than with respect to the price of such security and items directly related
thereto (including without limitation a liquidation preference or dividend right
calculated as a percentage thereof), shall not be considered senior to the
Series E Preferred); (ii) increase the number of shares or alter the rights,
preferences, privileges or restrictions of the Series E Preferred; or (iii)
declare any dividend on the Preferred Stock or Common Stock.
-33-
<PAGE>
(f) So long as there remains outstanding a number of shares of Series
F Preferred equal to twenty percent (20%) of the aggregate number of such series
issued by the Corporation, the Corporation shall not, without the affirmative
vote or written consent of the holders of at least sixty-seven percent (67%) of
the voting power of the outstanding shares of Series F Preferred, voting as a
separate class, (i) authorize or issue any shares of capital stock having
rights, preferences and privileges senior to the Series F Preferred (where, for
this purpose, a security equivalent to the Series F Preferred in all respects,
other than with respect to the price of such security and items directly related
thereto (including without limitation a liquidation preference or dividend right
calculated as a percentage thereof), shall not be considered senior to the
Series F Preferred); (ii) increase the number of shares or alter the rights,
preferences, privileges or restrictions of the Series F Preferred; or (iii)
declare any dividend on the Preferred Stock or Common Stock.
(g) So long as there remains outstanding a number of shares of Series
G Preferred equal to twenty percent (20%) of the aggregate number of such series
issued by the Corporation, the Corporation shall not, without the affirmative
vote or written consent of the holders of at least sixty-seven percent (67%) of
the voting power of the outstanding shares of Series F Preferred, voting as a
separate class, (i) authorize or issue any shares of capital stock having
rights, preferences and privileges senior to the Series G Preferred (where, for
this purpose, a security equivalent to the Series G Preferred in all respects,
other than with respect to the price of such security and items directly related
thereto (including without limitation a liquidation preference or dividend right
calculated as a percentage thereof), shall not be considered senior to the
Series G Preferred); (ii) increase the number of shares or alter the rights,
preferences, privileges or restrictions of the Series G Preferred; or (iii)
declare any dividend on the Preferred Stock or Common Stock.
(h) The Corporation shall not, without the affirmative vote or
written consent of the holders of at least sixty percent (60%) of the voting
power of the outstanding shares of Preferred Stock, voting together as a single
class, (i) authorize or issue any shares of capital stock having rights,
preferences and privileges on a parity with the Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred; or (ii) effect any
reclassification or recapitalization of Common Stock outstanding involving a
change in the Common Stock.
(i) The Corporation shall not, without the affirmative vote or
written consent of the holders of at least seventy percent (70%) of the voting
power of the outstanding shares of Preferred Stock, voting together as a single
class, effect any sale of all or substantially all of the assets of the
Corporation or any Merger (as defined in Section 3 above) of the Corporation
with or into another corporation.
3. The foregoing amendment of this Corporation's Amended and
Restated Articles of Incorporation has been duly approved by the Board of
Directors of this Corporation.
-34-
<PAGE>
4. The foregoing amendment of this Corporation's Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Sections 902 and 903 of the Corporations Code. The total number
of outstanding shares of the Corporation is 855,522 shares of Common Stock,
2,000,000 shares of Series A Preferred Stock, 356,080 shares of Series B
Preferred Stock, 2,035,583 shares of Series C Preferred Stock, 5,969,238 shares
of Series D Preferred Stock, 5,225,084 shares of Series E Preferred Stock and
9,224,627 shares of Series F Preferred Stock. The number of shares voting in
favor of the amendment equaled or exceeded the vote required. The percentage
vote required was more than fifty percent (50%) of the shares of Common Stock
voting as a separate class, more than fifty percent (50%) of the outstanding
shares of Series A Preferred Stock, voting as a separate class, at least sixty-
seven percent (67%) of the shares of Series B Preferred, voting as a separate
class, at least sixty-seven percent (67%) of the shares of Series C Preferred,
voting as a separate class, at least sixty-seven percent (67%) of the shares of
Series D Preferred, voting as a separate class, at least sixty-seven percent
(67%) of the shares of Series E Preferred, voting as a separate class, at least
sixty-seven percent (67%) of the shares of Series F Preferred, voting as a
separate class, and more than sixty percent (60%) of the shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, and Series F Preferred voting together as a class.
This certificate is dated as of December 10, 1997.
/s/ Matthew H. Taylor
____________________________________________
Matthew H. Taylor, Chairman of
the Board and Secretary
-35-
<PAGE>
The undersigned further declares under penalty of perjury that the matters
set forth in this certificate are true of his own knowledge. Executed in
Pleasant Hill, California on December 10, 1997.
/s/ Matthew H. Taylor
_____________________________________________
Matthew H. Taylor
-36-
<PAGE>
EXHIBIT 3.3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TUT SYSTEMS, INC.
Tut Systems, Inc., a corporation organized and existing under the laws of
the State of Delaware ("the Corporation"), hereby certifies as follows:
A. That the Corporation was originally incorporated on July 6, 1998 under
the name Tut Systems, Inc., pursuant to the General Corporation Law of Delaware.
On August , 1998, the Corporation's Restated Certificate of Incorporation was
filed with the Secretary of State.
B. Pursuant to Sections 228, 242 and 245 of the General Corporation Law
of Delaware, this Second Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of this corporation.
C. The text of the Restated Certificate of Incorporation as heretofore
amended or supplemented is hereby amended and restated in its entirety to read
as follows:
ARTICLE I
---------
The name of this Corporation is Tut Systems, Inc. (the "Corporation").
ARTICLE II
----------
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, County of New Castle. The name of its
registered agent at such office is The Corporation Trust Company.
ARTICLE III
-----------
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
<PAGE>
ARTICLE IV
----------
This Corporation is authorized to issue two classes of shares of stock
which shall be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares that this Corporation is authorized to issue is One
Hundred and Five Million (105,000,000) shares. The number of shares of Common
Stock authorized is One Hundred Million (100,000,000) shares, $0.001 par value.
The number of shares of Preferred Stock authorized is Five Million (5,000,000)
shares, $0.001 par value.
The shares of Preferred Stock authorized by this Certificate of
Incorporation may be issued from time to time in one or more series. For any
wholly unissued series of Preferred Stock, the Board of Directors is hereby
authorized to fix and alter the rights, preferences, privileges and restrictions
thereof, including but not limited to the dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption prices, and liquidation preferences, the
number of shares constituting any such series and the designation thereof, or
any of them. Without limitation of the generality of the foregoing, the Board
of Directors shall have the power to fix the number of authorized but
undesignated shares comprising any wholly unissued series of Preferred Stock,
and to fix and alter the rights, preferences, privileges and restrictions of any
such unissued series of Preferred Stock (including, but not limited to the
dividend rights, dividend rates, conversion rights, voting rights, rights and
terms of redemption and sinking fund provisions, redemption prices, and
liquidation preferences of such series) in such manner as the Board of Directors
determines, which rights, preferences, privileges and restrictions may, in the
sole discretion of the Board of Directors, be superior to, on a parity with, or
junior to the rights, preferences, privileges and restrictions of any other
series of Preferred Stock.
The Board of Directors is hereby authorized to increase or decrease the
number of shares of any series of Preferred Stock when the number of shares of
such series was originally fixed by designation of the Board of Directors. The
Board of Directors is authorized to decrease the number of shares of any series
of Preferred Stock when the number of shares was not originally fixed by
designation of the Board of Directors. Any such increase or decrease shall be
subject to the limitations and restrictions stated in the resolution of the
Board of Directors originally fixing the number of shares of such series, or in
the Certificate of Incorporation, as the case may be; provided, that the number
of shares of any series shall not be decreased below the number of shares of
such series then outstanding. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall resume the status of
authorized but undesignated shares of Preferred Stock.
ARTICLE V
---------
The Corporation is to have perpetual existence.
-2-
<PAGE>
ARTICLE VI
----------
Section 1. The management of the business and the conduct of the affairs
of the Corporation shall be vested in the Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed in
the manner designated in the Bylaws of the Corporation.
Section 2. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
Section 3. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
-----------
Section 1. 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.
Section 2. The Corporation may 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, officer,
employee or agent of the Corporation or any predecessor of the Corporation or
serves or served at any other enterprise as a director, officer, employee or
agent at the request of the Corporation or any predecessor to the Corporation.
Section 3. Neither any amendment nor repeal of this Article VII, nor the
adoption of any provision of this 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.
-3-
<PAGE>
ARTICLE VIII
------------
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 of 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 IX
----------
Vacancies created by newly created directorships, created in accordance
with the Bylaws of this Corporation, may be filled by the vote of a majority,
although less than a quorum, of the directors then in office, or by a sole
remaining director.
ARTICLE X
---------
Section 1. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting and any action contemplated by stockholders
after such time must be taken at a duly called annual or special meeting of
stockholders.
Section 2. The number of directors which constitute the whole Board of
Directors of the Corporation shall be fixed exclusively by one or more
resolutions adopted from time to time by the Board of Directors. Upon the
closing of the first sale of Common Stock of the Corporation pursuant to a
registration statement declared effective by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, the Board of
Directors shall be divided into three classes designated as Class I, Class II,
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the date thereof, the term
of office of the Class I directors shall expire and Class I directors shall be
elected for a full term of three years. At the second annual meeting of
stockholders following the date thereof, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three years. At the third annual meeting of stockholders following the date
thereof, the term of office of the Class III directors shall expire and Class
III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Section 3. Advance notice of new business and stockholder nominations for
the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation.
-4-
<PAGE>
ARTICLE XI
----------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this 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.
-5-
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed by Salvatore D'Auria, its
President, and attested by Matthew Taylor, its Secretary, this ________ day of
________, 1998.
TUT SYSTEMS, INC.
By:_____________________________________
Salvatore D'Auria, President
ATTEST:
___________________________________
Matthew Taylor, Secretary
-6-
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS
OF
TUT SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - OFFICES..................................................... 1
-------
1.01 - PRINCIPAL OFFICE........................................... 1
----------------
1.02 - OTHER OFFICES.............................................. 1
-------------
ARTICLE II - MEETINGS OF SHAREHOLDERS................................... 1
------------------------
2.01 - PLACE OF MEETINGS.......................................... 1
-----------------
2.02 - ANNUAL MEETINGS............................................ 1
---------------
2.03 - SPECIAL MEETINGS........................................... 2
----------------
2.04 - NOTICE OF MEETINGS......................................... 3
------------------
2.05 - MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............... 4
--------------------------------------------
2.06 - ADJOURNED MEETINGS AND NOTICE THEREOF...................... 4
-------------------------------------
2.07 - RECORD DATE FOR SHAREHOLDERS OF RECORD..................... 5
--------------------------------------
2.08 - VOTING AT MEETINGS......................................... 6
------------------
2.09 - QUORUM..................................................... 7
------
2.10 - CONSENT OF ABSENTEES....................................... 8
--------------------
2.11 - ACTION WITHOUT MEETING..................................... 9
----------------------
2.12 - PROXIES.................................................... 10
-------
ARTICLE III - DIRECTORS................................................. 11
---------
3.01 - POWERS.................................................... 11
------
3.02 - NUMBER OF DIRECTORS....................................... 14
-------------------
3.03 - ELECTION AND TERM OF OFFICE............................... 14
---------------------------
3.04 - REMOVAL................................................... 15
-------
3.05 - VACANCIES................................................. 15
---------
3.06 - MEETINGS BY TELEPHONE CONFERENCE.......................... 16
--------------------------------
3.07 - ACTION WITHOUT MEETING.................................... 16
----------------------
3.08 - ORGANIZATION MEETING...................................... 16
--------------------
3.09 - SPECIAL MEETINGS.......................................... 17
----------------
3.10 - ADJOURNMENT............................................... 17
-----------
3.11 - WAIVER OF NOTICE.......................................... 18
----------------
3.12 - QUORUM.................................................... 18
------
3.13 - APPROVAL OF LOANS TO OFFICERS............................. 19
-----------------------------
ARTICLE IV - OFFICERS................................................... 19
--------
4.01 - OFFICERS................................................... 19
--------
4.02 - ELECTION................................................... 20
--------
4.03 - REMOVAL AND RESIGNATION.................................... 20
-----------------------
4.04 - VACANCIES.................................................. 20
---------
4.05 - CHAIRMAN OF THE BOARD...................................... 21
---------------------
4.06 - PRESIDENT.................................................. 21
---------
4.07 - SECRETARY.................................................. 21
---------
4.08 - TREASURER.................................................. 22
---------
4.09 - SUBORDINATE OFFICERS....................................... 23
--------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE V - SHARES OF STOCK............................................. 24
---------------
5.01 - SHARE CERTIFICATES.......................................... 24
------------------
5.02 - TRANSFER OF SHARES.......................................... 24
------------------
5.03 - LOST OR DESTROYED CERTIFICATE............................... 25
-----------------------------
ARTICLE VI - MISCELLANEOUS.............................................. 25
-------------
6.01 - INDEMNITY OF DIRECTORS..................................... 25
----------------------
6.02 - SHAREHOLDER INSPECTION OF ARTICLES AND BYLAWS.............. 26
---------------------------------------------
6.03 - MAINTENANCE AND INSPECTION OF RECORDS OF SHAREHOLDERS...... 26
-----------------------------------------------------
6.04 - SHAREHOLDER INSPECTION OF CORPORATE RECORDS................ 27
-------------------------------------------
6.05 - INSPECTION BY DIRECTORS.................................... 28
-----------------------
6.06 - REPRESENTATION OF SHARES OF OTHER CORPORATIONS............. 28
----------------------------------------------
6.07 - ANNUAL REPORT.............................................. 29
-------------
6.08 - ANNUAL STATEMENT OF GENERAL INFORMATION.................... 29
---------------------------------------
ARTICLE VII - AMENDMENTS TO BYLAWS...................................... 30
--------------------
7.01 - AMENDMENT BY SHAREHOLDERS.................................. 30
-------------------------
7.02 - AMENDMENT BY DIRECTORS..................................... 30
----------------------
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
TUT SYSTEMS, INC.
ARTICLE I - OFFICES
-------
1.01 - PRINCIPAL OFFICE
----------------
The principal executive and business office of the corporation is hereby
fixed and located in the County of Contra Costa, State of California or such
other location as the board of directors may determine.
1.02 - OTHER OFFICES
-------------
Branch or subordinate offices may at any time be established at any place
or places by the board of directors.
ARTICLE II - MEETINGS OF SHAREHOLDERS
------------------------
2.01 - PLACE OF MEETINGS
-----------------
All annual and all other meetings of shareholders shall be held at the
principal executive office of the corporation, or at any other place within or
without the State of California which may be designated either by the board of
directors, or by the written consent of all shareholders entitled to vote
thereat, provided such shareholder consent is given either before or after the
meeting and filed with the secretary of the corporation.
2.02 - ANNUAL MEETINGS
---------------
<PAGE>
The annual meetings of shareholders shall be held on the first Thursday of
the fourth month following the end of each fiscal year at 10:00 a.m.; provided,
however, that should said day fall upon a legal holiday, then any such annual
meeting of shareholders shall be held at the same time and place on the next day
thereafter ensuing which is not a legal holiday. At such meetings, directors
shall be elected, reports of the affairs of the corporation shall be considered,
and any other business may be transacted which is within the powers of the
shareholders.
2.03 - SPECIAL MEETINGS
----------------
Special meetings of the shareholders, for any purpose or purposes
whatsoever, may be called at any time by any of (i) the president, (ii) the
board of directors, (iii) the chairman of the board, or (iv) one or more
shareholders holding shares in the aggregate entitled to cast not less than 10
percent of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, such person shall make a request therefor in writing,
specifying (i) the date and time of such meeting, which shall be not less than
35 nor more than 60 days after the receipt of the request, and (ii) the general
nature of the business proposed to be transacted at the meeting. Such request
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of
-2-
<PAGE>
the board, the president, any vice president or the secretary of the
corporation. The officer receiving the request shall cause notice to be given
within 20 days to the shareholders entitled to vote, in accordance with the
provisions of Sections 2.4 and 2.5, and the notice shall set forth that a
meeting will be held at the time requested by the person or persons calling the
meeting. If the notice is not given within such 20-day period, the person(s)
requesting the meeting may give the notice.
2.04 - NOTICE OF MEETINGS
------------------
All notices of meetings of shareholders, whether annual or special, shall
be sent or otherwise given not less than 10 nor more than 60 days before the
date of the meeting, except as provided in Section 2.03. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a special
meeting, the general nature of the business to be transacted, or (ii) in the
case of the annual meeting, those matters which the board of directors, at the
time of giving the notice, intends to present for action by the shareholders.
The notice of any meeting at which directors are to be elected shall include the
name of any nominee or nominees whom, at the time of the notice, management
intends to present for election. The notice shall also state the general nature
of the proposal if action is proposed to be taken at any meeting for approval of
any of the following: (i) a contract or transaction in which a director has a
direct or indirect financial interest;
-3-
<PAGE>
(ii) an amendment of the articles of incorporation; (iii) a reorganization of
the corporation; (iv) a voluntary dissolution of the corporation; or (v) a
distribution in dissolution other than in accordance with the rights of any
outstanding preferred shares. Notwithstanding the absence of specific notice
thereof, any such action may nevertheless be presented to the meeting and be
validly acted upon by the shareholders if approved by all shareholders entitled
to vote thereon, unless they sign waivers of notice specifying the general
nature of the proposal so approved.
2.05 - MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Notice of any shareholders' meeting shall be given either personally or by
first-class mail or telegraphic or written communication, charges prepaid,
addressed to the shareholder at the address of that shareholder appearing on the
books of the corporation or given by the shareholder to the corporation for the
purpose of notice. If no such address appears on the corporation's books or has
been so given, notice shall be deemed to have been given if published at least
once in a newspaper of general circulation in the county where that office is
located or in any manner permitted by law. Notice shall be deemed to have been
given at the time when delivered personally, deposited in the mail, delivered to
a common carrier for transmission to the recipient, actually transmitted by
electronic means to the recipient by the
-4-
<PAGE>
person giving the notice, or sent by other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting may be executed by the secretary, assistant secretary, or
any transfer agent of the corporation giving the notice, and filed and
maintained in the minute book of the corporation.
2.06 - ADJOURNED MEETINGS AND NOTICE THEREOF
-------------------------------------
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares which are represented at the meeting either in person or by proxy, but in
the absence of a quorum.
It shall not be necessary to give any notice of an adjournment or of the
business to be transacted at an adjourned meeting other than by announcement at
the meeting at which such adjournment is taken. However, when any shareholders'
meeting, either annual or special, is adjourned for more than 45 days, or if
after the adjournment a new record date is fixed for the adjourned meeting
notice of the adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting. At any adjourned meetings, the
corporation may transact any business that might have been transacted at the
regular meeting.
2.07 - RECORD DATE FOR SHAREHOLDERS OF RECORD
--------------------------------------
-5-
<PAGE>
For purposes of determining which shareholders are entitled to receive
notice of any meeting, to vote, or to give consent to corporate action without a
meeting, the board of directors may fix a record date in advance of such meeting
or corporate action which shall not be less than l0 nor more than 60 days before
any such meeting or any such action without a meeting. Only shareholders of
record at the close of business on the date so fixed are entitled to notice and
to vote or to give consent, as the case may be, notwithstanding any transfer of
any shares on the books of the corporation after the record date, except as
otherwise provided in the articles of incorporation, by agreement, or in the
California General Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to receive
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held; and
(b) The re cord date for determining shareholders entitled to give
consent to corporate action in writing without a meeting (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the board has been taken, shall
be at the
-6-
<PAGE>
close of business on the day on which the board adopts the resolution relating
to that action, or the 60th day before the date of such other action, whichever
is later.
2.08 - VOTING AT MEETINGS
------------------
Except as otherwise provided in the articles of incorporation and in the
case of cumulative voting for directors, each shareholder is entitled to one
vote per share. The shareholders' vote may be by voice vote or by ballot;
provided, however, that any election for directors must be by ballot if demanded
by any shareholder before the voting has begun. On any matter other than the
election of directors, any shareholder may vote part of the shares in favor of
the proposal and refrain from voting the remaining shares or vote them against
the proposal, but if the shareholder fails to specify the number of shares which
the shareholder is voting affirmatively, it will be conclusively presumed that
the shareholder's approving vote is with respect to all shares that the
shareholder is entitled to vote. The affirmative vote of a majority of the
shares represented and voting, provided such shares voting affirmatively also
constitutes a majority of the number of shares required for a quorum, shall be
the act of the shareholders, unless the vote of a greater number or voting by
classes is required by California General Corporation Law or by the articles of
incorporation.
-7-
<PAGE>
Every shareholder entitled to vote at any election for directors shall have
the right to cumulate his votes by (i) giving one candidate a number of votes
equal to the number of directors to be elected multiplied by the number of votes
to which his shares are entitled, or (ii) distributing such cumulated votes on
the same principle among as many candidates as he chooses; provided that the
name of such candidate has been placed in nomination prior to the voting and
that at least one shareholder has given notice at the meeting, prior to the
voting, of an intention to cumulate votes. In any election of directors, the
candidates receiving the highest number of votes, up to the number of directors
to be elected, shall be elected. Votes against a director or not cast shall have
no effect.
2.09 - QUORUM
------
The presence in person or by proxy of persons entitled to vote a majority
of the voting shares at any meeting shall constitute a quorum of the
shareholders for the transaction of business.
The shareholders present at a duly called or held meeting at which a quorum
is present may continue to do business until adjournment, notwithstanding the
withdrawal of one or more shareholders to leave less than a quorum, if any
action taken (other than adjournment) is approved by at least a majority of the
shares required to constitute a quorum.
2.10 - CONSENT OF ABSENTEES
--------------------
-8-
<PAGE>
The transactions of any meeting of shareholders, either annual or special,
however called and noticed and wherever held, shall be as valid as though made
at a meeting duly held after regular call and notice if a quorum is present
either in person or by proxy and if, either before or after the meeting, each of
the shareholders entitled to vote who was not present in person or by proxy
signs a written waiver of notice or a consent to the holding of such meeting or
an approval of the minutes thereof. The waiver of notice or consent need not
specify either the business to be transacted or the purpose of any annual or
special meeting of shareholders, unless the action taken or proposed to be taken
is for approval of any of those matters specified in Section 2.04. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Attendance at a meeting, in person or by proxy, shall also constitute a
waiver of notice of that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
has not been lawfully called or convened, and except that attendance at a
meeting is not a waiver of any right to object to the consideration of matters
required by law to be included in the notice of the meeting but not so included,
if that objection is expressly made at the meeting.
2.11 - ACTION WITHOUT MEETING
----------------------
-9-
<PAGE>
Except as may be limited by the articles of incorporation and except for
the election of directors, any action which may be taken by vote of the
shareholders at any annual or special meeting may be taken without a meeting and
without prior notice if a consent in writing setting forth the action so taken
is signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Directors may be elected by written consent without a meeting only if the
written consents of all outstanding shares entitled to vote are obtained, except
that a vacancy in the board (other than a vacancy created by removal of a
director) not filled by the board may be filled by the written consent of the
holders of a majority of the outstanding shares entitled to vote.
All such consents shall be filed and maintained in the corporate records.
Any shareholder (or the shareholder's proxyholders, or a transferee of the
shares or a personal representative of the shareholder or their respective
proxyholders) giving a written consent may revoke the consent only by a writing
received by the corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the secretary of the corporation. Such revocation is effective upon its receipt
by the secretary of the corporation.
-10-
<PAGE>
Unless the consents of all shareholders entitled to vote have been
solicited in writing:
(1) Notice of shareholder approval without a meeting by less than
unanimous written consent shall be given at least 10 calendar days before
the consummation of the action authorized by such approval, if the
corporate action concerns (i) a contract or transaction in which a director
has a direct or indirect financial interest under Section 310 of the
California Corporations Code, (ii) indemnification of agents of the
corporation, (iii) reorganization of the corporation, or (iv) a
distribution in dissolution other than in accordance with the rights of the
outstanding preferred shares; and
(2) Prompt notice shall be given of any other corporate action
approved by shareholders without a meeting by less than unanimous written
consent.
All such notices shall be given in the manner provided by Section 2.05.
2.12 - PROXIES
-------
Every person entitled to vote for directors or on any other matter shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
-11-
<PAGE>
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy that does not state that it is irrevocable shall continue
in full force and effect unless (i) revoked by the person executing it, before
the vote pursuant to that proxy, by a writing delivered to the corporation
stating that the proxy is revoked, or by attendance at the meeting and voting in
person by the person executing the proxy, or by a subsequent proxy executed by
the same person and presented at the meeting; or (ii) written notice of the
death or incapacity of the maker of that proxy is received by the corporation
before the vote pursuant to that proxy is counted; provided, however, that no
proxy shall be valid after the expiration of 11 months from the date of the
proxy, unless another term of longer or shorter duration is specified in the
proxy. The revocability of a proxy that states on its face that is irrevocable
shall be governed by the provisions of Sections 705(e) and 705(f) of the
Corporations Code of California.
ARTICLE III - DIRECTORS
---------
3.01 - POWERS
------
Except as reserved to the shareholders by law, the articles of
incorporation or these bylaws, all corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall be
controlled by, the board of
-12-
<PAGE>
directors. Without limiting the generality of the foregoing powers, the
directors shall have the following powers:
First: To conduct, manage and control the affairs and business of the
------
corporation and to make such rules and regulations therefor not inconsistent
with law or with the articles of incorporation or these bylaws, as they may deem
best.
Second: To select and remove the officers, agents and employees of the
-------
corporation, to prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or with these bylaws
and to fix their compensation.
Third: To change the principal executive and business office of the
------
corporation from one location to another as provided in Section 1.01; to fix and
locate from time to time one or more branch offices of the corporation within or
without the State of California, as provided in Section 1.02; to designate any
place within or without the State of California for the holding of any
shareholders' meeting or meetings except annual meetings; and to adopt, make and
use a corporate seal, to prescribe the forms of certificates of stock and to
alter the form of such seal and of such certificates from time to time as in
their judgment they may deem best, provided that such seal and such certificates
shall at all times comply with the provisions of law.
Fourth: To authorize the issue of shares of stock of the corporation from
-------
time to time, upon such terms as may be lawful, as
-13-
<PAGE>
dividends or in consideration of money paid, labor done or services actually
rendered to the corporation or for its benefit or in its formation or
reorganization, debts or securities canceled, or tangible or intangible property
actually received; but neither promissory notes of the purchaser, unless secured
by property other than the shares acquired or otherwise permitted by Section 408
of the General Corporation Law, nor future services shall constitute payment or
part payment for shares of the corporation.
Fifth: To borrow money and incur indebtedness for the purposes of the
------
corporation and to cause to be executed and delivered therefor, in the corporate
name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges,
hypothecations or other evidences of debt and securities therefor.
Sixth: To designate, by resolution adopted by a majority of the
------
authorized number of directors, one or more committees, each consisting of two
or more directors, to serve at the pleasure of the board. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of the committee. Any such committee
shall have all the authority of the board to the extent provided in the
resolution of the board or in the bylaws, except with respect to:
(a) The approval of any action for which, under the General
Corporation Law of California, also requires approval of the shareholders or
approval of the outstanding shares;
-14-
<PAGE>
(b) The filling of vacancies on the board or in any committee;
(c) The fixing of compensation of the directors for serving on the
board or on any committee;
(d) The amendment or repeal of bylaws or the adoption of new bylaws;
(e) The amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repeal-able;
(f) A distribution to the shareholders of the corporation, except at
a rate, in a periodic amount or within a price range set forth in the articles
or determined by the board; or
(g) The appointment of other committees of the board or the members
thereof.
Seventh: To declare dividends at such times and in such amounts as the
--------
condition of the affairs of the corporation may warrant.
Eighth: Generally to exercise all of the powers and to perform all of the
-------
acts and duties that from time to time may be permitted by law appertaining to
their office.
3.02 - NUMBER OF DIRECTORS
-------------------
The authorized number of directors of the corporation shall be not less
than five nor more than nine, with the exact number of
-15-
<PAGE>
authorized directors to be fixed within the foregoing limits by the board of
directors or by the shareholders.
3.03 - ELECTION AND TERM OF OFFICE
---------------------------
The directors shall be elected at each annual meeting of shareholders and
may be elected at any special meeting of shareholders held for that purpose.
Each director shall hold office until his successor is elected and qualified, or
until his earlier death, resignation, removal or ineligibility.
3.04 - REMOVAL
-------
A director may be removed for cause by (i) the board, when such director
has been convicted of a felony or declared incompetent by court order, or (ii)
the superior court, at the suit of at least 10% of the shareholders of any class
of shares having found that the director has either committed fraudulent or
dishonest acts, or has grossly abused his authority with reference to the
corporation.
A director may be removed without cause by a majority vote of all
outstanding shares, provided that (i) where cumulative voting is in effect, such
director may not be removed over the objection of the number of shares required
to elect him, and (ii) where the articles of incorporation provide for the
election of a director by the shareholders of a certain class or series of
shares, such
-16-
<PAGE>
director may be removed only by the majority vote of the outstanding shares of
such class or series.
Except as provided in this Section 3.04, and any reduction of the
authorized number of directors notwithstanding, a director may not be removed
prior to the expiration of such director's term of office.
3.05 - VACANCIES
---------
Vacancies in the board of directors may be filled by a majority of the
remaining directors, though less than a quorum, or by a sole remaining director.
A vacancy in the board of directors shall be deemed to exist (i) in case of the
death, resignation, ineligibility or removal of any director, (ii) if the
authorized number of directors is increased, or (iii) if the shareholders fail,
at any annual or special meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. In the event that such a
vacancy is created by an event other than removal, any election by written
consent of the shareholders must be signed by holders of a majority of the
outstanding shares. If the board of directors accepts the resignation of a
director tendered to take effect at a future time, the board or the
-17-
<PAGE>
shareholders shall have the power to elect a successor to take office when the
resignation is to become effective.
3.06 - MEETINGS BY TELEPHONE CONFERENCE
--------------------------------
Members of the board may participate in a meeting through use of conference
telephone or similar communication equipment, so long as all members
participating in such meeting can hear one another.
3.07 - ACTION WITHOUT MEETING
----------------------
Any action required or permitted to be taken by the board of directors or
any committee thereof may be taken without a meeting if each member of the board
consents in writing to such action. Such consents shall be filed with the
minutes of the meetings of the board.
3.08 - ORGANIZATION MEETING
--------------------
Immediately following each annual meeting of shareholders, the board of
directors shall hold a regular meeting for the purpose of organization, election
of officers and the transaction of other business. Notice of such meeting is
hereby dispensed with.
3.09 - SPECIAL MEETINGS
----------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by (i) the chairman of the board, (ii) the president,
(iii) any vice president, (iv) the secretary, or (v) any two directors.
Written notice of the time and place of special meetings shall be delivered
personally to the directors or sent to each director
-18-
<PAGE>
by mail or by other form of written communication, charges prepaid, addressed to
him at his address as it appears upon the records of the corporation or, if it
is not so shown or is not readily ascertainable, at the place in which the
meetings of directors are regularly held. In case such notice is mailed, it
shall be deposited in the United States mail at least four days prior to the
date of the meeting. In case such notice is delivered personally or
telegraphed, it shall be so delivered or deposited with the telegraph company at
least 48 hours prior to the time of the meeting.
3.10 - ADJOURNMENT
-----------
A majority of the directors present, whether or not a quorum is present,
may adjourn any directors' meeting to another time and place. If a meeting is
adjourned for more than 24 hours, notice of any adjournment to another time or
place shall be given in the manner specified in Section 3.09 prior to the time
of the adjourned meeting to the directors who were not present at the time of
adjournment.
3.11 - WAIVER OF NOTICE
----------------
The transactions at any meeting of the board of directors, however called
and noticed, or wherever held, shall be as valid as though such transactions had
occurred at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present
-19-
<PAGE>
signs a written waiver of notice of or consent to holding the meeting or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
3.12 - QUORUM
------
A majority of the authorized number of directors then holding office shall
constitute a quorum for the transaction of business. The act of the majority of
the directors at a meeting at which a quorum is present shall be the act of the
board of directors, unless a greater number is required by law, the articles of
incorporation or these bylaws. However, 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 such meeting. The provisions of this Section 3.12
shall apply to action taken by any committee from time to time designated by the
board of directors.
3.13 - APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may, upon the approval of the Board of Directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guarantees
provided that
-20-
<PAGE>
(i) no such loan to any one individual be in excess of $500,000 in the
aggregate; (ii) loans made in any one year may not exceed $1,000,000; (iii) all
such loans be approved by all outside directors (directors who are not directly
employed by the Company); (iv) the Board of Directors determines that such a
loan or guaranty or plan may reasonably be expected to benefit the corporation;
(v) the corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the California Corporations Code) on
the date of approval by the Board of Directors; and (vi) the approval of the
Board of Directors is by vote sufficient without counting the vote of any
interested Director or Directors.
ARTICLE IV - OFFICERS
--------
4.01 - OFFICERS
--------
The officers of the corporation shall be a president, a secretary, a
treasurer, and such other officers with such titles and duties as may be
appointed in accordance with the provisions of Section 4.09. Any number of
offices may be held by the same person. The president shall be the chief
executive officer and the treasurer shall be the chief financial officer.
4.02 - ELECTION
--------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 4.04 or
-21-
<PAGE>
4.09, shall be chosen annually by the board of directors; and each officer shall
hold his office until he has resigned or removed or is otherwise disqualified to
serve and his successor has been elected and qualified.
4.03 - REMOVAL AND RESIGNATION
-----------------------
Any officer may be removed, either with or without cause, by a majority of
the directors at the time in office, 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 board of
directors or to the president or to the secretary of the corporation. Any such
resignation shall take effect at the date of the receipt of such notice or any
later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
4.04 - VACANCIES
---------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to such office.
4.05 - CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if one has been appointed, shall, if present,
preside at all meetings of the board of directors and
-22-
<PAGE>
exercise and perform all such other powers and duties as may from time to time
be assigned to him by the board of directors or prescribed by these bylaws.
4.06 - PRESIDENT
---------
The president, subject to the board of directors, shall have general
supervision, direction and control of the business and of other officers and
employees of the corporation. He shall preside at all meetings of the
shareholders and, if there is no regular, appointed chairman of the board or if
such chairman is absent, at all meetings of the board of directors. He shall be
ex officio a member of all standing committees, including the executive
- ----------
committee, if any, and shall have general powers and duties of management,
together with such other powers and duties as may be prescribed by the board of
directors.
4.07 - SECRETARY
---------
The secretary shall keep, or cause to be kept, a book of minutes at the
principal executive and business office, or such other place as the board of
directors may order, of all meetings of directors and shareholders, with the
time and place of holding, whether regular or special and, if special, how
authorized, the notice thereof given, the names of those present at directors'
meetings, the number of shares present or represented at shareholders' meetings
and the proceedings thereof.
-23-
<PAGE>
The secretary shall keep, or cause to be kept, at the principal executive
and business office or at the office of the corporation's transfer agent, a
share register or a duplicate share register showing the names of the
shareholders and their addresses, the number and classes of shares held by each,
the number and the date of certificates issued for the same, 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 the meetings
of the shareholders and of the board of directors required by these bylaws or by
law to be given, shall keep the seal of the corporation in safe custody and
shall have such other powers and shall perform such other duties as may be
prescribed by the board of directors or the bylaws.
4.08 - TREASURER
---------
The chief financial officer shall be the treasurer. The treasurer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, surplus and shares.
The treasurer shall deposit all moneys and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall be responsible for the proper disbursement of
the funds of
-24-
<PAGE>
the corporation as may be ordered by the board of directors and shall render to
the president or directors, whenever they request it, an account of all of his
transactions as treasurer and of the financial condition of the corporation. The
treasurer shall prepare a proper annual budget of income and expenses for each
calendar year, revised quarterly, for approval of or revision by the board of
directors and shall be responsible for the handling of finances in connection
therewith. He shall have such other powers and shall perform such other duties
as may be prescribed by the board of directors.
4.09 - SUBORDINATE OFFICERS
--------------------
The board of directors may appoint such vice presidents, assistant
treasurers and assistant secretaries and other subordinate officers as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are provided in these
bylaws or as the board of directors may from time to time determine.
In the absence or disability of the president, treasurer or secretary, the
vice presidents, assistant treasurers and assistant secretaries, respectively,
in order of their rank as fixed by the board of directors or, if not ranked, the
subordinate officer designated by the board of directors shall perform all the
duties of such absent or disabled officer and, when so acting, shall have all
the powers of and be subject to all the restrictions upon such
-25-
<PAGE>
officer. Each subordinate officer shall have such other powers and shall perform
such other duties as from time to time may be prescribed for him by the board of
directors or these bylaws.
ARTICLE V - SHARES OF STOCK
---------------
5.01 - SHARE CERTIFICATES
------------------
Certificates representing shares of the capital stock of the corporation
shall be in such form as shall be approved by the board of directors, consistent
with the articles of incorporation and the laws of the State of California. A
certificate or certificates for shares of the capital stock of the corporation
shall be issued to each shareholder when such shares are fully paid, and the
board of directors may authorize the issuance of certificates or shares as
partly paid provided that these certificates shall state the amount of the
consideration to be paid for them and the amount paid. All such certificates
shall be signed by (i) the chairman or vice chairman of the board or the
president or a vice president, and (ii) by the treasurer or an assistant
---
financial officer or the secretary or any assistant secretary, certifying the
number of shares and the class or series of shares issued to the shareholder and
evidenced by such certificate. The corporation may issue, sell or transfer
fractional shares.
5.02 - TRANSFER OF SHARES
------------------
-26-
<PAGE>
Subject to the provisions of applicable securities and other laws and any
other valid contractual and other restrictions on transfer of shares, upon the
surrender to the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
5.03 - LOST OR DESTROYED CERTIFICATE
-----------------------------
The holder of any shares of stock of the corporation shall immediately
notify the corporation of any loss or destruction of the certificate therefor,
and the corporation may issue a new certificate in the place of any certificate
theretofore issued by it alleged to have been lost or destroyed, upon approval
of the board of directors. The board may, in its discretion, as a condition to
authorizing the issue of such new certificate, require the owner of the lost or
destroyed certificate, or his legal representative, to make proof satisfactory
to the corporation of the loss or destruction thereof and to give the
corporation a bond or other security, in such amount and with such surety or
sureties as the corporation may determine, as indemnity against any claim that
may be made against the corporation on account of any such certificate so
alleged to have been lost or destroyed.
-27-
<PAGE>
ARTICLE VI - MISCELLANEOUS
-------------
6.01 - INDEMNITY OF DIRECTORS
----------------------
The corporation shall, to the fullest extent permitted by the articles of
incorporation and the California General Corporation Law (and in excess of that
otherwise permitted by Section 317 of that law), indemnify each of its directors
and officers against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, including
proceedings brought by or on behalf of the corporation, arising by reason of the
fact any such person is or was a director or officer of the corporation and
shall have power to advance to each such director or officer expenses incurred
in defending any such proceeding to the fullest extent permitted by that law.
6.02 - SHAREHOLDER INSPECTION OF ARTICLES AND BYLAWS
---------------------------------------------
The corporation shall keep at its principal executive and business office
the original or a copy of the articles of incorporation and the bylaws and any
amendments thereto, certified by the secretary, which shall be open to
inspection by shareholders at all reasonable times during office hours.
6.03 - MAINTENANCE AND INSPECTION OF RECORDS OF SHAREHOLDERS
-----------------------------------------------------
The corporation shall keep at its principal executive and business office
or at the office of its transfer agent or registrar (if one has been appointed),
as determined by resolution of the board of directors, a record of its
shareholders, giving the names
-28-
<PAGE>
and addresses of all shareholders and the number and class of shares held by
each shareholder.
A shareholder or shareholders of the corporation holding at least 5% in
the aggregate of the outstanding voting shares of the corporation may (i)
inspect and copy the records of shareholders' names, addresses and
shareholdings, during usual business hours on five business days' prior written
demand on the corporation, and (ii) obtain from the transfer agent of the
corporation, on written demand and on the tender of such transfer agent's usual
charges for such list, a list of the names and addresses of the shareholders who
are entitled to vote for the election of directors, and their shareholdings, as
of the most recent record date for which that list has been compiled or as of a
date specified by the shareholder after the date of demand. This list shall be
made available to any such shareholder or shareholders by the transfer agent on
or before the later of five business days after the demand is received or the
date specified in the demand as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate. Any
inspection and copying under this Section may be made in person or
-29-
<PAGE>
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
6.04 - SHAREHOLDER INSPECTION OF CORPORATE RECORDS
-------------------------------------------
The accounting books and records and minutes of proceedings of the
shareholders and the board of directors and any committee or committees of the
board of directors shall be kept at such place or places designated by the board
of directors or, in the absence of such designation, at the principal executive
and business office of the corporation. The minutes shall be kept in written
form, and the accounting books and records shall be kept either in written form
or in any other form capable of being converted into written form. The minutes
and accounting books and records shall be open to inspection upon the written
demand of any shareholder or holder of a voting trust certificate, at any
reasonable time during usual business hours, for a purpose reasonably related to
the holder's interests as a shareholder or as the holder of a voting trust
certificate. The inspection may be made in person or by an agent or attorney and
shall include the right to copy and make extracts. These rights of inspection
shall extend to the records of each subsidiary corporation of the corporation.
6.05 - INSPECTION BY DIRECTORS
-----------------------
Every director shall have the absolute right at any reasonable time to
inspect all books, records and documents of every kind and the physical
properties of the corporation and each of its
-30-
<PAGE>
subsidiary corporations. This inspection by a director may be made in person or
by an agent or attorney, and the right of inspection includes the right to copy
and make extracts of documents.
6.06 - REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The president or, in the event of his absence or inability to serve, any
vice president and the secretary or assistant secretary of this corporation are
authorized to vote, represent and exercise, on behalf of this corporation, all
rights incidental to any and all shares of any other corporation standing in the
name of this corporation. The authority herein granted to such officers to vote
or represent on behalf of this corporation any and all shares held by this
corporation in any other corporation may be exercised either by such officers in
person or by any person authorized to do so by proxy or power of attorney duly
executed by such officers.
6.07 - ANNUAL REPORT
-------------
The annual report to shareholders referred to in Section 1501(a) of the
California Corporations Code is expressly waived subject to the limitations
thereof, but the board of directors of the corporation may cause to be sent to
the shareholders, not later than 120 days after the close of the fiscal or
calendar year, an annual report in such form as may be deemed appropriate by the
board of directors.
6.08 - ANNUAL STATEMENT OF GENERAL INFORMATION
---------------------------------------
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<PAGE>
Within 90 days of incorporation and annually thereafter, the corporation
shall file with the Secretary of State, on the prescribed form, a statement
setting forth the authorized number of directors, the names and complete
business or residence addresses of all incumbent directors, the names and
complete business or residence addresses of the chief executive officer,
secretary and chief financial officer, the street address of its principal
executive office or principal business office in this state, and the general
type of business constituting the principal business activity of the
corporation, together with a designation of the agent of the corporation for the
purpose of service of process, all in compliance with section 1502 of the
California Corporations Code.
ARTICLE VII - AMENDMENTS TO BYLAWS
--------------------
7.01 - AMENDMENT BY SHAREHOLDERS
-------------------------
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of the shareholders entitled to exercise a majority of
the voting power of the corporation, except as otherwise provided by either
these bylaws or the articles of the corporation; provided, however, that if the
articles of incorporation set forth the number of authorized directors of the
corporation, the authorized number of directors
-32-
<PAGE>
may be changed only by an amendment of the articles of incorporation.
7.02 - AMENDMENT BY DIRECTORS
----------------------
Subject to the rights of the shareholders as provided in Section 7.01 to
adopt, amend or repeal bylaws, bylaws may be adopted, amended, or repealed by
the board of directors; provided, however, that the board of directors may adopt
a bylaw or amendment of a bylaw changing the authorized number of directors only
for the purpose of fixing the exact number of directors within the limits
specified in the articles of incorporation or in Section 3.02 of these bylaws.
-33-
<PAGE>
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected qualified and acting Secretary of
Tut Systems, Inc., a California corporation, does hereby certify that the
foregoing Amended and Restated Bylaws, comprising thirty (30) pages, are the
Amended and Restated Bylaws of such corporation, as duly adopted by the
unanimous vote of the Board of Directors and majority vote of the Shareholders
at a meeting duly called and held on the 20th day of June, 1995, at which a
quorum was at all times present acting.
Dated at Pleasant Hill, California, this 20th day of June, 1995.
/s/ Matthew Taylor
__________________________________
Matthew Taylor, Secretary
-34-
<PAGE>
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED BYLAWS OF
TUT SYSTEMS, INC.
Article III, Section 3.02 of the Amended and Restated Bylaws of Tut
Systems, Inc. (the "Company") was amended, effective May 20, 1998 by the
shareholders of the Company in order to conform the Bylaws to the Company's
Articles of Incorporation. Article III, Section 3.02 was amended to provide in
its entirety as follows:
"3.02 - NUMBER OF DIRECTORS
-------------------
Unless otherwise provided in the corporation's Articles of
Incorporation, the authorized number of directors of the corporation shall
be not less than five (5) nor more than nine (9), with the exact number of
authorized directors to be fixed within the foregoing limits by the board
of directors or by the shareholders."
This Certificate of Amendment of Amendment and Restated Bylaws shall be
effective as of this 20th day May, 1998.
/s/ Matthew Taylor
__________________________________
Matthew Taylor, Secretary
<PAGE>
EXHIBIT 3.5
BYLAWS
OF
TUT SYSTEMS, INC.
(a Delaware 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 VOTING........................................................ 3
2.9 WAIVER OF NOTICE.............................................. 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING........................................... 3
2.11 RECORD DATE FOR STOCKHOLDER NOTICE;
VOTING; GIVING CONSENTS..................................... 4
2.12 PROXIES....................................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 5
2.14 NOMINATIONS AND PROPOSALS..................................... 5
ARTICLE III DIRECTORS..................................................... 6
3.1 POWERS........................................................ 6
3.2 NUMBER OF DIRECTORS........................................... 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS....... 7
3.4 RESIGNATION AND VACANCIES..................................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 8
3.6 FIRST MEETINGS................................................ 8
3.7 REGULAR MEETINGS.............................................. 8
3.8 SPECIAL MEETINGS; NOTICE...................................... 9
3.9 QUORUM........................................................ 9
3.10 WAIVER OF NOTICE.............................................. 9
3.11 ADJOURNED MEETING; NOTICE..................................... 10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 10
3.13 FEES AND COMPENSATION OF DIRECTORS............................ 10
3.14 APPROVAL OF LOANS TO OFFICERS................................. 10
3.15 REMOVAL OF DIRECTORS.......................................... 10
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IV COMMITTEES..................................................... 11
4.1 COMMITTEES OF DIRECTORS........................................ 11
4.2 COMMITTEE MINUTES.............................................. 11
4.3 MEETINGS AND ACTION OF COMMITTEES.............................. 11
ARTICLE V OFFICERS....................................................... 12
5.1 OFFICERS....................................................... 12
5.2 ELECTION OF OFFICERS........................................... 12
5.3 SUBORDINATE OFFICERS........................................... 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS............................ 12
5.5 VACANCIES IN OFFICES........................................... 13
5.6 CHAIRMAN OF THE BOARD.......................................... 13
5.7 PRESIDENT...................................................... 13
5.8 VICE PRESIDENT................................................. 13
5.9 SECRETARY...................................................... 13
5.10 TREASURER...................................................... 14
5.11 ASSISTANT SECRETARY............................................ 14
5.12 ASSISTANT TREASURER............................................ 14
5.13 AUTHORITY AND DUTIES OF OFFICERS............................... 14
ARTICLE VI INDEMNITY...................................................... 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................... 15
6.2 INDEMNIFICATION OF OTHERS...................................... 15
6.3 INSURANCE...................................................... 15
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............................... 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................. 17
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII GENERAL MATTERS................................................ 17
8.1 CHECKS........................................................... 17
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS................. 17
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................... 17
8.4 SPECIAL DESIGNATION ON CERTIFICATES.............................. 18
8.5 LOST CERTIFICATES................................................ 18
8.6 CONSTRUCTION; DEFINITIONS........................................ 19
8.7 DIVIDENDS........................................................ 19
8.8 FISCAL YEAR...................................................... 19
8.9 SEAL............................................................. 19
8.10 TRANSFER OF STOCK................................................ 19
8.11 STOCK TRANSFER AGREEMENTS........................................ 19
8.12 REGISTERED STOCKHOLDERS.......................................... 20
ARTICLE IX AMENDMENTS....................................................... 20
ARTICLE X DISSOLUTION...................................................... 20
ARTICLE XI CUSTODIAN........................................................ 21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES...................... 21
11.2 DUTIES OF CUSTODIAN.............................................. 21
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
TUT SYSTEMS, INC.
-----------------
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The
name of its registered agent at such address is The Corporation Trust 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 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.
2.3 SPECIAL MEETING
---------------
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.
<PAGE>
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 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-
<PAGE>
2.8 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).
2.9 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 stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter 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.
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.
In the event of the delivery, in the manner provided hereby, to the
corporation of the requisite written consent or consents to take corporate
action and/or any related revocation or revocations, the corporation may engage
independent inspectors of elections for the purpose of performing promptly a
ministerial review of the validity of the consents and revocations. For the
purpose of permitting the inspectors to perform such review, in the event such
inspectors are appointed, no action by written consent without a meeting shall
be effective until such date as such appointed independent inspectors certify to
the corporation that the consents delivered to the corporation in accordance
-3-
<PAGE>
herewith represent at least the minimum number of votes that would be necessary
to take the corporate action. Nothing contained in these Bylaws shall in any
way be construed to suggest or imply that the board of directors or any
stockholder shall not be entitled to contest the validity of any consent or
revocation thereof, whether before or after any certification by any independent
inspectors, or to take any other action (including, without limitation, the
commencement, prosecution or defense of any litigation with respect thereto, and
the seeking of injunctive relief in such litigation).
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated written consent received in accordance herewith, a written
consent or consents signed by a sufficient number of holders to take such action
are delivered to the corporation in the manner prescribed herein.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
(a) Actions other than Written Consent. For the purpose of
----------------------------------
determining 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 the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of stock,
or other lawful purpose (other than the expression of consent to corporate
action in writing without a meeting) the directors may fix, in advance, a record
date, which, in the case of a meeting of stockholders, shall not be more than 60
days nor less than 10 days before the date of such meeting. If no record date is
fixed, 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
and the record date for determining stockholders for any other purpose pursuant
to this Section 2.11(a) 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 any 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.
(b) Action by Written Consent. In order that the corporation may
-------------------------
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors. Any stockholder of record seeking to have
the stockholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the board of directors to fix a record
date. The board of directors may, at any time within ten (10) days after the
date on which such a request is received, adopt a resolution fixing the record
date (unless a record date has previously been fixed by the first sentence of
this Section 2.11(b)). If no record date has been fixed by the board of
directors pursuant to the first sentence of this Section 2.11(b) or otherwise
within ten (10) days of the date on which such a request is received, the record
date for determining stockholders entitled to consent to
-4-
<PAGE>
corporate action in writing without a meeting, when no prior action by the board
of directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in Delaware,
its principal place of business, or to any officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the board of directors
and prior action by the board of directors is required by applicable law, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the date on
which the board of directors adopts the resolution taking such prior action.
2.12 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 him 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(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.14 NOMINATIONS AND PROPOSALS
-------------------------
Nominations of persons for election to the board of directors of the
corporation and the proposal of business to be considered by the stockholders
may be made at any meeting of stockholders only (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the corporation who was a stockholder of
record at the time of giving of notice provided for in these bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.14.
-5-
<PAGE>
For nominations or other business to be properly brought before a
stockholders meeting by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice
shall be delivered to the secretary at the principal executive offices of the
corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the meeting; provided,
however, that in the event that less than 65 days notice of the meeting is given
to stockholders, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. In no event shall the public
announcement of an adjournment of a stockholders meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) 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 in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder
(or any successor thereto) (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, 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 (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (I) the name and address of such stockholder,
as they appear on the corporation's books, and of such beneficial owner, and
(ii) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
Notwithstanding any provision herein to the contrary, no business shall be
conducted at a stockholders meeting except in accordance with the procedures set
forth in this Section 2.14.
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.
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<PAGE>
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be nine (9). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
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 the certificate of incorporation and 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 successor is elected and qualified or until his 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 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:
(a) 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.
(b) 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.
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<PAGE>
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 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 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>
3.8 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 (2) 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.
3.9 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.
3.10 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 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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<PAGE>
3.11 ADJOURNED MEETING; NOTICE
-------------------------
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.
3.12 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.
3.13 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.
3.14 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 contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 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.
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.
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<PAGE>
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 he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. 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 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), (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 Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are
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<PAGE>
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 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 president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, 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 ELECTION 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 chosen 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 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
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.
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5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
--------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at 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 resolu-
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tion 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 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 TREASURER
---------
The treasurer 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 treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may be
ordered by the board of directors, shall render to the president and directors,
whenever they request it, an account of all of his transactions as treasurer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
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5.13 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
INDEMNITY
---------
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 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 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 and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the
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power to indemnify him against such liability under the provisions of the
General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office 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.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
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 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
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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.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority 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 such person
having the authority.
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 the 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
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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 president or vice-president, and by the treasurer
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 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.
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 theretofore 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 his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made
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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
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
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
----
This corporation may have a corporate seal, which may be adopted or altered
at the pleasure of the board of directors, 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
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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 original or other 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.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103
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of the General Corporation Law of Delaware. Upon such consent's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved. If the consent is signed by an
attorney, then the original power of attorney or a photocopy thereof shall be
attached to and filed with the consent. The consent filed with the Secretary of
State shall have attached to it the affidavit of the secretary or some other
officer of the corporation stating that the consent has been signed by or on
behalf of all the stockholders entitled to vote on a dissolution; in addition,
there shall be attached to the consent a certification by the secretary or some
other officer of the corporation setting forth the names and residences of the
directors and officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(a) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(b) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(c) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
TUT SYSTEMS, INC.
(a Delaware corporation)
Adoption by Incorporation
-------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Tut Systems, Inc. hereby adopts the foregoing bylaws,
comprising twenty-two pages, as the Bylaws of the corporation.
Executed this ___ day of July, 1998.
_________________________________
Matt Taylor, Secretary
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<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
July 31, 1998
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on July 31, 1998, (as such may be amended
or supplemented, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933 , as amended, of 2,875,000
shares of Common Stock of Tut Systems, Inc. (the "Shares"). The Shares,
which include up to 375,000 shares of Common Stock issuable pursuant to an
over-allotment option granted to the underwriters, are to be sold to the
underwriters as described in such Registration Statement for the sale to the
public or issued to the Representatives of the underwriters. As your counsel
in connection with this transaction, we have examined the proceedings proposed
to be taken in connection with said sale and issuance of the Shares.
It is our opinion that, upon approval by the pricing committee duly
authorized by the Company's Board of Directors, the Shares when issued and
sold in the manner referred to in the Registration Statement will be legally
and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name wherever
appearing in the Registration Statement, including the prospectus constituting
a part hereof, and any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.1
TUT SYSTEMS, INC.
1992 STOCK PLAN, AS AMENDED
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory 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, as amended, 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 any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Tut Systems, Inc., a California corporation.
-------
(g) "Consultant" means any person engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of the employment relationship by the Company or any
Subsidiary. 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 Board, 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
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<PAGE>
Company policy adopted from time to time; or (iv) in the case of transfers
between locations of the Company or between the Company, its Subsidiaries or its
successor.
(i) "Employee" means any person, including officers and directors,
--------
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 to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market System 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 or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination) as reported in the Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market System 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 and low asked prices for the Common Stock; 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.
(l) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(p) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(q) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
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<PAGE>
(r) "Plan" means this 1992 Stock Plan.
----
(s) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 below.
(t) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(u) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to the Plan or the right to receive a bonus of Common Stock for past
services.
(v) "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 13 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 5,750,000 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, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Administration With Respect to Directors and Officers.
-----------------------------------------------------
With respect to grants of Options or Stock Purchase Rights to Employees who are
also officers or directors of the Company, the Plan shall be administered by (A)
the Board if the Board may administer the Plan in compliance with Rule 16b-3
promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with
respect to a plan intended to qualify thereunder as a discretionary plan, or (B)
a Committee designated by the Board to administer the Plan, which Committee
shall be constituted in such a manner as to permit the Plan to comply with Rule
16b-3 with respect to a plan intended to qualify thereunder as a discretionary
plan. Once appointed, 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 the 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 the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan.
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<PAGE>
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3, the
------------------------------
Plan may be administered by different bodies with respect to directors, non-
director officers and Employees who are neither directors nor officers.
(iii) Administration With Respect to Consultants and Other Employees.
--------------------------------------------------------------
With respect to grants of Options or Stock Purchase Rights to Employees or
Consultants who are neither directors nor officers of the Company, the Plan
shall be administered by (A) the Board or (B) a Committee designated by the
Board, which Committee shall be constituted in such a manner as to satisfy the
legal requirements relating to the administration of incentive stock option
plans, if any, of California corporate and securities laws and of the Code (the
"Applicable Laws"). Once appointed, 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 the 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
the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, 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(k) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(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 (including, but not
limited to, the share price and any restriction or limitation of any Option or
other award and/or the shares of Common Stock relating thereto, based in each
case on such factors as the Administrator shall determine, in its sole
discretion);
(vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(f) instead of Common Stock;
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<PAGE>
(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
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights.
(c) Effect of Committee's Decision. All decisions, determinations
------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written 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 the 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.
(c) For purposes of 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 shall be determined as of the time the Option with respect
to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's right
to terminate his 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
shareholders 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 in the case of an Incentive Stock
Option or a Nonstatutory Stock Option, 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. However, in the case of an Incentive Stock Option granted
to an Optionee who, at the time the Incentive Stock Option is granted, owns
stock
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<PAGE>
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any 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 granted to any
person, the per Share exercise price shall be no less than 85% of the Fair
Market Value per Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (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 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 said
Option shall be exercised, (5) 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, (6) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) delivery of an irrevocable subscription
agreement for the Shares which irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (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 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
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<PAGE>
reasonably expected to benefit the Company (Section 315(b) of the California
General Corporation law).
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
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, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(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 shareholder shall exist with respect to the Optioned Stock,
notwithstanding 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 13 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 Employment. In the event of termination of an
-------------------------
Optionee's consulting relationship or Continuous Status as an Employee with the
Company (as the case may be), such Optionee may, but only within ninety (90)
days (or such other period of time of 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 and not
exceeding ninety (90) days) 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 Option to the extent that Optionee was 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 such termination, or if
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
----------------------
Section 9(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of his disability,
Optionee may, but only within twelve (12) months from the
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<PAGE>
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.
In the event that the disability for which the Optionee is terminated is not a
total and permanent disability (as defined in Section 22(e)(3) of the Code), the
Incentive Stock Option at issue will be treated as a Nonstatutory Stock Option
on and after the ninety-first (91) day after 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.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised, at any time within twelve (12) months 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 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 the Optionee was entitled to exercise the
Option at the date of death. 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.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. 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 and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
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 (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a stock purchase agreement or
-8-
<PAGE>
stock bonus agreement in the form determined by the Administrator. Shares
purchased pursuant to the grant of a Stock Purchase Right shall be referred to
herein as "Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the stock purchase agreement or stock bonus 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 stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine but in no event shall such repurchase option lapse
at a rate less favorable to the holder than 20% per year.
(c) Other Provisions. The stock purchase agreement or stock bonus
----------------
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 stock purchase agreements or stock
bonus agreements need not be the same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
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 13
of the Plan.
12. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the Stock Purchase Right,
if any, that number of Shares having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
-9-
<PAGE>
(c) all elections shall be subject to the consent or disapproval of
the Administrator; and
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by an Optionee
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 Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
13. Adjustments Upon Changes in Capitalization or Merger. Subject to any
----------------------------------------------------
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, 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, 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.
In the event of the proposed dissolution or liquidation of the
Company, the Administrator 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 will terminate immediately prior to the consummation of
such proposed action.
In the event of a merger of the Company with or into another corporation,
the 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. If, in such event, the Option or Stock
Purchase Right is not assumed or substituted, the Option or Stock Purchase Right
shall terminate as of the date of the closing of the merger. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger, the option or right confers the right to purchase, for
each Share of Optioned Stock subject to the Option or Stock
-10-
<PAGE>
Purchase Right immediately prior to the merger, the consideration (whether
stock, cash, or other securities or property) received in the merger by holders
of Common Stock for each Share held on the effective date of the transaction
(and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger 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 the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASDAQ or an established stock exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted 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.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, 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.
-11-
<PAGE>
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 relevant provisions of law.
17. 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.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Board shall approve from time to time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
20. Information to Optionees and Purchasers. The Company shall provide
---------------------------------------
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, copies of all annual reports and other information which are
provided to all shareholders of the Company. The Company shall not be required
to provide such information if the issuance of Options or Stock Purchase Rights
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information.
-12-
<PAGE>
TUT SYSTEMS, INC.
NOTICE OF STOCK OPTION GRANT
_______________________
_______________________
_______________________
You have been granted an option to purchase Common Stock of Tut Systems,
Inc. (the "Company") as follows:
Grant Number __________________
Date of Grant __________________
Option Price Per Share $
------------------
Total Number of Shares Granted __________________
Total Price of Shares Granted __________________
Type of Option: X Incentive Stock Option
---
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Exercise Schedule:
-----------------
This Option may be exercised, in whole or in part, in accordance with
the Vesting Schedule set out below.
* Vesting Schedule:
----------------
Date of Vesting Number of Shares
--------------- ----------------
Termination Period:
------------------
_____________________
* Vesting must occur at a rate of no less than 20% per year.
-13-
<PAGE>
Option may be exercised for 30 days after termination of employment or
consulting relationship except as set out in Sections 6, 7 and 8 of the Stock
Option Agreement (but in no event later than the Expiration Date).
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 1992 Stock Plan and the Incentive/Nonstatutory Stock
Option Agreement, all of which are attached and made a part of this document.
OPTIONEE: TUT SYSTEMS, INC.
________________________________ By:_______________________________
Signature
________________________________ Title:____________________________
Print Name
-14-
<PAGE>
TUT SYSTEMS, INC.
STOCK OPTION AGREEMENT
1. Grant of Option. Tut Systems, Inc., a California corporation (the
---------------
"Company"), hereby grants to the Optionee named in the Notice of Grant (the
"Optionee"), an option (the "Option") to purchase a total number of shares of
Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "Exercise Price") subject
to the terms, definitions and provisions of the 1992 Stock Plan, as amended (the
"Plan") adopted by the Company, which is incorporated herein by reference.
Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Option.
If designated an Incentive Stock Option, this Option is intended to
qualify as an Incentive Stock Option as defined in Section 422 of the Code.
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Exercise Schedule set out in the Notice of Grant and with
the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) This Option may not be exercised for a fraction of a
share.
(b) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitation contained in subsection
2(i)(c).
(c) In no event may this Option be exercised after the date
of expiration of the term of this Option as set forth in the Notice of Grant.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice (in the form attached as Exhibit 1) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
3. Method of Payment. Payment of the Exercise Price shall be made by cash
-----------------
or check.
4. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation. As a condition to the
exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
5. Termination of Relationship. In the event of termination of Optionee's
---------------------------
consulting relationship or Continuous Status as an Employee, Optionee may, to
the extent otherwise so entitled at the date of such termination (the
"Termination Date"), exercise this Option during the Termination Period set out
in the Notice of Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified herein, the Option shall terminate.
6. Disability of Optionee. Notwithstanding the provisions of Section 5
----------------------
above, in the event of termination of Optionee's Continuous Status as an
Employee as a result of his disability, Optionee may, but only within twelve
(12) months from the date of termination of employment (but in no event later
than the date of expiration of the term of this Option as set forth in Section
10 below), exercise the Option to the extent otherwise so entitled at the date
of such termination. In the event that the disability for which the Optionee is
terminated is not a total and permanent disability (as defined in Section
22(e)(3) of the Code), the Incentive Stock Option at issue will automatically be
treated as a Nonstatutory Stock Option on and after the ninety-first (91) day
after 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 otherwise so entitled) within the time specified
herein, the Option shall terminate.
7. Death of Optionee. In the event of the death of Optionee, the Option
-----------------
may be exercised at any time within twelve (12) months following the date of
death (but in no event later than the date of expiration of the term of this
Option as set forth in Section 9 below), 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 the Optionee could exercise the Option at the date of death.
-2-
<PAGE>
8. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
9. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 8 of the Plan regarding Options designated as Incentive Stock Options
granted to more than ten percent (10%) shareholders shall apply to this Option.
10. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal and California tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(i) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability or California income tax liability
upon the exercise of the Option, although the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(ii) Exercise of Nonstatutory Stock Option. If this Option does not
-------------------------------------
qualify as an ISO, there may be a regular federal income tax liability and a
California income tax liability upon the exercise of the Option. 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
Shares on the date of exercise over the Exercise Price. If Optionee is an
employee, the Company will be required to withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities an amount
equal to a percentage of this compensation income at the time of exercise.
(iii) Disposition of Shares. In the case of an NSO, if Shares are held for
---------------------
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and California income tax
purposes. In the case of an ISO, if Shares transferred pursuant to the Option
are held for at least one year after exercise and are disposed of at least two
years after the Date of Grant, any gain realized on disposition of the Shares
will also be treated as long-term capital gain for federal and California income
tax purposes. If Shares purchased under an ISO are disposed of within such one-
year period or within two years after the Date of Grant, any gain realized on
such disposition will be treated as compensation income (taxable at ordinary
income rates) to the extent of
-3-
<PAGE>
the excess, if any, of the fair market value of the Shares on the date of
exercise over the Exercise Price.
(iv) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after transfer of such Shares to the Optionee upon exercise of the ISO, the
Optionee shall immediately notify the Company in writing of such disposition.
Optionee agrees that Optionee may be subject to income tax withholding by the
Company on the compensation income recognized by the Optionee from the early
disposition by payment in cash or out of the current earnings paid to the
Optionee.
11. Right of First Refusal.
----------------------
(i) Company's Right of First Refusal. The Company shall have a
--------------------------------
right of first refusal (the "Right of First Refusal") on the terms set forth in
this Section 11 to purchase Shares which the Optionee proposes to sell, assign,
transfer or otherwise dispose of.
(ii) Definitions. As used in this Section 11, any sale, assignment,
-----------
transfer or other disposition of the Company's Shares by the Optionee is
referred to as a "Transfer"; any Shares of the Company which the Optionee
proposes to transfer are referred to as "Transfer Stock"; and the person to whom
the Optionee proposes to Transfer any Shares is referred to as a "Transferee".
(iii) Notice. In the event the Optionee proposes to Transfer any Shares,
------
the Optionee shall deliver a "Notice of Proposed Transfer" to the Company. This
Notice of Proposed Transfer shall set forth (i) the Optionee's bona fide
intention to Transfer the Shares, (ii) the number of Shares the Optionee
proposes to Transfer, (iii) the price and material terms and conditions on which
the Optionee proposes to Transfer such Shares, and (iv) the name of the proposed
Transferee.
(iv) Election of Right of First Refusal.
----------------------------------
(a) The Company shall have the assignable Right of First
Refusal to purchase all shares of Transfer Stock. In order to elect its Right of
First Refusal hereunder, the Company shall deliver a written Company Notice of
Election to the Optionee within fifteen (15) days after delivery to the Company
of the Notice of Proposed Transfer. The Company Notice of Election shall specify
the number of Shares of Transfer Stock that the Company elects to purchase. The
Company shall pay for such shares of Transfer Stock within thirty (30) days
after delivery to the Company of the Notice of Proposed Transfer.
-4-
<PAGE>
(b) In the event the Company declines to exercise its Right
of First Refusal as to some or all of the shares of Transfer Stock, the Company
may assign its rights hereunder to an assignee of its choice. Any purchase made
by such assignee shall be made within forth-five (45) days after delivery to the
Company of the Notice of Proposed Transfer.
(c) All shares of Transfer Stock must be purchased for the
price as is specified in the Notice of Proposed Transfer. If the terms of
payment set forth in the Notice of Proposed Transfer provide that the Shares are
to be Transferred for consideration other than cash, then the Company shall pay
the fair market value for the Shares of Transfer Stock to be purchased,
determined as provided in Section 11 hereof. At the option of the Company or its
assignee, payment may be made in cash, by cancellation of any outstanding
indebtedness owing by the Optionee to the Company or such assignee, or by a
combination thereof.
(v) Determination of Fair Market Value. The determination of fair
----------------------------------
market value of any shares of Transfer Stock purchased by the Company shall be
determined by the Board of Directors of the Company in good faith.
(vi) Permitted Transfers. Any Transfer Stock which is not purchased
-------------------
pursuant to the Right of First Refusal may be Transferred by the Optionee to any
person named in the Notice of Proposed Transfer. Such Transfer Stock must be
sold at the price specified in the Notice of Proposed Transfer, and upon other
terms and conditions not materially different than those specified in the Notice
of Proposed Transfer. Any Transfer permitted under this Section 11 must be
consummated within ninety (90) days after the date of delivery of the Notice of
Proposed Transfer to the Company and the Purchasers.
(vii) Exempt Transfers. The provisions of this Agreement shall not apply
----------------
to a Transfer of shares of Transfer Stock by the Optionee to its estate, to
ancestors, descendants or spouse, or any custodian or trustee for the account of
the Optionee or its ancestors, descendants or spouse; provided that in each such
case any such Transferee shall receive and hold the Transfer Stock subject to
the provisions of this Agreement and there shall be no further Transfer of such
Shares unless in accordance herewith.
(viii) No Transfer on Corporate Books. The Company shall not be required
------------------------------
(i) to transfer on its books any Shares which shall have been sold or
transferred in violation of any of the provisions of this Agreement, or (ii) to
treat as owner of such Shares or to accord the right to vote as such owner or to
pay dividends to any transferee to whom such Shares shall have been so
transferred.
(ix) Termination. The Rights of First Refusal under this Section 11
-----------
shall not apply to and shall terminate immediately before the Company's Initial
Public Registration.
-5-
<PAGE>
EXHIBIT 1
---------
EXERCISE NOTICE
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
--------
_________ shares of the Common Stock (the "Shares") of Tut Systems, Inc. (the
------
"Company") under and pursuant to the Company's 1992 Stock Plan, as amended (the
- --------
"Plan") and the [ ] Incentive [ ] Nonqualified Stock Option Agreement dated
----
________ (the "Option Agreement").
----------------
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions. Optionee represents that
Optionee is purchasing the Shares for Optionee's own account for investment and
not with a view to, or for sale in connection with, a distribution of any of
such Shares.
3. Compliance with Securities Laws. Optionee understands and acknowledges
-------------------------------
that the Shares have not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), and, notwithstanding any other provision of the Option
--------
Agreement to the contrary, the exercise of any rights to purchase any Shares is
expressly conditioned upon compliance with the 1933 Act, all applicable state
securities laws and all applicable requirements of any stock exchange or over
the counter market on which the Company's Common Stock may be listed or traded
at the time of exercise and transfer. Optionee agrees to cooperate with the
Company to ensure compliance with such laws.
4. Federal Restrictions on Transfer. Optionee understands that the Shares
--------------------------------
have not been registered under the 1933 Act and therefore cannot be resold and
must be held indefinitely unless they are registered under the 1933 Act or
unless an exemption from such registration is available and that the
certificate(s) representing the Shares may bear a legend to that effect.
Optionee understands that the Company is under no obligation to register the
Shares and that an exemption may not be available or may not permit Optionee to
transfer Shares in the amounts or at the times proposed by Optionee.
Specifically, Optionee has been advised that Rule 144 promulgated under the 1933
Act, which permits certain resales of unregistered securities, is not presently
available with respect to the Shares and, in any event requires that the Shares
be paid for and then be held for at least one year (and in some cases two years)
before they may be resold under Rule 144.
5. Rights as Optionee. Subject to the terms and conditions of this
------------------
Agreement, Optionee shall have all of the rights of a shareholder of the Company
with respect to the Shares from and after the date that Optionee delivers full
payment of the Exercise Price until such time as Optionee disposes of the Shares
<PAGE>
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR,
IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER, RIGHTS OF REPURCHASE AND
RIGHTS OF FIRST REFUSAL HELD BY THE ISSUER OR ITS
ASSIGNEE(S) AS SET FORTH IN THE STOCK OPTION AGREEMENT
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES,
A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF
THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHTS OF
REPURCHASE ARE BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
-7-
<PAGE>
8. Market Standoff Agreement. Optionee hereby agrees that if so requested
-------------------------
by the Company or any representative of the underwriters in connection with any
registration of the offering of any securities of the Company under the 1933
Act, Optionee shall not sell or otherwise transfer any Shares or other
securities of the Company during the 180-day period following the effective date
of a registration statement of the Company filed under the 1933 Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the 1933 Act which include
securities to be sold on behalf of the Company to the public in an underwritten
public offering under the 1933 Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period. Optionee agrees that this provision shall
be binding upon any transferee receiving shares of the Company's securities.
9. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
10. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
11. Governing Law; Severability. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of California excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
12. Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
13. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
14. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full Exercise Price for the Shares.
15. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
----------------
incorporated herein by reference. This Agreement, the Plan and the Notice of
Grant/Option Agreement constitute
-8-
<PAGE>
the entire agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and is governed by California law except for that body of
law pertaining to conflict of laws.
Submitted by: Accepted by:
PURCHASER: TUT SYSTEMS, INC.
___________________________ By: __________________________
Signature
___________________________ Its: __________________________
Print Name
Address: Address:
- ------- -------
___________________________ Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
___________________________
-9-
<PAGE>
RESTRICTED STOCK DOCUMENTS
21. Form of Notice of Grant of Stock Purchase Right
22. Form of Restricted Stock Purchase Agreement
23. Form of Investment Representation Statement, with Attachment (Exhibit A)
24. Form of Assignment Separate from Certificate (Exhibit B)
25. Form of Joint Escrow Instructions (Exhibit C)
26. Form of Consent of Spouse (Exhibit D)
27. Form of Election Under Section 83(b) of the Internal Revenue Code of 1986
(Exhibit E)
-10-
<PAGE>
TUT SYSTEMS, INC.
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's repurchase option and your ongoing Continuous Status as
an Employee or Consultant (as described in the Plan and the attached Restricted
Stock Purchase Agreement), as follows:
Grant Number: __________________
Date of Grant: __________________
Price Per Share: $
------------------
Total Number of Shares Subject
to This Stock Purchase Right: __________________
Expiration Date: __________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the Tut Systems, Inc. 1992 Stock Plan, as
amended, and the Restricted Stock Purchase Agreement, all of which are attached
and made a part of this document. You further agree to execute the attached
Restricted Stock Purchase Agreement as a condition to purchasing any shares
under this Stock Purchase Right.
GRANTEE: TUT SYSTEMS, INC.
______________________ By:______________________
Signature
______________________ Title:___________________
Print Name
<PAGE>
TUT SYSTEMS, INC. 1992 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant (the "Purchaser"), is an
employee or consultant of the Company, and the Purchaser's continued
participation is considered by the Company to be important for the Company's
continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser stock
purchase rights subject to the terms and conditions of the Plan and the Notice
of Grant, which are incorporated herein by reference, and pursuant to this
restricted stock purchase agreement (the "Agreement");
NOW, THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares") at the per share purchase price and as otherwise described in the
Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. Purchaser's Representations. Purchaser understands and acknowledges
---------------------------
that the Shares have not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), and, notwithstanding any other provision of this
Agreement to the contrary, the exercise of any rights to purchase any Shares is
expressly conditioned upon compliance with the 1933 Act, all applicable state
securities laws, and all applicable requirements of any stock exchange or over
the counter market on which the Company's Common Stock may be listed or traded
at the time of exercise and transfer. Purchaser agrees to cooperate with the
Company to ensure compliance with such laws. Purchaser understands that the
Company is under no obligation to register the Shares and that an exemption may
not be available or may not permit Purchaser to transfer Shares in the amounts
or at the times proposed by Purchaser. Concurrently with the execution hereof,
Purchaser shall deliver to the Company his or her Investment Representation
Statement in the form attached hereto as Exhibit A, and shall read the
applicable rules of the Commissioner of Corporations attached to such Investment
Representation Statement.
4. Option to Repurchase Unreleased Shares.
--------------------------------------
<PAGE>
A. Procedure. In the event the Purchaser's Continuous Status as an
---------
Employee or Consultant terminates for any or no reason (including death or
Disability) before all of the Shares are released from the Company's Repurchase
Option for Unreleased Shares, the Company shall, upon the date of such
termination (as reasonably fixed and determined by the Company) have an
irrevocable, exclusive option for a period of one hundred fifty (150) days from
such date to repurchase up to that number of shares which constitute Unreleased
Shares (as defined in Section 5) (the "Option to Repurchase Unreleased Shares")
at the original purchase price per share (the "Repurchase Price"). Said option
shall be exercised by the Company by delivering written notice to the Purchaser
or the Purchaser's executor (with a copy to the Escrow Holder) AND, at the
Company's option, (i) by delivering to the Purchaser or the Purchaser's executor
a check in the amount of the aggregate Repurchase Price, or (ii) by the Company
canceling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals such aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price in any of the ways described above, the Company shall become
the legal and beneficial owner of the Shares being repurchased and all rights
and interests therein or relating thereto, and the Company shall have the right
to retain and transfer to its own name the number of Shares being repurchased by
the Company.
B. Right to Assign Option. Whenever the Company shall have the
----------------------
Option to Repurchase Unreleased Shares pursuant to this Section 4, the Company
may designate and assign one or more employees, officers, directors or
shareholders of the Company, or other persons or organizations, to exercise all
or a part of the Company's Option to Repurchase Unreleased Shares under this
Agreement and purchase all or a part of such Unreleased Shares; provided that if
the Fair Market Value of the Shares to be repurchased on the date of such
designation or assignment (the "Repurchase FMV") exceeds the aggregate
Repurchase Price of such Unreleased Shares, then each such designee or assignee
shall pay the Company cash equal to the difference between the Repurchase FMV
and the aggregate Repurchase Price of such Unreleased Shares.
5. Release of Shares From Option to Repurchase Unreleased Shares.
-------------------------------------------------------------
A. Release of Option. ___________________ (_______) of the Shares
-----------------
shall be released from the Company's Option to Repurchase Unreleased Shares
___________________________________ ___________, provided in each case that the
Purchaser's Continuous Status as an Employee or Consultant has not terminated
prior to the date of any such release.
B. Definitions. Any of the Shares which have not yet been released
-----------
from the Company's Option to Repurchase Unreleased Shares are referred to herein
as "Unreleased Shares." Shares which have been released from the Company's
Option to Repurchase Unreleased Shares are referred to herein as "Vested
Shares."
6. Right to Repurchase Vested Shares.
---------------------------------
A. Repurchase of Stock. Upon the termination of Purchaser's
-------------------
consulting relationship or Continuous Status as an Employee, the Company (or its
assignee) shall have a right,
-2-
<PAGE>
but not an obligation, to repurchase any or all Vested Shares (as defined in
Section 5 hereof) (the "Right to Repurchase Vested Shares"), which repurchase
shall be at a price per share equal to the greater of (i) the fair market value
(as determined in good faith by the affirmative vote of a majority of the Board
of Directors of the Company not including the Purchaser if he or she is a
director) of such shares as of the date that Purchaser's consulting relationship
or Continuous Status as an Employee terminated or (ii) the purchase price paid
by the Purchaser for such shares. In the event the Company exercises its Right
to Repurchase Vested Shares, Purchaser agrees to sell to the Company or its
assignee the Vested Shares with respect to which the Company has exercised said
right, on the terms and conditions specified in this Section 6.
B. Escrow of Shares. In order to facilitate the exercise of the
----------------
Right to Repurchase Vested Shares, the Company shall have the option,
exercisable in its sole discretion, to require that the Vested Shares be held in
escrow pursuant to Section 9 hereof.
C. Repurchase Procedure. The Right to Repurchase Vested Shares
--------------------
shall terminate if it (i) is not exercised by written notice from the Company
(or its assignee) to Purchaser (or his or her executor, administrator or any
person holding title to the Vested Shares pursuant to any permissible transfer
under Section 8 hereof) within ninety (90) days after the date of the
termination of Purchaser's consulting relationship or Continuous Status as an
Employee. If the Company (or its assignee) exercises the Right to Repurchase
Vested Shares, the escrow agent or the Purchaser (or his or her executor,
administrator or any person holding title to the Shares pursuant to any
permissible transfer under Section 8 hereof), as the case may be, shall
immediately endorse and deliver to the Company the stock certificate(s)
representing the Shares being repurchased. The Company shall then promptly pay
the total repurchase price to the Purchaser (or his or her executor,
administrator or any person holding title to the Shares pursuant to any
permissible transfer under Section 8 hereof) in cash (by check), by canceling
all or a portion of any indebtedness of the Purchaser then owing to the Company,
or by any combination thereof.
D. Termination of Right to Repurchase Vested Shares. The Right to
------------------------------------------------
Repurchase Vested Shares shall terminate as to any Shares 90 days after the
first sale of Common Stock of the Company to the general public pursuant to a
registration statement filed with and declared effective by the Securities and
Exchange Commission or the acquisition of the Company by another entity by means
of the merger or consolidation of the Company with or into another corporation
in which the shareholders of the Company prior to such transaction own less than
50% of the voting securities of the surviving entity.
7. Company's Right of First Refusal. Before any Shares held by Purchaser
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
A. Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or
---- ----
-3-
<PAGE>
otherwise transfer such Shares; (ii) the name of each proposed purchaser or
other transferee ("Proposed Transferee"); (iii) the number of Shares to be
transferred to each Proposed Transferee; and (iv) the bona fide cash price or
---- ----
other consideration for which the Holder proposes to transfer the Shares (the
"Offered Price"), and the Holder shall offer the Shares at the Offered Price to
the Company or its assignee(s).
B. Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (C)
below.
C. Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
D. Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
E. Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws, and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company and/or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
F. Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Purchaser's lifetime or on the Purchaser's death by will or
intestacy to the Purchaser's immediate family or a trust for the benefit of the
Purchaser's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
-4-
<PAGE>
G. Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate as to any Shares on the day of the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission or
the acquisition of the Company by another entity by means of the merger or
consolidation of the Company with or into another corporation in which the
shareholders of the Company prior to such transaction own less than 50% of the
voting securities of the surviving entity.
8. Restriction on Transfer. Except for the escrow described in Section 9
-----------------------
or transfer of the Shares to the Company or its assignees contemplated by this
Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until the release of
such Shares from the Company's Option to Repurchase Unreleased Shares, Right to
Repurchase Vested Shares and Right of First Refusal (the "Repurchase Options"),
in accordance with the provisions of this Agreement, other than by will or the
laws of descent and distribution.
9. Escrow of Shares.
----------------
A. Deposit of Shares. To ensure the availability for delivery of
-----------------
the Purchaser's Shares upon repurchase by the Company pursuant to all or any of
the Company's Repurchase Options, the Purchaser shall, upon execution of this
Agreement, deliver and deposit with an escrow holder designated by the Company
(the "Escrow Holder") the share certificates representing the Shares, together
with the stock assignments duly endorsed in blank, attached hereto as Exhibits
B-1, B-2 and B-3. The Shares and stock assignments shall be held by the Escrow
Holder, pursuant to the Joint Escrow Instructions of the Company and Purchaser
attached as Exhibit C hereto, until such time as the Company's Repurchase
Options all expire. As a further condition to the Company's obligations under
this Agreement, the spouse of Purchaser, if any, shall execute and deliver to
the Company the Consent of Spouse attached hereto as Exhibit D.
B. No Liability. The Escrow Holder shall not be liable for any
------------
act it may do or omit to do with respect to holding the Shares in escrow and
while acting in good faith and in the exercise of its judgment.
C. Transfer. If the Company or any assignee exercises any of its
--------
Repurchase Options hereunder, the Escrow Holder, upon receipt of written notice
of exercise of any of such rights, shall take all steps necessary to accomplish
such transfer.
D. Termination of Escrow. When the Repurchase Options have been
---------------------
exercised or have all expired unexercised, upon Purchaser's request the Escrow
Holder shall promptly cause a new certificate to be issued for such Shares and
shall deliver such certificate to the Company or the Purchaser, as the case may
be.
E. Rights as Shareholder. Subject to the terms hereof, the
---------------------
Purchaser shall have all the rights of a shareholder with respect to such Shares
for so long as they are held in escrow pursuant to the terms hereof, including
without limitation, the right to vote the Shares and receive
-5-
<PAGE>
any cash dividends declared thereon. If (A) from time to time during the term of
any of the Company's Repurchase Options there is (i) any stock dividend, stock
split or other change in the Shares or (ii) any merger or sale of all or
substantially all of the assets or other acquisition of the Company, and (B)
after giving effect to Sections 6.D. and 7.G. above, there remain Shares subject
to this escrow ("Escrow Shares"), then any and all new, substituted or
additional securities to which the Purchaser is entitled by reason of the
Purchaser's ownership of the Escrow Shares shall be immediately subject to this
escrow, deposited with the Escrow Holder and included thereafter as Escrow
Shares for purposes of this Agreement and the Company's Repurchase Options.
10. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
A. Legends. Purchaser understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR,
IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER, RIGHTS OF REPURCHASE AND
RIGHTS OF FIRST REFUSAL HELD BY THE ISSUER OR ITS
ASSIGNEE(S) AS SET FORTH IN THE RESTRICTED STOCK AGREEMENT
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES,
A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF
THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHTS OF
REPURCHASE ARE BINDING ON TRANSFEREES OF THESE SHARES.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
-6-
<PAGE>
Purchaser understands that transfer of the Shares may be restricted by
Section 260.141.11 of the Rules of the California Corporations Commissioner, a
copy of which is attached to Exhibit A, the Investment Representation Statement.
B. Stop-Transfer Notices. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
C. Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
11. Market Standoff Agreement. Purchaser hereby agrees that if so
-------------------------
requested by the Company or any representative of the underwriters in connection
with any registration of the offering of any securities of the Company under the
1933 Act, Purchaser shall not sell or otherwise transfer any Shares or other
securities of the Company during the 180-day period following the effective date
of a registration statement of the Company filed under the 1933 Act; provided,
however, that such restriction shall only apply to the first two registration
statements of the Company to become effective under the 1933 Act which include
securities to be sold on behalf of the Company to the public in an underwritten
public offering under the 1933 Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period.
12. Adjustment for Stock Split. All references to the number of Shares,
--------------------------
including Vested and Unreleased Shares, and the purchase price of the Shares,
including Vested and Unreleased Shares, in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
13. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of
the United States Internal Revenue Code of 1986, as amended (the "Code"), taxes
as ordinary income the difference between the purchase price for the Shares and
the Fair Market Value of the Shares as of the date any restrictions on the
Shares lapse. In this context, "restriction" includes the right of the Company
to buy back the Shares pursuant to its repurchase option. The Purchaser
understands that the Purchaser may elect to be taxed at the time the Shares are
purchased rather than when and as the Company's repurchase option expires by
filing an election under Section 83(b) of the Code with the I.R.S. within 30
days from the date of purchase. The form for making this election is attached
as Exhibit E hereto.
-7-
<PAGE>
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
14. General Provisions.
------------------
A. Governing Laws. This Agreement shall be governed by the laws
--------------
of the State of California. This Agreement, subject to the terms and conditions
of the Plan and the Notice of Grant, represents the entire agreement between the
parties with respect to the purchase of Common Stock by the Purchaser. In the
event of a conflict between the terms and conditions of the Plan and the terms
and conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
B. Notices. Any notice, demand or request required or permitted
-------
to be given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. or Canadian mail, First Class with postage
prepaid, and addressed to the parties at the addresses of the parties set forth
at the end of this Agreement or such other address as a party may request by
notifying the other in writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
C. Assignment. Subject to the terms of Section 4B. hereof, the
----------
rights and benefits of the Company under this Agreement shall be transferable to
any one or more persons or entities, and all covenants and agreements hereunder
shall inure to the benefit of, and be enforceable by the Company's successors
and assigns. The rights and obligations of the Purchaser under this Agreement
may only be assigned with the prior written consent of the Company and any
transferee shall be bound by the Repurchase Options set forth herein.
D. Waivers. Either party's failure to enforce any provision or
-------
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party from thereafter
enforcing each and every other provision of this Agreement. The rights granted
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
E. Additional Documents. The Purchaser agrees upon request to
--------------------
execute any further documents or instruments necessary or desirable to carry out
the purposes or intent of this Agreement.
F. No Employment Contract. PURCHASER ACKNOWLEDGES AND AGREES THAT
----------------------
THE VESTING OF SHARES PURSUANT TO SECTION 5 HEREOF IS EARNED ONLY BY CONTINUING
SERVICE AS AN EMPLOYEE OR CONSULTANT AT
-8-
<PAGE>
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES
HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN
EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT
CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this
Agreement. Purchaser further agrees to notify the Company upon any change in
the residence indicated in the Notice of Grant.
PURCHASER: TUT SYSTEMS, INC.
__________________________ By:_____________________________
Signature
______________________________ Title:____________________________
Print Name
-9-
<PAGE>
EXHIBIT A
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : TUT SYSTEMS, INC.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities (the "Shares"),
the undersigned Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
acquiring the Shares for investment for Purchaser's own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Purchaser acknowledges and understands that the Shares constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
---- ----
investment intent as expressed herein. In this connection, Purchaser
understands that, in the view of the Securities and Exchange Commission, the
statutory basis for such exemption may be unavailable if Purchaser's
representation was predicated solely upon a present intention to hold the Shares
for the minimum capital gains period specified under tax statutes, for a
deferred sale, for or until an increase or decrease in the market price of the
Shares, or for a period of one year or any other fixed period in the future.
Purchaser further understands that the Shares must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available. Purchaser further acknowledges and understands
that the Company is under no obligation to register the Shares. Purchaser
understands that the certificate evidencing the Shares will be imprinted with a
legend which prohibits the transfer of the Shares unless they are registered or
such registration is not required in the opinion of counsel satisfactory to the
Company, a legend prohibiting their transfer without the consent of the
Commissioner of Corporations of the State of California and any other legend
required under applicable state securities laws.
(c) Purchaser is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at
<PAGE>
the time of exercise of the Option by the Purchaser, such exercise will be
exempt from registration under the Securities Act. In the event the Company
later becomes subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, one hundred eighty (180) days thereafter
the securities exempt under Rule 701 may be resold, subject to the satisfaction
of certain of the conditions specified by Rule 144, including among other
things: (1) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934); and, in the case of an
affiliate, (2) the availability of certain public information about the Company,
and the amount of securities being sold during any three month period not
exceeding the limitations specified in Rule 144(e), if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of the grant of the Shares, then the Shares may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires among other
things: (1) the resale occurring not less than one year after the party has
purchased, and made full payment for, within the meaning of Rule 144, the
securities to be sold; and (2) in the case of an affiliate, or of a non-
affiliate who has held the securities less than two years, (A) the availability
of certain public information about the Company, (B) the sale being made through
a broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934), and (C) the amount of securities being sold during any three month
period not exceeding the specified limitations stated therein, if applicable.
(d) Purchaser agrees, in connection with the Company's initial
underwritten public offering of the Company's securities, (1) not to sell, make
short sale of, loan, grant any options for the purchase of, or otherwise dispose
of any shares of Common Stock of the Company held by Purchaser (other than those
shares included in the registration) without the prior written consent of the
Company or the underwriters managing such initial underwritten public offering
of the Company's securities for one hundred eighty (180) days from the effective
date of such registration, and (2) further agrees to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering; provided however that the officers and directors of the Company
-------- -------
who own the stock of the Company also agree to such restrictions.
(e) Purchaser further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Purchaser understands that no assurances can be given that
any such other registration exemption will be available in such event.
-2-
<PAGE>
(f) Purchaser understands that the certificate evidencing the Shares
will be imprinted with a legend which prohibits the transfer of the Shares
without the consent of the Commissioner of Corporations of California.
Purchaser has read the applicable Commissioner's Rules with respect to such
restriction, a copy of which is attached.
Signature of Purchaser:
____________________________
Name:_______________________
Date:_________________, 19__
-3-
<PAGE>
ATTACHMENT 1
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
----------------------------------------------------
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: Restriction on Transfer. (a) The issuer of any security upon
---------- -----------------------
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issue or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferror's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferrer or the
transferror's ancestors, descendants, or spouse; or to a transferee by a
trustee or custodian for the account of the transferee or the transferee's
ancestors, descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory
or country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not
required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102;
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS
OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES."
<PAGE>
EXHIBIT B-1
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto _____________________________________________ (__________) shares
of the Common Stock of Tut Systems, Inc. standing in my name on the books of
said corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _____________________________________ to
transfer the said stock on the books of the within named corporation with full
power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between ________________________ and the undersigned
dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its Option
to Repurchase Unreleased Shares, Right to Repurchase Vested Shares and Right of
First Refusal as set forth in Sections 4, 6 and 7 of the Agreement, without
requiring additional signatures on the part of the Purchaser.
<PAGE>
EXHIBIT B-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto ______________________________________________ (__________) shares
of the Common Stock of Tut Systems, Inc. standing in my name on the books of
said corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _____________________________________________
to transfer the said stock on the books of the within named corporation with
full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between ________________________ and the undersigned
dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its Option
to Repurchase Unreleased Shares, Right to Repurchase Vested Shares and Right of
First Refusal as set forth in Sections 4, 6 and 7 of the Agreement, without
requiring additional signatures on the part of the Purchaser.
<PAGE>
EXHIBIT B-3
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto ___________________________________________________ (__________)
shares of the Common Stock of Tut Systems, Inc. standing in my name on the books
of said corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint _____________________________________________
to transfer the said stock on the books of the within named corporation with
full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between ________________________ and the undersigned
dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its Option
to Repurchase Unreleased Shares, Right to Repurchase Vested Shares and Right of
First Refusal as set forth in Sections 4, 6 and 7 of the Agreement, without
requiring additional signatures on the part of the Purchaser.
<PAGE>
EXHIBIT C
---------
JOINT ESCROW INSTRUCTIONS
-------------------------
_______, 19__
Chief Financial Officer
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Dear __________________:
As Escrow Agent for both Tut Systems, Inc., a California corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("Agreement") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
Option to Repurchase Unreleased Shares, Right to Repurchase Vested Shares or
Right of First Refusal (the "Repurchase Options") set forth in the Agreement,
the Company shall give to Purchaser and you a written notice specifying the
number of shares of stock to be purchased, the purchase price, and the time for
a closing hereunder at the principal office of the Company. Purchaser and the
Company hereby irrevocably authorize and direct you to close the transaction
contemplated by such notice in accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to
<PAGE>
the provisions of this paragraph 3, Purchaser shall exercise all rights and
privileges of a shareholder of the Company while the stock is held by you.
4. Within 90 days after termination of all of the Company's Repurchase
Options, you will deliver to Purchaser a certificate or certificates
representing the aggregate number of shares held or issued pursuant to the
Agreement and not purchased by the Company or its assignees pursuant to exercise
of any of the Company's Repurchase Options.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
-2-
<PAGE>
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
PURCHASER: __________________
__________________
__________________
ESCROW AGENT: Chief Financial Officer
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
-3-
<PAGE>
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
TUT SYSTEMS, INC.
By: _________________________________
Title: _________________________________
PURCHASER:
________________________________________
(Signature)
________________________________________
(Typed or Printed Name)
ESCROW AGENT:
_______________________
Chief Financial Officer
-4-
<PAGE>
EXHIBIT D
---------
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to
my spouse to purchase shares of Tut Systems Inc., as set forth in the Agreement,
I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of
any rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.
Dated: _______________, 19____
______________________________
<PAGE>
EXHIBIT E
---------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME : TAXPAYER: SPOUSE:
ADDRESS: :
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of Tut
Systems, Inc. (the "Company").
3. The date on which the property was transferred is: ______________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: _______________, 19__ ___________________________________
_________________________, Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: _______________, 19__ ___________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT 10.2
TUT SYSTEMS, INC.
1998 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1998 Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Tut Systems, Inc., a California corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "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.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1998 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant to
----------------
a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
----------
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "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 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,000,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year beginning in 2000 equal to the lesser of
(i) 375,000 shares, (ii) 3% of the outstanding shares on such date or a lesser
amount determined by the Board. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered by
------------------------------
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator determines
--------------
it to be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
-4-
<PAGE>
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to 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;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
-5-
<PAGE>
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
-6-
<PAGE>
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 2,500,000/1/ Shares.
(ii) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional 550,000/1/ Shares which
shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 13), the cancelled Option will be counted against the limits set
forth in subsections (i) and (ii) above. For this purpose, if the exercise price
of an Option is reduced, the transaction will be treated as a cancellation of
the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
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 determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of
- ---------
/1/ Pre-reverse stock split.
-7-
<PAGE>
stock of the Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, 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, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
-8-
<PAGE>
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
-9-
<PAGE>
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
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 or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted
-10-
<PAGE>
Stock Purchase Agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to the Company.
The repurchase option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
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 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; 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 or Stock
Purchase Right.
-11-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For
the purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
-12-
<PAGE>
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option 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.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
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.
-13-
<PAGE>
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-14-
<PAGE>
1998 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates.
<PAGE>
Termination Period:
------------------
This Option may be exercised for three (3) months after Optionee ceases to
be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for one year after Optionee ceases to be a Service
Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants to
---------------
the Optionee named in the Notice of Grant attached as Part I of this Agreement
(the "Optionee") an option (the "Option") to purchase the number of Shares, as
set forth in the Notice of Grant, at the exercise price per share set forth in
the Notice of Grant (the "Exercise Price"), subject to the terms and conditions
of the Plan, which is incorporated herein by reference. Subject to Section
15(c) of the Plan, in the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
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 Grant and the
applicable provisions of the Plan and this 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 completed
by the Optionee and delivered to [Title] 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 Applicable Laws. 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.
-2-
<PAGE>
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; or
(b) check; or
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; 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;
or
(e) with the Administrator's consent, delivery of Optionee's promissory
note (the "Note") in the form attached hereto as Exhibit C, in the amount of the
aggregate Exercise Price of the Exercised Shares together with the execution and
delivery by the Optionee of the Security Agreement attached hereto as Exhibit B.
The Note shall bear interest at the "applicable federal rate" prescribed under
the Code and its regulations at time of purchase, and shall be secured by a
pledge of the Shares purchased by the Note pursuant to the Security Agreement.
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 and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this 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 Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to this
----------------
Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option.
---------------------
(i) Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If
-3-
<PAGE>
the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO,
----------------------
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) Disposition of Shares.
---------------------
(i) NSO. If the Optionee holds NSO Shares for at least one year, any
---
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year
---
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee
-------------------------------------------------
sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on
or before the later of (i) two years after the grant date, or (ii) one year
after the exercise date, the Optionee shall immediately notify the Company in
writing of such disposition. The Optionee agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the
-4-
<PAGE>
Company and Optionee with respect to the subject matter hereof, and may not be
modified adversely to the Optionee's interest except by means of a writing
signed by the Company and Optionee. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
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 Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and 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 Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: TUT SYSTEMS, INC.
____________________________________ ______________________________________
Signature By
____________________________________ ______________________________________
Print Name Title
____________________________________
Residence Address
____________________________________
-5-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this 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 Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this 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 Option Agreement.
_______________________________________
Spouse of Optionee
-6-
<PAGE>
EXHIBIT A
---------
TUT SYSTEMS, INC.
EXERCISE NOTICE
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, 199__, the
------------------
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of Tut Systems, Inc. (the "Company") under and
pursuant to the 1998 Stock Plan (the "Plan") and the Stock Option Agreement
dated _____________, 19___ (the "Option Agreement"). The purchase price for the
Shares shall be $_____________, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser has
----------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares 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 of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing
<PAGE>
signed by the Company and Purchaser. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER: TUT SYSTEMS, INC.
____________________________________ ___________________________________
Signature By
____________________________________ ___________________________________
Print Name Its
Address: Address:
- ------- -------
_________________________________ 2495 Estand Way
_________________________________ Pleasant Hill, CA 94523
_____________________________________
Date Received
-2-
<PAGE>
EXHIBIT B
---------
SECURITY AGREEMENT
This Security Agreement is made as of __________, 19___ between Tut Systems,
Inc., a California corporation ("Pledgee"), and _________________________
("Pledgor").
Recitals
--------
Pursuant to Pledgor's election to purchase Shares under the Option Agreement
dated ________ (the "Option"), between Pledgor and Pledgee under Pledgee's 1998
Stock Plan, and Pledgor's election under the terms of the Option to pay for such
shares with his promissory note (the "Note"), Pledgor has purchased _________
shares of Pledgee's Common Stock (the "Shares") at a price of $________ per
share, for a total purchase price of $__________. The Note and the obligations
thereunder are as set forth in Exhibit C to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of the
---------------------------------------------
transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant
to the California Commercial Code, hereby pledges all of such Shares (herein
sometimes referred to as the "Collateral") represented by certificate number
______, duly endorsed in blank or with executed stock powers, and herewith
delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who
shall hold said certificate subject to the terms and conditions of this Security
Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledge holder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of the
-----------------------
Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances,
------------
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
c. Margin Regulations. In the event that Pledgee's Common Stock is now
------------------
or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within
<PAGE>
the meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making
any amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge any
-----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this pledge,
------------------
subscription Options or other rights or options shall be issued in connection
with the pledged Shares, such rights, Options and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
-------
this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be delinquent for
a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder here under upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
-2-
<PAGE>
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
----
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross negligence,
----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the
-----------------------------------
enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms
---------------------
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
-------------
governed under the internal substantive laws, but not the choice of law rules,
of California.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PLEDGOR _________________________________
Signature
_________________________________
Print Name
Address: _________________________________
_________________________________
PLEDGEE Tut Systems, Inc.
a California corporation
________________________________
Signature
________________________________
Print Name
________________________________
Title
PLEDGEHOLDER ________________________________
Secretary of
Tut Systems, Inc.
-4-
<PAGE>
EXHIBIT C
---------
NOTE
$_______________ [City, State]
______________, 19___
FOR VALUE RECEIVED, _______________ promises to pay to Tut Systems, Inc., a
California corporation (the "Company"), or order, the principal sum of
_______________________ ($_____________), together with interest on the unpaid
principal hereof from the date hereof at the rate of _______________ percent
(____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, 19___.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
____________________________________
____________________________________
<PAGE>
1998 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number _________________________
Date of Grant _________________________
Price Per Share $________________________
Total Number of Shares Subject _________________________
to This Stock Purchase Right
Expiration Date: _________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR IT
WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the 1998 Stock Plan and the Restricted Stock
Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a
part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.
GRANTEE: TUT SYSTEMS, INC.
___________________________ ________________________________
Signature By
___________________________ ________________________________
Print Name Title
<PAGE>
EXHIBIT A-1
-----------
1998 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an
Service Provider, and the Purchaser's continued participation is considered by
the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Admin istrator has granted to the Purchaser a Stock
Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. Repurchase Option.
-----------------
(a) In the event the Purchaser ceases to be a Service Provider for any
or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
cancelling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price, the Company shall become the legal and beneficial owner of the
Shares being repurchased and all
<PAGE>
rights and interests therein or relating thereto, and the Company shall have the
right to retain and transfer to its own name the number of Shares being
repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares
to be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
4. Release of Shares From Repurchase Option.
----------------------------------------
(a) _______________________ percent (______%) of the Shares shall be
released from the Company's Repurchase Option [one year] after the Date of
----------------
Grant and __________________ percent (______%) of the Shares [at the end of each
------------------
month thereafter], provided that the Purchaser does not cease to be a Service
- ----------------
Provider prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option shall
be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. Restriction on Transfer. Except for the escrow described in Section 6
-----------------------
or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the provi
sions of this Agreement, other than by will or the laws of descent and
distribution.
6. Escrow of Shares.
----------------
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires. As a further condition to the Company's obligations under this
-2-
<PAGE>
Agreement, the Company may require the spouse of Purchaser, if any, to execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or omit
to do with respect to holding the Unreleased Shares in escrow while acting in
good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
(d) When the Repurchase Option has been exercised or expires unexercised
or a portion of the Shares has been released from the Repurchase Option, upon
request the Escrow Holder shall promptly cause a new certificate to be issued
for the released Shares and shall deliver the certificate to the Company or the
Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the rights
of a shareholder with respect to the Shares while they are held in escrow,
including without limitation, the right to vote the Shares and to receive any
cash dividends declared thereon. If, from time to time during the term of the
Repurchase Option, there is (i) any stock dividend, stock split or other change
in the Shares, or (ii) any merger or sale of all or substantially all of the
assets or other acquisition of the Company, any and all new, substituted or
additional securities to which the Purchaser is entitled by reason of the
Purchaser's ownership of the Shares shall be immediately subject to this escrow,
deposited with the Escrow Holder and included thereafter as "Shares" for
purposes of this Agreement and the Repurchase Option.
7. Legends. The share certificate evidencing the Shares, if any, issued
-------
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. Adjustment for Stock Split. All references to the number of Shares and
--------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contem plated by this Agreement. The Purchaser
is relying solely on such advisors and not on any
-3-
<PAGE>
statements or representations of the Company or any of its agents. The Purchaser
understands that the Purchaser (and not the Company) shall be responsible for
the Purchaser's own tax liability that may arise as a result of the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income
the difference between the purchase price for the Shares and the Fair Market
Value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to the Repurchase Option. The Purchaser understands that the Purchaser
may elect to be taxed at the time the Shares are purchased rather than when and
as the Repurchase Option expires by filing an election under Section 83(b) of
the Code with the IRS within 30 days from the date of purchase. The form for
making this election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
10. General Provisions.
------------------
(a) This Agreement shall be governed by the internal substantive laws,
but not the choice of law rules of California. This Agreement, subject to the
terms and conditions of the Plan and the Notice of Grant, represents the entire
agreement between the parties with respect to the purchase of the Shares by the
Purchaser. Subject to Section 15(c) of the Plan, in the event of a conflict
between the terms and conditions of the Plan and the terms and conditions of
this Agreement, the terms and conditions of the Plan shall prevail. Unless
otherwise defined herein, the terms defined in the Plan shall have the same
defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given by
either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party hereto.
(c) The rights of the Company under this Agreement shall be transferable
to any one or more persons or entities, and all covenants and agreements
hereunder shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of the Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
-4-
<PAGE>
(d) Either party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, nor prevent
that party from thereafter enforcing any other provision of this Agreement. The
rights granted both parties hereunder are cumulative and shall not constitute a
waiver of either party's right to assert any other legal remedy available to it.
(e) The Purchaser agrees upon request to execute any further documents
or instruments necessary or desirable to carry out the purposes or intent of
this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED: _____________________
PURCHASER: TUT SYSTEMS, INC.
____________________________________ ____________________________
Signature By
____________________________________ ____________________________
Print Name Title
-5-
<PAGE>
EXHIBIT A-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto ________________________________________ (__________) shares of
the Common Stock of Tut Systems, Inc. standing in my name of the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint ____________________________________________
to transfer the said stock on the books of the within named corporation with
full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between Tut Systems, Inc. and the
undersigned dated ______________, 19__.
Dated: _______________, 19__
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
-----------
JOINT ESCROW INSTRUCTIONS
-------------------------
_____________, 19__
Corporate Secretary
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Dear _________________:
As Escrow Agent for both Tut Systems, Inc., a California corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("Agreement") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred to
collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in the
United States Post Office, by registered or certified mail with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
PURCHASER: _________________________
_________________________
_________________________
ESCROW AGENT: Corporate Secretary
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
-3-
<PAGE>
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed and
enforced in accordance with, the internal substantive laws, but not the choice
of law rules, of California.
Very truly yours,
TUT SYSTEMS, INC.
_____________________________________
By
_____________________________________
Title
PURCHASER:
_____________________________________
Signature
_____________________________________
Print Name
ESCROW AGENT:
_____________________________________
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-4
-----------
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of Tut Systems, Inc., as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: _______________, 19____
__________________________________________
Signature of Spouse
<PAGE>
EXHIBIT A-5
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of Tut
Systems, Inc. (the "Company").
3. The date on which the property was transferred is: ______________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: ___________________, 19____ __________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 19____ __________________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT 10.3
TUT SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
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 through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall 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" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Tut Systems, Inc., a California corporation,
-------
and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, exclusive of payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is a regular, full-time
--------
non-temporarary employee of the Company whose customary employment with the
Company is at least twenty-one (21) hours per week. For purposes of the Plan,
the employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the Company.
Where the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed either by statute or by contract, the employment
relationship shall be deemed to have terminated on the 91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
(i) "Exercise Date" shall mean the last day of each Offering Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq
<PAGE>
SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day
on the date of such determination, as reported in The Wall Street Journal or
such other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the Board.
(k) "Offering Period" shall mean a period of approximately six (6)
---------------
months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after November 1 and terminating on
the last Trading Day in the period ending the following April 30, or commencing
on the first Trading Day on or after May 1 and terminating on the last Trading
Day in the period ending the following October 31; provided, however, that the
first Offering Period under the Plan shall commence with the first Trading Day
on or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before April 30. The duration of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(n) "Reserves" shall mean the number of shares of Common Stock covered
--------
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(o) "Subsidiary" shall mean 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.
(p) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
-2-
<PAGE>
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
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 such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive
----------------
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after November 1 and May 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 20 hereof; provided, however, that the first Offering Period under the
Plan shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the last Trading Day on or before April 30. The Board
shall have the power to change the duration of Offering Periods (including the
commencement dates thereof) 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 thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not exceeding fifteen percent (15%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
-3-
<PAGE>
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of parti
cipation rate changes during any Offering Period. The change in rate shall be
effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during an
Offering Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than
5,000/1/ shares (subject to any adjustment pursuant to Section 19), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such
- ---------
/1/ Pre-reverse stock split.
-4-
<PAGE>
participant at the applicable Purchase Price with the accumulated payroll
deductions in his or her account. No fractional shares shall be purchased; 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 Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, the shares purchased upon exercise of his or
her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
-------------------------
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
-5-
<PAGE>
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 250,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2000 equal to the lesser of (i) 250,000
shares, (ii) 2% of the outstanding shares on such date or (iii) a lesser amount
determined by the Board. If, on a given Exercise Date, the number of shares
with respect to which options are to be exercised exceeds the number of shares
then available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
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 parti cipant's death subsequent to an Exercise
Date on which the option is exercised but prior to delivery to such participant
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
exercise of the option. 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
at any time by written notice. In the event of the death of a participant 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
-6-
<PAGE>
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 payroll deductions 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 hereof) 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 from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions 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 payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
----------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares 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 of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of 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) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the
-7-
<PAGE>
New Exercise Date and that the participant's option shall be exercised
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the
Company's proposed sale or merger. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as
provided in Section 19 and Section 20 hereof, no amendment may make any change
in any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as 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, 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.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
-8-
<PAGE>
(1) altering the Purchase Price for any Offering Period including
an Offering Period underway at the time of the change in Purchase Price;
(2) shortening any Offering Period so that Offering Period ends on
a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
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 Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, 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 pur chased 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. 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. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
-9-
<PAGE>
EXHIBIT A
---------
TUT SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in the
Tut Systems, Inc. 1998 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock in accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
__________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal to the excess of the fair
market value of the shares at the time such shares were purchased by me
over the price which I paid for the shares. I hereby agree to notify the
----------------------------
Company in writing within 30 days after the date of any disposition of
----------------------------------------------------------------------
shares 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
------------
<PAGE>
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 sale or early disposition of
Common Stock by me. If I dispose of such shares at any time after the
expiration of the 2-year holding period, I understand that I will be
treated for federal income tax purposes as having received income only at
the time of such disposition, and that such income will be taxed as
ordinary 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, or (2) 15%
of the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
__________________________________________________________
(First) (Middle) (Last)
_________________________ __________________________________________________
Relationship
__________________________________________________
(Address)
Employee's Social
Security Number: __________________________________________________
Employee's Address: __________________________________________________
__________________________________________________
__________________________________________________
-2-
<PAGE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: __________________ _____________________________________________________
Signature of Employee
_____________________________________________________
Spouse's Signature (If beneficiary other than spouse)
-3-
<PAGE>
EXHIBIT B
---------
TUT SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Tut Systems, Inc.
1998 Employee Stock Purchase Plan which began on ___________ 19____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
____________________________________
____________________________________
____________________________________
Signature:
____________________________________
Date: _______________________________
<PAGE>
EXHIBIT 10.4
AMERICAN CAPITAL MARKETING, INC.
401(K) PLAN & TRUST
(C) 1990 AMERICAN CAPITAL MARKETING, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
ARTICLE I
DEFINITIONS
ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
<S> <C>
2.1 TOP HEAVY PLAN REQUIREMENTS................................ 11
2.2 DETERMINATION OF TOP HEAVY STATUS.......................... 11
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER................ 13
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY.................... 14
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES.............. 14
2.6 POWER AND DUTIES OF THE ADMINISTRATOR...................... 14
2.7 RECORDS AND REPORTS........................................ 15
2.8 APPOINTMENT OF ADVISERS.................................... 15
2.9 INFORMATION FROM EMPLOYER.................................. 15
2.10 PAYMENT OF EXPENSES........................................ 16
2.11 MAJORITY ACTIONS........................................... 16
2.12 CLAIMS PROCEDURE........................................... 16
2.13 CLAIMS REVIEW PROCEDURE.................................... 16
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY.................................. 17
3.2 EFFECTIVE DATE OF PARTICIPATION............................ 17
3.3 DETERMINATION OF ELIGIBILITY............................... 17
3.4 TERMINATION OF ELIGIBILITY................................. 17
3.5 OMISSION OF ELIGIBLE EMPLOYEE.............................. 17
3.6 INCLUSION OF INELIGIBLE EMPLOYEE........................... 17
3.7 ELECTION NOT TO PARTICIPATE................................ 18
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE...................... 18
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION............ 18
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION.................... 19
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION................. 21
4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND
EARNINGS................................................... 22
4.5 ACTUAL DEFERRAL PERCENTAGE TESTS........................... 26
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS............. 28
4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS....................... 30
4.8 ADJUSTMENT TO
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ACTUAL CONTRIBUTION PERCENTAGE TESTS....................... 32
4.9 MAXIMUM ANNUAL ADDITIONS................................... 35
4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS.................. 40
4.11 TRANSFERS FROM QUALIFIED PLANS............................. 40
4.12 VOLUNTARY CONTRIBUTIONS.................................... 41
4.13 DIRECTED INVESTMENT ACCOUNT................................ 41
4.14 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS................. 42
4.15 INTEGRATION IN MORE THAN ONE PLAN.......................... 42
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND................................ 43
5.2 METHOD OF VALUATION........................................ 43
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON............................. 43
6.2 DETERMINATION OF BENEFITS UPON DEATH....................... 43
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY........... 44
6.4 DETERMINATION OF BENEFITS UPON TERMINATION................. 44
6.5 DISTRIBUTION OF BENEFITS................................... 47
6.6 DISTRIBUTION OF BENEFITS UPON DEATH........................ 50
6.7 TIME OF SEGREGATION OR DISTRIBUTION........................ 53
6.8 DISTRIBUTION FOR MINOR BENEFICIARY......................... 53
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN............. 53
6.10 PRE-RETIREMENT DISTRIBUTION................................ 54
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP.......................... 54
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS.................. 55
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS......................... 55
ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE..................... 56
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE ............... 56
7.3 OTHER POWERS OF THE TRUSTEE................................ 57
7.4 LOANS TO PARTICIPANTS...................................... 59
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS................... 61
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES.............. 61
7.7 ANNUAL REPORT OF THE TRUSTEE............................... 61
7.8 AUDIT...................................................... 61
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE............. 62
7.10 TRANSFER OF INTEREST....................................... 62
7.11 TRUSTEE INDEMNIFICATION.................................... 63
7.12 EMPLOYER SECURITIES AND REAL PROPERTY...................... 63
</TABLE>
ii
<PAGE>
<TABLE>
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
<S> <C>
8.1 AMENDMENT................................................ 63
8.2 TERMINATION.............................................. 64
8.3 MERGER OR CONSOLIDATION.................................. 64
ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS....................................... 64
9.2 PARTICIPANT'S RIGHTS..................................... 64
9.3 ALIENATION............................................... 65
9.4 CONSTRUCTION OF PLAN..................................... 65
9.5 GENDER AND NUMBER........................................ 65
9.6 LEGAL ACTION............................................. 65
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS................... 65
9.8 BONDING.................................................. 66
9.9 INSURER'S PROTECTIVE CLAUSE.............................. 66
9.10 RECEIPT AND RELEASE FOR PAYMENTS......................... 66
9.11 ACTION BY THE EMPLOYER................................... 66
9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY....... 66
9.13 HEADINGS................................................. 67
9.14 APPROVAL BY INTERNAL REVENUE SERVICE..................... 67
9.15 UNIFORMITY............................................... 67
9.16 PAYMENT OF BENEFITS...................................... 67
ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER.............. 68
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS.................. 68
10.3 DESIGNATION OF AGENT..................................... 68
10.4 EMPLOYEE TRANSFERS....................................... 68
10.5 PARTICIPATING EMPLOYER'S.................................
CONTRIBUTION AND FORFEITURES............................. 68
10.6 AMENDMENT................................................ 69
10.7 DISCONTINUANCE OF PARTICIPATION.......................... 69
10.8 ADMINISTRATOR'S AUTHORITY................................ 69
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE........ 69
</TABLE>
iii
<PAGE>
- ------------------------------------------------------------------------------
ARTICLE I
DEFINITIONS
- ------------------------------------------------------------------------------
As used in this Plan, the following words and phrases shall have the
meanings set forth herein unless a different meaning is clearly required by the
context:
1.1 "ACT" means the Employee Retirement Income Security Act of 1974, as it
may be amended from time to time.
1.2 "ADMINISTRATOR" means the person(s) or entity designated by the Employer
pursuant to Section 2.4 to administer the Plan on behalf of the Employer.
1.3 "ADOPTION AGREEMENT" means the separate Agreement which is executed by the
Employer and accepted by the Trustee which sets forth the elective provisions of
this Plan and Trust as specified by the Employer.
1.4 "AFFILIATED EMPLOYER" means the Employer and any corporation which is a
member of a controlled group of corporations (as defined in Code Section 414(b))
which includes the Employer, any trade or business (whether or not incorporated)
which is under common control (as defined in Code Section 414(c)) with the
Employer, any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Code Section 414(m)) which includes the
Employer", and any other entity required to be aggregated with the Employer
pursuant to Regulations under Code Section 414(o).
1.5 "AGGREGATE ACCOUNT" means with respect to each Participant, the value of
all accounts maintained on behalf of a Participant, whether attributable to
Employer or Employee contributions, subject to the provisions of Section 2.2.
1.6 "ANNIVERSARY DATE" means the anniversary date specified in C3 of the
Adoption Agreement.
1.7 "BENEFICIARY" means the person to whom a share of a deceased Participant's
interest in the Plan is payable, subject to the restrictions of Sections 6.2 and
6.6.
1.8 "CODE" means the Internal Revenue Code of 1986, as amended or replaced
from time to time.
1.9 "COMPENSATION" with respect to any Participant means such Participant's
compensation as specified by the Employer in E1 of the Adoption Agreement that
is paid during the applicable period. Compensation for any Self-Employed
Individual shall be equal to his Earned Income.
In addition, if specified in the Adoption Agreement, Compensation for all
Plan purposes shall also include compensation which is not currently includible
in the Participant's gross income by reason of the application of Code Sections
125, 402(a)(8), 402(h)(1)(B), or 403(b).
Compensation in excess of $200,000 shall be disregarded. Such amount shall
be adjusted at the same time and in such manner as permitted under Code Section
415(d). In applying this limitation, the family group of a Highly Compensated
Participant who is subject to the Family Member aggregation rules of Code
Section 414(q)(6) because such Participant is either a "five percent owner" of
the Employer or one of the ten (10) Highly Compensated Employees paid the
greatest "415 Compensation" during the year, shall be treated as a single
Participant, except that for this purpose Family Members shall include only the
affected Participant's spouse and any lineal descendants who have not attained
age nineteen (19) before the close of the year. If, as a result of the
application of such rules, the adjusted $200,000 limitation is exceeded, then
(except for purposes of determining the portion of Compensation up to the
integration level if this plan is integrated), the limitation shall be prorated
among the affected individuals in proportion to each such individual's
Compensation as determined under this Section prior to the application of this
limitation.
<PAGE>
For Plan Years beginning prior to January 1, 1989, the $200,000 limit
(without regard to Family Member aggregation) shall apply only for Top Heavy
Plan Years and shall not be adjusted.
1.10 "CONTRACT" OR "POLICY" means any life insurance policy, retirement income
policy, or annuity contract (group or individual) issued by the Insurer. In the
event of any conflict between the terms of this Plan and the terms of any
insurance contract purchased hereunder, the Plan provisions shall control.
1.11 "DEFERRED COMPENSATION" means that portion of a Participant's total
Compensation that such Participant has elected to defer for a Plan Year pursuant
to Section 4.2.
1.12 "EARLY RETIREMENT DATE" means the date specified in the Adoption
Agreement on which a Participant or Former Participant has satisfied the age and
service requirements specified in the Adoption Agreement (Early Retirement Age).
A Participant shall become fully Vested upon satisfying this requirement if
still employed at his Early Retirement Age.
A Former Participant who terminates employment after satisfying the
service requirement for Early Retirement and who thereafter reaches the age
requirement contained herein shall be entitled to receive his benefits under
this Plan.
1.13 "EARNED INCOME" means with respect to a Self-Employed Individual, the net
earnings from self-employment in the trade or business with respect to which the
Plan is established, for which the personal services of the individual are a
material income-producing factor. Net earnings will be determined without regard
to items not included in gross income and the deductions allocable to sue.
items. Net earnings are reduced by contributions by the Employer to a qualified
Plan to the extent deductible under Code Section 404. In addition, for Plan
Years beginning after December 31, 1989, net earnings shall be determined with
regard to the deduction allowed to the Employer by Code Section 164(f).
1.14 "ELECTIVE CONTRIBUTION" means the Employer's contributions to the Plan
that are made pursuant to the Participant's deferral election pursuant to
Section 4.2. In addition, if selected in E3 of the Adoption Agreement, the
Employer's matching contribution made pursuant to Section 4.l(b) shall be
considered an Elective Contribution for purposes of the Plan. Elective
Contributions shall be subject to the requirements of Sections 4.2(b) and 4.2(c)
and shall further be required to satisfy the diction requirements of Regulation
1.401(k)-1(b)(3), the provisions of which are specifically incorporated herein
by reference.
1.15 "ELIGIBLE EMPLOYEE" means any Employee specified in D1 of the Adoption
Agreement.
1.16 "EMPLOYEE" means any person who is employed by the Employer, but excludes
any person who is employed as an independent contractor. The term Employee shall
also include Leased Employees as provided in Code Section 414(n) or (o).
Except as provided in the Non-Standardized Adoption Agreement, all
Employees of all entities which are an Affiliated Employer will be treated as
employed by a single employer.
1.17 "EMPLOYER" means the entity specified in the Adoption Agreement, any
Participating Employer (as defined in Section 10.1) which shall adopt this Plan,
any successor which shall maintain this Plan and any predecessor which has
maintained this Plan.
1.18 "EXCESS COMPENSATION" means, with respect to a Plan that is integrated
with Social Security, a Participant's Compensation which is in excess of the
amount set forth in the Adoption Agreement.
1.19 "EXCESS CONTRIBUTIONS" means, with respect to a Plan Year, the excess of
Elective Contributions and Qualified Non-Elective Contributions made on behalf
of Highly Compensated Participants for the Plan Year over the maximum amount of
such contributions permitted under Section 4.5(a).
2
<PAGE>
1.20 "EXCESS DEFERRED COMPENSATION" means, with respect to any taxable year of
a Participant, the excess of the aggregate amount of such Participant's Deferred
Compensation and the elective deferrals pursuant to Section 4.2(f) actually made
on behalf of such Participant for such taxable year, over the dollar limitation
provided for in Code Section 402(g), which is incorporated herein by reference.
1.21 "FAMILY MEMBER" means, with respect to an affected Participant, such
Participant's spouse, and such Participant's lineal descendants and ascendants
and their spouses, all as described in Code Section 414(q)(6)(B).
1.22 "FIDUCIARY" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of its
sets, (b) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any monies or other property of the Plan or has any
authority or responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
1.23 "FISCAL YEAR" means the Employer's accounting year as specified in the
Adoption Agreement.
1.24 "FORFEITURE" means that portion of a Participant's Account that is not
Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a Participant's
Account, or
(b) the last day of the Plan Year in which the Participant incurs five
(5) consecutive 1-Year Breaks in Service.
Furthermore, for purposes of paragraph (a) above, in the case of a
Terminated Participant whose Vested benefit is zero, such Terminated Participant
shall be deemed to have received a distribution of his Vested benefit upon his
termination of employment. In addition, the term Forfeiture shall also include
amounts deemed to be Forfeitures pursuant to any other provision of this Plan.
1.25 "FORMER PARTICIPANT" means a person who has been a Participant, but who
has ceased to be a Participant for any reason.
1.26 "414(S) COMPENSATION" with respect to any Employee means his Compensation
on as defined in Section 1.9. However, for purposes of this Section,
Compensation shall be Compensation paid and shall be determined by including, in
the case of a non-standardized Adoption Agreement, any items that are excluded
from Compensation pursuant to the Adoption Agreement. The amount of "414(s)
Compensation" with respect to any Employee shall include "414(s) Compensation"
during the entire twelve (12) month period ending on the last day of such Plan
Year, except that for Plan Years beginning prior to the later of January 1,
1992, or the date that is sixty (60) days after the date final Regulations are
issued, "414(s) Compensation" shall only be recognized as of an Employee's
effective date of participation.
In addition, if specified in the Adoption Agreement, "414(s)
Compensation" shall also include compensation which is not currently includible
in the Participant's gross income by reason of the application of Code Sections
125, 402(a)(8), 402(h)(l)(B), or 403(b), plus Elective Contributions
attributable to Deferred Compensation recharacterized as voluntary Employee
contributions pursuant to 4.6(a).
1.27 "415 COMPENSATION" means compensation as defined in Section 4.9(f)(2).
1.28 "HIGHLY COMPENSATED EMPLOYEE" means an Employee described in Code Section
414(q) and the regulations thereunder and generally means an Employee who
performed services for the Employer during the "determination year" and is in
one or more of the following groups:
(a) Employees who at any time during the "determination year" or
"look-back year" were "five percent owners" as defined in Section
1.35(c).
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(b) Employees who received "415 Compensation" during the "look-back"
year from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the "look-back
year" from the Employer in excess of $50,000 and were in the Top Paid Group
of Employees for the Plan Year.
(d) Employees who during the "look-back year" were officers of the
Employer (as that term is defined within the meaning of the Regulations
under Code Section 416) and received "415 Compensation" during the "look-
back year" from the Employer greater than 50 percent of the limit in effect
under Code Section 415(b)(1)(A) for any such Plan Year. The number of
officers shall be limited to the lesser of (i) 50 employees; or (ii) the
greater of 3 employees or l0 percent of all employees. If the Employer does
not have at least one officer whose annual "415 Compensation" is in excess
of 50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid
officer of the Employer will be treated as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100 Employees
paid the greatest "415 Compensation" during the "determination year" and
are also described in (b), (c) or (d) above when these paragraphs are
modified to substitute "determination year" for "look-back year".
The "determination year" shall be the Plan Year for which testing is being
performed, and the "look-back year" shall be the immediately preceding twelve-
month period. However, if the Plan Year is a calendar year, or if another Plan
of the Employer so provides, then the "look-back year" shall be the calendar
year ending with or within the Plan Year for which testing is being performed,
and the "determination year" (if applicable) shall be the period of time, if
any, which extends beyond the "look-back year" and ends on the last day of the
Plan Year for which testing is being performed (the "lag period"). With respect
to this election, it shall be applied on a uniform and consistent basis to all
plans, entities, and arrangements of the Employer.
For purposes of this Section, the determination of "415 Compensation" shall
be made by including amounts that would otherwise be excluded from a
Participant's gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(l)(B) and, in the case of Employer contributions made pursuant
to a salary reduction agreement, Code Section 403(b). Additionally, the dollar
threshold amounts specified in (b) and (c) above shall be adjusted at such time
and in such manner as is provided in Regulations. In the case of such an
adjustment, the dollar limits which shall be applied are those for the calendar
year in which the "determination year" or "look back year" begins.
In determining who is a Highly Compensated Employee, Employees who are non-
resident aliens and who received no named income (within the meaning of Code
Section 91l(d)) from the Employer constituting United States source income
within the meaning of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, all Affiliated Employers shall be taken into account as a single
employer and Leased Employees within the meaning of Code Sections 414(n)(2) and
414(o)(2) shall be considered Employees unless such Leased Employees are covered
by a plan described in Code Section 414(n)(5) and are not covered in any
qualified plan maintained by the Employer. The exclusion of Leas Employees for
this purpose shall be applied on a uniform and consistent basis for all of the
Employer's retirement plans. In addition, Highly Compensated Former Employees
shall be treated as Highly Compensated Employees without regard to whether they
performed services during the "determination year".
1.29 "HIGHLY COMPENSATED FORMER EMPLOYEE" means a former Employee who had a
separation year prior to the "determination year" and was a Highly Compensated
Employee in the year of separation from service or in any "determination year"
after attaining age 55. Notwithstanding the foregoing, an Employee who separated
from service prior to 1987 will be treated as a Highly Compensated Former
Employee only if during the separation year (or year preceding the separation
year) or any year after the Employee attains age 55 (or the last year ending
before the Employee's 55th birthday), the Employee either received "415
Compensation" in excess of $50,000 or was a "five percent owner". For purposes
of this Section, "determination year", "415 Compensation" and "five percent
owner" shall be determined in accordance with Section 1.28. Highly Compensated
Former Employees shall be treated as
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Highly Compensated Employees. The method set forth in this Section for
determining who is a "Highly Compensated Former Employee" shall be applied on a
uniform and consistent basis for all purposes for which the Code Section 414(q)
definition is applicable.
1.30 "HIGHLY COMPENSATED PARTICIPANT" means any Highly Compensated Employee
who is eligible to participate in the Plan.
1.31 "HOUR OF SERVICE" means (1) each hour for which an Employee is directly
or indirectly compensated or entitled to pen on by the Employer for the
performance of duties during the applicable computation period; (2) each hour
for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty
or leave of absence) during the applicable computation period; (3) each hour for
which back pay is awarded or agreed to by the Employer without regard to
mitigation of damages. The same Hours of Service shall not be credited both
under (1) or (2), as the case may be, and under (3).
Notwithstanding the above, (i) no more than 501 Hours of Service are
required to be credited to an Employee on account of any single continuous
period during which the Employee performs no duties (whether or not such period
occurs in a single computation period); (ii) an hour for which an Employee is
directly or indirectly paid, or entitled to payment, on account of s period
during which no duties are performed is not required to be credited to the
Employee if such payment is made or due under a plan maintained solely for the
purpose of complying with applicable worker's compensation, or unemployment
compensation or disability insurance laws; and (iii) Hours of Service are not
required to be credited for s payment which solely reimburses an Employee for
medical or medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by or
due from the Employer regardless of whether such payment is made by or due from
the Employer directly, or indirectly through, among others, a trust fund, or
insurer, to which the Employer contributes or pays premiums and regardless of
whether contributions made or due to the trust fund, insurer, or other entity
are for the benefit of particular Employees or are on behalf of a group of
Employees in the aggregate.
An Hour of Service must be counted for the purpose of determining a Year
of Service, a year of participation for purposes of accrued benefits, a l-Year
Break in Service. and employment commencement date (or reemployment commencement
date). The provisions of Department of labor regulations 2530.200b-2(B) and (c)
are incorporated herein by reference.
Hours of Service will be credited for employment with all Affiliated
Employers and for any individual considered to be a Lease Employee pursuant to
Code Sections 414(n)or 414(o) and the Regulations thereunder.
Hours of Service will be determined on the basis of the method selected
in the Adoption Agreement.
1.32 "INSURER" means any legal reserve insurance company which shall issue one
or more policies under the Plan.
1.33 "INVESTMENT MANAGER" means an entity that (a) has the power to manage,
acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility
to the Plan in writing. Such entity must be a person, firm, or corporation
registered as an investment adviser under the Investment Advisers Act of 1940, a
bank, or an insurance company.
1.34 . "JOINT AND SURVIVOR ANNUITY" means an annuity for the life of a
Participant with a survivor annuity for the life of the Participant's spouse
which is not less than 1/2, nor greater than the amount of the annuity payable
during the joint lives of the Participant and the Participant's spouse. The
Joint and Survivor Annuity will be the amount of benefit which can be purchased
with the Participant's Vested interest in the Plan.
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1.35 "KEY EMPLOYEE" means an Employee as defined in Code Section 416(i) and
the Regulations thereunder. Generally, any Employee or former Employee (as well
as each of his Beneficiaries) is considered a Key Employee if he, at any time
during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
(a) an officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation " greater than 50 percent of the amount in effect under Code
Section 415(b)(1)(A) for any such Plan Year,
(b) one of the ten employees having annual "415 Compensation " from
the Employer for at Plan Year greater than the dollar limitation in effect
under Code Section 415(c)(1)(A) for the calendar year in which such Plan
Year ends and owning (or considered as owning within the meaning of Code
Section 318) both more than one-half percent interest and the largest
interests in the Employer.
(c) a "five percent owner" of the Employer. "Five percent owner"
means any person who owns (or is considered as owning within the meaning of
Code Section 318) more than five percent (5 %) of the outstanding stock of
the Employer or stock possessing more than five percent (5%) of the total
combined voting power of all stock of the Employer or, in the case of an
unincorporated business, any person who owns more than five percent (5%) of
the capital or profits interest in the Employer. In determining percentage
ownership hereunder, employers that would otherwise be aggregated under
Code Sections 414(b), (c), (m) and (o) shall be treated as separate
employers.
(d) a "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent owner"
means any person who owns (or is considered as owning within the meaning of
Code Section 318) more than one percent (1%) of the outstanding stock of
the Employer or stock possessing more than one percent (1%) of the total
combined voting power of all stock of the Employer or, in the case of an
unincorporated business, any person who owns more than one percent (1%) of
the capital or profits interest in the Employer. In determining percentage
ownership hereunder, employers that would otherwise be aggregated under
Code Sections 414(b), (c), (m) and (o) shall be treated as separate
employers. However, in determining whether an individual has "415
Compensation" of more than $150,000, "415 Compensation" from each employer
required to be aggregated under Code Sections 414(b), (c), (m) and (o)
shall be taken into account.
For purposes of this ,Section, the determination of "415 Compensation"
shall be made by including amounts that would otherwise be excluded from a
Participant's gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made pursuant
to a salary reduction agreement, Code Section 403(b).
1.36 "LATE RETIREMENT DATE" means the date of, or the first day of the month
or the Anniversary Date coinciding with or next following, whichever corresponds
to the election made for the Normal Retirement Date, a Participant's actual
retirement after having reached his Normal Retirement Date.
1.37 "LEASED EMPLOYEE" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)) on a substantially full time basis for a period of at least one year,
and such services are of a type historically performed by employees in the
business field of the recipient employer. Contributions or benefits provided a
leased employee by the leasing organization which are attributable to services
performed for the recipient employer shall be treated as provided by the
recipient employer.
A leased employee shall not be considered an Employee of the recipient
if: (i) such employee is covered by a money purchase pension plan providing: (1)
a nonintegrated employer contribution rate of at least 10 percent of
compensation, as defined in Code Section 415(c)(3), but including amounts
contributed pursuant to a salary reduction agreement which are excludable from
the employee's gross income under Code Sections 125, 402(a)(8),
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402(h) or 403(b), (2) immediate participation, and (3) full and immediate
vesting; and (ii) leased employees do not constitute more than 20 percent of the
recipient's nonhighly compensated workforce.
1.38 "NET PROFIT" means with respect to any Fiscal Year the Employer's net
income or profit for such Fiscal Year determined upon the basis of the
Employer's books of account in accordance with generally accepted accounting
principles, without any reduction for taxes based upon income, or for
contributions made by the Employer to this Plan and any other qualified plan.
1.39 "NON-ELECTIVE CONTRIBUTION" means the Employer's contributions to the
Plan other than those made pursuant to the Participant's deferral election made
pursuant to Section 4.2 and any Qualified Non-Elective Contribution. In
addition, if selected in E3 of the Adoption Agreement, the Employer's Matching
Contribution made pursuant to Section 4.1(b) shall be considered a Non-Elective
Contribution for purposes of the Plan.
1.40 "NON-KEY COMPENSATED PARTICIPANT" means any Participant who is neither a
Highly Compensated Employee nor a Family Member.
1.41 "NON-KEY EMPLOYEE" means any Employee or former Employee (and his
Beneficiaries) who is not a Key Employee.
1.42 "NORMAL RETIREMENT AGE" means the age specified in the Adoption Agreement
at which time a Participant shall become fully Vested in his Participant's
Account.
1.43 "NORMAL RETIREMENT DATE" means the date specified in the Adoption
Agreement on which a Participant shall bee roe eligible to have his benefits
distributed to him.
1.44 "1-YEAR BREAK IN SERVICE" means the applicable computation period during
which an Employee has not completed more than 500 Hours of Service with the
Employer. Further, solely for the purpose of determining whether a Participant
has incurred a 1-Year Break in Service, Hours of Service shall be recognized for
"authorized leaves of absence" and "maternity and paternity leaves of absence."
"Authorized leave of absence" means an unpaid, temporary cessation from
active employment with the Employer pursuant to an established nondiscriminatory
policy, whether occasioned by illness, military service, or any other reason.
A "maternity or paternity leave of absence" means, for Plan Years
beginning after December 31, 1984, an absence from work for any period by reason
of the Employee's pregnancy, birth of the Employee's child, placement of a child
with the Employee in connection with the adoption of such child, or any absence
for the purpose of caring for such child for a period immediately following such
birth or placement. For this purpose, Hours of Service shall be credited for the
computation period in which the absence from work begins, only if credit
therefore is necessary to prevent the Employee from incurring a l-Year Break in
Service, or, in any other case, in the immediately following computation period.
The Hours of Service credited for a "maternity or paternity leave of absence"
shall be those which would normally have been credited but for such absence, or,
in any case in which the Administrator is unable to determine such hours
normally credited, eight (8) Hours of Service per day. The total Hours of
Service required to be credited for a "maternity or paternity leave of absence"
shall not exceed 501.
1.45 "OWNER-EMPLOYEE" means a sole proprietor who owns the entire interest in
the Employer or a partner who owns more than 10% of either the capital interest
or the profits interest in the Employer and who receives income for personal
services from the Employer.
1.46 "PARTICIPANT" means any Eligible Employee who participates in the Plan as
provided in Section 3.2 and has not for any reason become ineligible to
participate further in the Plan.
1.47 "PARTICIPANT'S ACCOUNT" means the account established and maintained by
the Administrator for each Participant with respect to his total interest under
the Plan resulting from the Employer's Non-Elective
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Contributions. A separate accouting shall be maintained for matching
contributions if they are deemed to be Non-Elective Contributions.
1.48 "PARTICIPANT'S COMBINED ACCOUNT" means the total aggregate amount of each
Participant's Elective Account, Qualified Non-Elective Account, and
Participant's Account.
1.49 "PARTICIPANT'S ELECTIVE ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan and Trust resulting from the Employer's Elective
Contributions. A separate accounting shall be maintained with respect to that
portion of the Participant's Elective Account attributable to Elective
Contributions made pursuant to Section 4.2, Employer matching contributions if
they are deemed to be Elective Contributions, mad any Qualified Non-Elective
Contributions.
1.50 "PARTICIPANT'S ROLLOVER ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from amounts transferred from another qualified
plan or "conduit" Individual Retirement Account in accordance with Section 4.
11.
1.51 "PLAN" means this instrument (hereafter referred to as American Capital
Marketing, Inc. 401(k) Plan & Trust Basic Plan Document #02) including all
amendments thereto, end the Adoption Agreement as adopted by the Employer.
1.52 "PLAN YEAR" means the Plan's accounting year as specified in C2 of the
Adoption Agreement.
1.53 "PRE-RETIREMENT SURVIVOR ANNUITY" means an immediate annuity for the life
of the Participant's spouse, the payments under which must be equal to the
actuarial equivalent of 50% of the Participant's Vested interest in the Plan as
of the date of death.
1.54 "QUALIFIED NON-ELECTIVE ACCOUNT" means the account established hereunder
to which Qualified Non-Elective Contributions are allocated.
1.55 "QUALIFIED NON-ELECTIVE CONTRIBUTION" means the Employer's contributions
to the Plan that are made pursuant to Section 4.1(d) and Section 4.6(b) which
are used to satisfy the "Actual Deferral Percentage" tests. Qualified Non-
Elective Contributions are nonforfeitable when made and are distributable only
as specified in Sections 4.2(c) and 6.11. In addition, the Employer's
contributions to the Plan that are made pursuant to Section 4.8(h) and which are
used to satisfy the "Actual Contribution Percentage" tests shall be considered
Qualified Non-Elective Contributions.
1.56 "QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTION ACCOUNT" means the account
established and maintained by the Administrator for each Participant with
respect to his total interest under the Plan resulting from the Participant's
tax deductible qualified voluntary employee contributions made pursuant to
Section 4.14.
1.57 "REGULATION" means the Income Tax Regulations as promulgated by the
Secretary of the Treasury or his delegate, and as amended from time to time.
1.58 "RETIRED PARTICIPANT" means a person who has been a Participant, but who
has become entitled to retirement benefits under the Plan.
1.59 "RETIREMENT DATE" means the date as of which a Participant retires for
reasons other than Total and Permanent Disability, whether such retirement
occurs on a Participant's Normal Retirement Date, Early or Late Retirement Date
(see Section 6.1).
1.60 "SELF-EMPLOYED INDIVIDUAL" means an individual who has earned income for
the taxable year from the trade or business for which the Plan is established,
and, also, an individual who would have had earned income but for the fact that
the trade or business had no net profits for the taxable year. A Self-Employed
Individual shall be treated as an Employee.
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1.61 "SHAREHOLDER-EMPLOYEE" means a Participant who owns more than five
percent (5%) of the Employer's outstanding capital stock during any year in
which the Employer elected to be taxed as a Small Business Corporation under the
applicable Code Section.
1.62 "SHORT PLAN YEAR" means, if specified in the Adoption Agreement, that the
Plan Year shall be less than a 12 month period. If chosen, the following rules
shall apply in the administration of this Plan. In determining whether an
Employee has completed a Year of Service for benefit accrual purposes in the
Short Plan Year, the number of the Hours of Service required shall be
proportionately reduced based on the number of days in the Short Plan Year. The
determination of whether an Employee has completed a Year of Service for vesting
and eligibility purposes shall be made in accordance with Department of Labor
Regulation 2530.203-2(c). In addition, if this Plan is integrated with Social
Security, the integration level shall also be proportionately reduced based on
the number of days in the Short Plan Year.
1.63 "SUPER TOP HEAVY PLAN" means a plan described in Section 2.2(b).
1.64 "TAXABLE WAGE BASE" means, with respect to any year, the maximum amount
of earnings which may be considered wages for such year under Code Section
3121(a)(1).
1.65 "TERMINATED PARTICIPANT" means a person who has been a Participant, but
whose employment has been terminated other than by death, Total and Permanent
Disability or retirement.
1.66 "TOP HEAVY PLAN" means a plan described in Section 2.2(a).
1.67 "TOP HEAVY PLAN YEAR" means a Plan Year commencing after December 31,
1983 during which the Plan is a Top Heavy Plan.
1.68 "TOP PAID GROUP" shall be determined pursuant to Code Section 414(q) and
the Regulations thereunder and generally means the top 20 percent of Employees
who performed services for the Employer during the applicable year, ranked
according to the amount of "415 Compensation" (as determined pursuant to Section
1.28) received from the Employer during such year. All Affiliated Employers
shall be taken into account as a single employer, and Leased Employees shall be
treated as Employees pursuant to Code Section 414(n) or (o). Employees who are
non-resident aliens who received no earned income (within the meaning of Code
Section 911(d)(2)) from the Employer constituting United States source income
within the meaning of Code Section 86l(a)(3) shall not be treated as Employees.
Additionally, for the purpose of determining the number of active Employees in
any year, the following additional Employees shall also be excluded, however,
such Employees shall still be considered for the purpose of identifying the
particular Employees in the Top Paid Group:
(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17 1/2 hours per week;
(c) Employees who normally work less than six (6) months during a year;
and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer are
covered under agreement the Secretary of Labor finds to be collective bargaining
agreements between Employee representatives and the Employer, and the Plan
covers only Employees who are not covered under such agreements, then Employees
covered by such agreements shall be excluded from both the total number of
active Employees as well as from the identification of particular Employees in
the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied on a
uniform and consistent basis for all purposes for which the Code Section 414(q)
definition is applicable.
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1.69 "TOTAL AND PERMANENT DISABILITY" means the inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months. The
disability of a Participant shall be determined by a licensed physician chosen
by the Administrator. However, if the condition constitutes total disability
under the federal Social Security Acts, the Administrator may rely upon such
determination that the Participant is Totally and Permanently Disabled for the
purposes of this Plan. The determination shall be applied uniformly to all
Participants.
1.70 "TRUSTEE" means the person or entity named in B6 of the Adoption
Agreement and any successors.
1.71 "TRUST FUND" means the assets of the Plan and Trust as the same shall
exist from time to time.
1.72 "VESTED" means the nonforfeitable portion of any account maintained on
behalf of a Participant.
1.73 "VOLUNTARY CONTRIBUTION ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from the Participant's nondeductible voluntary
contributions made pursuant to Section 4.12.
Amounts recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a) shall remain subject to the limitations of Sections 4.2(b) and
4.2(c). Therefore, a separate accounting shall be maintained with respect to
that portion of the Voluntary Contribution Account attributable to voluntary
Employee contributions made pursuant to Section 4.12.
1.74 "YEAR OF SERVICE" means the computation period of twelve (12) consecutive
months, herein set forth, and during which an Employee has completed at least
1000 Hours of Service.
For purposes of eligibility for participation, the initial computation
period shall begin with the date on which the Employee first performs an Hour of
Service (employment commencement date). The computation period beginning after a
l-Year Break in Service shall be measured from the date on which an Employee
again performs an Hour of Service. The succeeding computation periods shall
begin with the first anniversary of the Employee's employment commencement date.
However, if one (1) Year of Service or less is require as a condition of
eligibility, then after the initial eligibility computation period, the
eligibility computation period shall shift to the current Plan Year which
includes the anniversary of the date on which the Employee first performed an
Hour of Service. An Employee who is credited with 1,000 Hours of Service in both
the initial eligibility computation period and the first Plan Year which
commences prior to the first anniversary of the Employee's initial eligibility
computation period will be credited with two Years of Service for purposes of
eligibility to participate.
For vesting purposes, and all other purposes not specifically addressed
in this Section, the computation period shall be the Plan Year, including
periods prior to the Effective Date of the Plan unless specifically excluded
pursuant to the Adoption Agreement.
Years of Service and breaks in service will be measured on the same
computation period.
Years of Service with any predecessor Employer which maintained this Plan
shall be recognized. Years of Service with any other predecessor Employer shall
be recognized as specified in the Adoption Agreement.
Years of Service with any Affiliated Employer shall be recognized.
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ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
2.1 TOP HEAVY PLAN REQUIREMENTS
For any Top Heavy Plan Year, the Plan shall provide the special vesting
requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the
special minimum allocation requirements of Code Section 416(c) pursuant to
Section 4.4(i) of the Plan.
2.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year beginning
after December 31, 1983, in which, as of the Determination Date, (1) the
Present Value of Accrued Benefits of Key Employees and (2) the sum of the
Aggregate Accounts of Key Employees under this Plan and all plans of an
Aggregation Group, exceeds sixty percent (60%) of the Present Value of
Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees
under this Plan and ell plans of an Aggregation Group.
If any Participant is a Non-Key Employee for any Plan Year, but such
Participant was a Key Employee for any prior Plan Year, such Participant's
Present Value of Accrued Benefit and/or Aggregate Account balance shall not
be taken into Account for pose of determining whether this Plan is a Top
Heavy or Super Top Heavy Plan (or whether any Aggregation Group which
includes this Plan is a Top Heavy Group). In addition, if a Participant or
Former Participant has not performed any services for any Employer
maintaining the Plan at any time during the five year period ending on the
Determination Date, any accrued benefit for such Participant or Former
Participant shall not be taken into account for the purposes of determining
whether this Plan is a Top Heavy or Super Top Heavy Plan.
(b) This Plan shall be a Super Top Heavy Plan for any Plan Year
beginning after December 31, 1983, in which, as of the Determination Date,
(1) the rest Value of Accrued Benefits of Key Employees and (2) the sum of
the Aggregate Accounts of Key Employees under this Plan and all plans of an
Aggregation Group, exceeds ninety percent (90%) of the Present Value of
Accrued Benefits end the Aggregate Accounts of all Key and Non-Key Employees
under this Plan and ell plans of an Aggregation Group.
(c) Aggregate Account: A Participant Aggregate Account as of the
Determination Date is the sum of:
(1) his Participant's Combined Account balance as of the most recent
valuation occurring within a twelve (12) month period ending on the
Determination Date;
(2) an adjustment for any contributions due as of the Determination
Date. Such adjustment shall be the amount of any contributions actually
made after the valuation date but on or before the Determination Date,
except for the first Plan. Year when such adjustment shall also reflect
the amount of any contributions made after the Determination Date that
arc allocated as of a date in that first Plan Year;
(3) any Plan distributions made within the Plan Year that includes
the Determination Date or within the four (4) preceding Plan Years.
However, in the case of distributions made after the valuation date and
prior to the Determination Date, such distributions are not included as
distributions for top heavy purposes to the extent that such
distributions are already included in the Participant's Aggregate Account
balance as of the valuation date. Notwithstanding anything herein to the
contrary, all distributions, including distributions made prior to
January 1, 1984, and distributions under a terminated plan which if it
had not been terminated would have been required to be included in an
Aggregation Group, will be counted. Further, distributions from the Plan
(including the cash value of life insurance
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policies) of a Participant's account balance because of death shall be
treated as a distribution for the purposes of this paragraph.
(4) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary
employee contributions shall not be considered to be a part of the
Participant's Aggregate Account balance.
(5) with respect to unrelated rollover and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan
maintained by one employer to a plan maintained by another employer), if
this Plan provides the rollover or plan-to-plan transfers, it shall
always consider such rollovers or plan-to-plan transfers as a
distribution for the purposes of this Section. If this Plan is the plan
accepting such rollovers or plan-to-plan transfers, it shall not consider
such rollovers or plan-to-plan transfers accepted after December 31, 1983
as part of the Participant's Aggregate Account balance. However,
rollovers or plan to-plan transfers accepted prior to January 1, 1984
shall be considered as part of the Participant's Aggregate Account
balance.
(6) with respect to related rollovers and plan-to-plan transfers
(ones either not initiated by the Employee or made to a plan maintained
by the same employer), if this Plan provides the rollover or plan-to-plan
transfer, it shall not be counted as a distribution for purposes of this
Section. If this Plan is the plan accepting such rollover or plan-to-plan
transfer, it shall consider such rollover or plan-to-plan transfer as
part of the Participant's Aggregate Account balance, irrespective of the
date on which such rollover or plan-to-plan transfer is accepted.
(7) For the purposes of determining whether two employers are to be
treated as the same employer in 2.2(c)(5) and 2.2(c)(6) above, all
employers aggregated under Code Section 414(b), (c), (m) and (o) are
treated as the same employer.
(d) "Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required Aggregation
Group hereunder, each qualified plan of the Employer, including any
Simplified Employee Pension Plan, in which a Key Employee is a
participant in the Plan Year containing the Determination Date or any of
the four preceding Plan Years, and each other qualified plan of the
Employer which enables any qualified plan in which a Key Employee
participates to meet the requirements of Code Sections 401(a)(4) or 410,
will be required to be aggregated. Such group shall be known as a
Required Aggregation Group.
In the case of a Required Aggregation Group, each plan in the group will
be considered a Top Heavy Plan if the Required Aggregation Group is a Top
Heavy Group. No plan in the Required Aggregation Group will be considered
a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy
Group.
(2) Permissive Aggregation Group: The Employer may also include any
other plan of the Employer, including any Simplified Employee Pension
Plan, not required to be included in the Required Aggregation Group,
provided the resulting group, taken as a whole, would continue to satisfy
the provisions of Code Sections 401(a)(4) and 410. Such group shall be
known as a Permissive Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that is part
of the Required Aggregation Group will be considered a Top Heavy Plan if
the Permissive Aggregation Group is a Top Heavy Group. No plan in the
Permissive Aggregation Group will be considered a Top Heavy Plan if the
Permissive Aggregation Group is not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination Dates
fall within the same calendar year shall be aggregated in order to
determine whether such plans are Top Heavy Plans.
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(4) When aggregating plans, the value of Aggregate Accounts and
Accrued Benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
(5) An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending on
the Determination Date.
(e) "Determination Date" means (a) the last day of the preceding Plan
Year, or (b) in the case of the first Plan Year, the last day of such Plan
Year.
(f) Present Value of Accrued Benefit: In the case of a defined benefit
plan, the Present Value of Accrued Benefit for a Participant other than a
Key Employee shall be as determined using the single accrual method used
for all plans of the Employer and Affiliated Employers, or if no such
single method exists, using a method which results in benefits accruing not
more rapidly than the slowest accrual rate permitted under Code Section
411(b)(1)(C). The determination of the Present Value of Accrued Benefit
shall be determined as of the most recent valuation date that falls within
or ends with the 12-month period ending on the Determination Date, except
as provided in Code Section 416 and the Regulations thereunder for the
first and second plan years of a defined benefit plan.
However, any such determination must include present value of accrued
benefit attributable to any Plan distributions referred to in Section
2.2(c)(3) above, any Employee contributions referred to in Section
2.2(c)(4) above or any related or unrelated rollovers referred to in
Sections 2.2(c)(5) and 2.2(c)(6) above.
(g) "Top Heavy Group" means an Aggregation Group in which, as of the
Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under all
defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group, exceeds sixty percent (60%) of
a similar sum determined for all Participants.
(h) The Administrator shall determine whether this Plan is a Top Heavy
Plan on the Anniversary Date specified in the Adoption Agreement. Such
determination of the top heavy ratio shall be in accordance with Code
Section 416 and the Regulations thereunder.
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) The Employer shall be empowered to appoint and remove the Trustee and
the Administrator from time to time as it deems necessary for the proper
administration of the Plan to assure that the Plan is being operated for
the exclusive benefit of the Participants and their Beneficiaries in
accordance with the terms of the Plan, the Code, and the Act.
(b) The Employer shall establish a "funding policy and method", i.e., it
shall determine whether the Plan has a short run need for liquidity (e.g.,
to pay benefits) or whether liquidity is a long run goal and investment
growth (and stability of same) is a more current need, or shall appoint a
qualified person to do so. The Employer or its delegate shall communicate
such needs and goals to the Trustee, who shall coordinate such Plan needs
with its investment policy. The communication of such a "funding policy and
method" shall not, however, constitute a directive to the Trustee as to
investment of the Trust Funds. Such "funding policy and method" shall be
consistent with the objectives of this Plan and with the requirements of
Title I of the Act.
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(c) The Employer may, in its discretion, appoint an Investment
Manager to manage all or a designated portion of the assets of the Plan. In
such event, the Trustee shall follow the directive of the Investment
Manager in investing the assets of the Plan managed by the Investment
Manager.
(d) The Employer shall periodically review the performance of any
Fiduciary or other person to whom duties have been delegated or allocated
by it under the provisions of this Plan or pursuant to procedures
established hereunder. This requirement may be satisfied by formal periodic
review by the Employer or by a qualified person specifically designated by
the Employer, through day-to-day conduct and evaluation, or through other
appropriate ways.
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more Administrators. Any person,
including, but not limited to, the Employees of the Employer, shall be eligible
to serve as an Administrator. Any person so appointed shall signify his
acceptance by filing written acceptance with the Employer. An Administrator may
resign by delivering his written resignation to the Employer or be removed by
the Employer by delivery of written not flee of removal, to take effect at a
date specified therein, or upon delivery to the Administrator if no date is
specified.
The Employer, upon the resignation or removal of an Administrator, shall
promptly designate in writing a successor to this position, If the Employer does
not appoint an Administrator, the Employer will function as the Administrator.
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILIES
If more than one person is appointed as Administrator, the responsibilities
of each Administrator may be specified by the Employer and accepted in writing
by each Administrator. In the event that no such delegation is made by the
Employer, the Administrators may allocate the responsibilities among themselves,
in which event the Administrators shall notify the Employer and the Trustee in
writing of such action and specify the responsibilities of each Administrator.
The Trustee thereafter shall accept and rely upon any documents executed by the
appropriate Administrator until such time as the Employer or the Administrators
file with the Trustee a written revocation of such designation.
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer the Plan
for the exclusive benefit of the Participants and their Beneficiaries, subject
to the specific terms of the Plan. The Administrator shall administer the Plan
in accordance with its terms and shall have the power and discretion to construe
the terms of the Plan and determine all questions arising in connection with the
administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding upon all
persons. The Administrator may establish procedures, correct any defect, supply
any information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the purpose of the
Plan; provided, however, that any procedure, discretionary act, interpretation
or construction shall be done in a nondiscriminatory manner based upon uniform
principles consistently applied and shall be consistent with the intent that the
Plan shall continue to be deemed a qualified plan under the terms of Code
Section 401(a), and shall comply with the terms of the Act and all regulations
issued pursuant thereto. The Administrator shall have all powers necessary or
appropriate to accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the general
administration of the Plan, including, but not limited to, the following:
(a) the discretion to determine all questions relating to the
eligibility of Employees to participate or remain a Participant hereunder
and to receive benefits under the Plan;
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(b) to compute, certify, and direct the Trustee with respect to the amount
and the kind of benefits to which any Participant shall be entitled
hereunder;
(c) to authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust Fund;
(d) to maintain all necessary records for the administration of the
Plan;
(e) to interpret the provisions of the Plan and to make and publish such
rules for regulation of the Plan as are consistent with the terms hereof;
(f) to determine the size and type of any Contract to be purchased from
any Insurer, and to designate the Insurer from which such Contract shall be
purchased;
(g) to compute and certify to the Employer and to the Trustee from time to
time the sums of money necessary or desirable to be contributed to the Trust
Fund;
(h) to consult with the Employer and the Trustee regarding the short and
long-term liquidity needs of the Plan in order that the Trustee can exercise
any investment discretion in a manner designed to accomplish specific
objectives;
(i) to prepare and distribute to Employees a procedure for notifying
Participants and Beneficiaries of their rights to elect Joint and Survivor
Annuities and Pre-Retirement Survivor Annuities if required by the Code and
Regulations thereunder;
(j) to prepare and implement a procedure to notify Eligible Employees that
they may elect to have a portion of their Compensation deferred or paid to
them in cash;
(k) to assist any Participant regarding his rights, benefits, or elections
available under the Plan.
2.7 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall keep
all other books of account, records, and other data that may be necessary for
proper administration of the Plan and shall be responsible for supplying all
information and reports to the Internal Revenue Service, Department of Labor,
Participants, Beneficiaries and others as required by law.
2.8 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the Administrator, may
appoint counsel, specialists, advisers, and other persons as the Administrator
or the Trustee deems necessary or desirable in connection with the
administration of this Plan.
2.9 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer shall
supply full and timely information to the Administrator on all matters relating
to the Compensation of all Participants, their Hours of Service, their Years of
Service, their retirement, death, disability, or termination of employment, and
such other pertinent facts as the Administrator may require; and the
Administrator shall advise the Trustee of such of the foregoing facts as may be
pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
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2.10 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund unless
paid by the Employer. Such expense shall include any expenses incident to the
functioning of the Administrator, including, but not limited to, fees of
accountants, counsel, and other specialists and their agents, and other costs of
administering the Plan. Until paid, the expenses shall constitute a liability of
the Trust Fund. However, the Employer may reimburse the Trust Fund for any
administration expense incurred. Any administration expense paid to the Trust
Fund as a reimbursement shall not be considered an Employer contribution.
2.11 MAJORITY ACTIONS
Except where there has been an allocation and delegation of administrative
authority pursuant to Section 2.5, if there shall be more than one
Administrator, they shall act by a majority of their number, but may authorize
one or more of them to sign all papers on their behalf.
2.12 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with the
Administrator. Written notice of the disposition of a claim shall be furnished
to the claimant within 90 days after the application is filed. In the event the
claim is denied, the reasons for the denial shall be specifically set forth in
the notice in language calculated to be understood by the claimant, pertinent
provisions of the Plan shall be cited, and, where appropriate, an explanation as
to how the claimant can perfect the claim will be provided. In addition, the
claimant shall be furnished with an explanation of the Plan's claims review
procedure.
2.13 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has been
denied a benefit by a decision of the Administrator pursuant to Section 2.12
shall be entitled to request the Administrator to give further consideration to
his claim by filing with the Administrator a written request for a hearing. Such
request, together with a written statement of the reasons why the claimant
believes his claim should be allowed, shall be filed with the Administrator no
later than 60 days after receipt of the written notification provided for in
Section 2.12. The Administrator shall then conduct a hearing within the next 60
days, at which the claimant may be represented by an attorney or any other
representative of his choosing and expense and at which the claimant shall have
an opportunity to submit Written and oral evidence and arguments in support of
his claim. At the hearing (or prior thereto upon 5 business days written notice
to the Administrator) the claimant or his representative shall have an
opportunity to review all documents in the possession of the Administrator which
are pertinent to the claim at issue and its disallowance. Either the claimant or
the Administrator may cause a court reporter to attend the hearing and record
the proceedings. In such event, a complete written transcript of the proceedings
shall be furnished to both parties by the court reporter. The full expense of
any such court report and such reports shall be borne by the party causing the
court reporter to attend the hearing. A final decision as to the allowance of
the claim shall be made by the Administrator within 60 days of receipt of the
appeal (unless there has been an extension of 60 days due to special
circumstances, provided the delay and the special circumstances occasioning it
are communicated to the claimant within the 60 day period). Such communication
shall be written in a manner calculated to be understood by the claimant and
shall include specific reasons for the decision and specific references to the
pertinent Plan provisions on which the decision is based.
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ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee shall be eligible to participate hereunder on the
date he has satisfied the requirements specified in the Adoption Agreement.
3.2 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee who has become eligible to be a Participant shall
become a Participant effective as of the day specified in the Adoption
Agreement.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise have become a Participant shall go from a
classification of a noneligible Employee to an Eligible Employee, such Employee
shall become a Participant as of the date he becomes an Eligible Employee.
In the event an employee who has satisfied the Plan's eligibility
requirements and would otherwise become a Participant shall go from a
classification of an Eligible Employee to a noneligible Employee and becomes
ineligible to participate and has not incurred a 1-Year Break in Service, such
Employee shall participate in the Plan as of the date he returns to an eligible
class of Employees. If such Employee does incur a l-Year Break in Service,
eligibility will be determined under the Break in Service rules of the Plan.
3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee for
participation in the Plan based upon information furnished by the Employer. Such
determination shall be conclusive and binding upon all persons, as long as the
same is made pursuant to the Plan and the Act. Such determination shall be
subject to review per Section 2.13.
3.4 TERMINATION OF ELIGIBILITY
In the event a Participant shall go from a classification of an Eligible
Employee to an ineligible Employee, such Former Participant shall continue to
vest in his interest in the Plan for each Year of Service completed while a
noneligible employee, until such time as his Participant's Account shall be
forfeited or distributed pursuant to the terms of the Plan. Additionally, his
interest in the Plan shall continue to share in the earnings of the Trust Fund.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a Participant
in the Plan is erroneously omitted and discovery of such omission is not made
until after a contribution by his Employer for the year has been made, the
Employer shall make a subsequent contribution, if necessary after the
application of Section 4.4(e), so that the omitted Employee receives a total
amount which the said Employee would have received had he not been omitted. Such
contribution shall be made regardless of whether or not it is deductible in
whole or in part in any taxable year under applicable provisions of the Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included as a
Participant in the Plan is erroneously included and discovery of such incorrect
inclusion is not made until after a contribution for the year has been made, the
Employer shall not be entitled to recover the contribution made with respect to
the ineligible person regardless of whether or not a deduction is allowable with
respect to such contribution. In such event, the
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amount contributed with respect to the ineligible person shall
constitute a Forfeiture for the Plan Year in which the discovery is made.
3.7 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect voluntarily
not to participate in the Plan. The election not to participate must be
communicated to the Employer, in writing, at least thirty (30) days before the
beginning of a Plan Year. For Standardized Plans, a Participant or an Eligible
Employee may not elect not to participate. Furthermore, the foregoing election
not to participate shall not be available with respect to partners in a
partnership.
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE
(a) If this Plan provides contributions or benefits for one or more
Owner-Employees who control both the business for which this Plan is
established and one or more other entities, this Plan and the plan
established for other trades or businesses must, when looked at as a single
Plan, satisfy Code Sections 401(a) and (d) for the Employees of this and all
other entities.
(b) If the Plan provides contributions or benefits for one or more
Owner-Employees who control one or more other trades or businesses, the
employees of the other trades or businesses must be included in a plan which
satisfies Code Sections 401(a) and (d) and which provides contributions and
benefits not less favorable than provided for Owner-Employees under this
Plan.
(c) If an individual is covered as an Owner-Employee under the plans of
two or more trades or businesses which are not controlled and the individual
controls a trade or business, then the benefits or contributions of the
employees under the plan of the trades or business which are controlled must
be as favorable as those provided for him under the most favorable plan of
the trade or business which is not controlled.
(d) For purposes of the preceding paragraphs, an Owner-Employee, or two
or more Owner-Employees, will be considered to control an entity if the
Owner-Employee, or two or more Owner-Employees together:
(1) own the entire interest in an unincorporated entity, or
(2) in the case of a partnership, own more than 50 percent of either
the capital interest or the profits interest in the partnership.
(e) For purposes of the preceding sentence, an Owner-Employee, or two or
more Owner-Employees shall be treated as owning any interest in a
partnership which is owned, directly or indirectly, by a partnership which
such Owner-Employee, or such two or more Owner-Employees, are considered to
control within the meaning of the preceding sentence.
ARTICLE IV
CONTRIBUTION AND LOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
For each Plan Year, the Employer shall contribute to the Plan:
(a) The amount of the total salary reduction elections of all
Participants made pursuant to Section 4.2(a), which amount shall be deemed
an Employer's Elective Contribution, plus
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(b) If specified in E3 of the Adoption Agreement, a matching
contribution equal to the percentage specified in the Adoption Agreement of
the Deferred Compensation of each Participant eligible to share in the
allocations of the matching contribution, which amount shall be deemed an
Employer's Non-Elective or Elective Contribution as selected in the Adoption
Agreement, plus
(c) If specified in E4 of the Adoption Agreement, a discretionary
amount, if any, which shall be deemed an Employer's Non-Elective
Contribution, plus
(d) If specified in E5 of the Adoption Agreement, a Qualified Non-
Elective Contribution.
(e) Notwithstanding the foregoing, however, the Employer's contributions
for any Fiscal Year shall not exceed the maximum amount allowable as a
deduction to the Employer under the provisions of Code Section 404. All
contributions by the Employer shall be made in cash or in such property as
is acceptable to the Trustee.
(f) Except, however, to the extent necessary to provide the top heavy
minimum allocations, the Employer shall make a contribution even if it
exceeds current or accumulated Net Profit or the amount which is deductible
under Code Section 404.
4.2 PARTICIPANT'S SALARY REDUCTION ELECTION
(a) Each Participant may elect to defer his Compensation which would
have been received in the Plan Year, but for the deferral election, subject
to the limitations of this Section and the Adoption Agreement. A deferral
election (or modification of an earlier election) may not be made with
respect to Compensation which is currently available on or before the date
the Participant executed such election, or if later, the latest of the date
the Employer adopts this cash or deferred arrangement, or the date such
arrangement first became effective. Any elections made pursuant to this
Section shall become effective as soon as is administratively feasible.
Additionally, if elected in the Adoption Agreement, each Participant may
elect to defer and have allocated for a Plan Year all or a portion of any
cash bonus attributable to services performed by the Participant for the
Employer during such Plan Year and which would have been received by the
Participant on or before two and one-half months following the end of the
Plan Year but for the deferral. A deferral election may not be made with
respect to cash bonuses which are currently available on or before the date
the Participant executed such election. Notwithstanding the foregoing, cash
bonuses attributable to services performed by the Participant during a Plan
Year but which arc to be paid to the Participant later than two and one-half
months after the close of such Plan Year will be subjected to whatever
deferral election is in effect at the time such cash bonus would have
otherwise been received.
The amount by which Compensation and/or cash bonuses are reduced shall be
that Participant's Deferred Compensation and be treated as an Employer
Elective Contribution and allocated to that a Participant's Elective
Account.
Once made, a Participant's election to reduce Compensation shall remain
in effect until modified or terminated. Modifications may be made as
specified in the Adoption Agreement, and terminations may be made at any
time. Any modification or termination of an election will become effective
as soon as is administratively feasible.
(b) The balance in each Participant's Elective Account shall be fully
Vested at all times and shall not be subject to Forfeiture for any reason.
(c) Amounts held in the Participant's Elective Account and Qualified Non-
Elective Account may be distributable as permitted under the Plan, but in no
event prior to the earlier of:
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(1) a Participant's termination of employment, Total and Permanent
Disability, or death;
(2) a Participant's attainment of age 59 1/2;
(3) the proven financial hardship of a Participant, subject to the
limitations of Section 6.11;
(4) the termination of the Plan without the existence at the time of
Plan termination of another defined contribution plan (other than an
employee stock ownership plan as defined in Code Section 4975(e)(7)) or
the establishment of a successor defined contribution plan (other than an
employee stock ownership plan as defined in Code Section 4975(e)(7)) by
the Employer or an Affiliated Employer within, the period ending twelve
months after distribution of all assets from the Plan maintained by the
Employer;
(5) the date of the sale by the Employer to an entity that is not an
Affiliated Employer of substantially all of the assets (within the
meaning of Code Section 409(d)(2)) with respect to a Participant who
continues employment with the corporation acquiring such assets; or
(6) the date of the sale by the Employer or an Affiliated Employer of
its interest in a subsidiary (within the meaning of Code Section
409(d)(3)) to an entity that is not an Affiliated Employer with respect
to a Participant who continues employment with such subsidiary.
(d) In any Plan Year beginning after December 31, 1987, a Participant's
Deferred Compensation made under this Plan and all other plans, contract or
arrangements of the Employer maintaining this Plan shall not exceed the
limitation imposed by Code Section 402(g), as in effect for the calendar
year in which such Plan Year began. This dollar limitation shall be adjusted
annually pursuant to the method provided in Code Section 415(d) in
accordance with Regulations.
(e) In the event a Participant has received a hardship distribution
pursuant to Regulation 1.401(k)-l(d)(2)(iii)(B) from any other plan
maintained by the Employer or from his Participant's Elective Account
pursuant to Section 6.11(c), then such Participant shall not be permitted to
elect to have Deferred Compensation contributed to the Plan on his behalf
for a period of twelve (12) months following the receipt of the
distribution. Furthermore, the dollar limitation under Code Section 402(g)
shall be reduced, with respect to the Participant's taxable year following
the taxable year in which the hardship distribution was made, by the amount
of such Participant's Deferred Compensation, if any, made pursuant to this
Plan (and any other plan maintained by the Employer) for the taxable year of
the hardship distribution.
(f) If a Participant's Deferred Compensation under this Plan together
with any elective deferrals (as defined in Regulation 1.402(g)-1(b)) under
another qualified cash or deferred arrangement (as defined in Code Section
40 l(k)), a simplified employee pension (as defined in Code Section 408(k)),
a salary reduction arrangement (within the meaning of Code Section
3121(a)(5)(D)), a deferred compensation plan under Code Section 457, or a
trust described in Code Section 501(c)(18) cumulatively exceed the
limitation imposed by Code Section 402(g) (as adjusted annually in
accordance with the method provided in Code Section 415(d) pursuant to
Regulations) for such Participant's taxable year, the Participant may, not
later than March 1st following the close of his taxable year, notify the
Administrator in writing of such excess and request that his Deferred
Compensation under this Plan be reduced by an amount specified by the
Participant. In such event, the Administrator shall direct the Trustee to
distribute such excess amount (and any Income allocable to such excess
amount) to the Participant not later than the first April 15th following the
close of the Participant's taxable year. Distributions in accordance with
this paragraph may be made for any taxable year of the Participant which
begins after December 31, 1986. Any distribution of less than the entire
amount of Excess Deferred Compensation and Income shall be treated as a pro
rata distribution of Excess Deferred Compensation and Income. The amount
distributed shall not exceed the Participant's Deferred Compensation under
the Plan for the taxable year. Any distribution on or before the last day of
the Participant's taxable year must satisfy each of the following
conditions:
(1) the Participant shall designate the distribution as Excess Deferred
Compensation;
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(2) the distribution must be made after the date on which the Plan
received the Excess Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution of Excess
Deferred Compensation.
For the purpose of this Section, "Income" means the amount of income or
loss allocable to a Participant's Excess Deferred Compensation and shall be
equal to the sum of the allocable gain or loss for the taxable year of the
Participant and the allocable gain or loss for the period between the end of
the taxable year of the Participant and the date of distribution ("gap
period"). The income or loss allocable to each such period is calculated
separately and is determined by multiplying the income or loss allocable to
the Participant's Deferred Compensation for the respective period by a
fraction. The numerator of the fraction is the Participant's Excess Deferred
Compensation for the taxable year of the Participant. The denominator is the
balance, as of the last day of the respective period, of the Participant's
Elective Account that is attributable to the Participant's Deferred
Compensation reduced by the gain allocable to such total amount for the
respective period and increase by the loss allocable to such total amount
for the respective period.
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable income or loss for the "gap
period". Under such "safe harbor method", allocable income or loss for the
"gap period" shall be deemed to equal ten percent (10%) of the income or
loss allocable to a Participant's Excess Deferred Compensation for the
taxable year of the Participant multiplied by the number calendar months in
the "gap period". For purposes of determining the number of calendar months
in the "gap period", a distribution occurring on or before the fifteenth day
of the month shall be treated as having been made on the last day of the
preceding month and a distribution occurring after such fifteenth day shall
be treated as having been made on the first day of the next subsequent
month.
Income or loss allocable to any distribution of Excess Deferred
Compensation on or before the last day of the taxable year of the
Participant shall be calculated from the first day of the taxable year of
the Participant to the date on which the distribution is made pursuant to
either the "fractional method" or the "safe harbor method".
Notwithstanding the above, for the 1987 calendar year, Income during the
"gap period" shall not be taken into account.
(g) Notwithstanding Section 4.2(f) above, a Participant's Excess Deferred
Compensation shall be reduced, but not below zero, by any distribution
and/or recharacterization of Excess Contributions pursuant to Section 4.6(a)
for the Plan Year beginning with or within the taxable year of the
Participant.
(h) At Normal Retirement Date, or such other date when the Participant
shall be entitled to receive benefits, the fair market value of the
Participant's Elective Account shall be used to provide benefits to the
Participant or his Beneficiary.
(i) Employer Elective Contributions made pursuant to this Section may be
segregated into a separate account for each Participant in a federally
insured savings account, certificate of deposit in a bank or savings and
loan association, money market certificate, or other short-term debt
security acceptable to the Trustee until such time as the allocations
pursuant to Section 4.4 have been made.
(j) The Employer and the Administrator shall adopt a procedure necessary
to implement the salary reduction elections provided for herein.
4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
The Employer shall generally pay to the Trustee its contribution to the
Plan for each Plan Year within the time prescribed by law, including extensions
of time, for the filing of the Employer's federal income tax return for the
Fiscal Year.
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However, Employer Elective Contributions accumulated through payroll
deductions shall be paid to the Trustee as of the earliest date on which such
contributions can reasonably be segregated from the Employer's general assets,
but in any event within ninety (90) days from the date on which such amounts
would otherwise have been payable to the Participant in cash. The provisions of
Department of Labor regulations 2510.3-102 are incorporated herein by reference.
Furthermore, any additional Employer contributions which are allocable to the
Participant's Elective Account for a Plan Year shall be paid to the Plan no
later than the twelve-month period immediately following the close of such Plan
Year.
4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in the name
of each Participant to which the Administrator shall credit as of each
Anniversary Date, or other valuation date, all amounts allocated to each
such Participant as set forth herein.
(b) The Employer shall provide the Administrator with all information
required by the Administrator to make a proper allocation of the Employer's
contributions for each Plan Year. Within a reasonable period of time after
the date of receipt by the Administrator of such information, the
Administrator shall allocate such contribution as follows:
(1) With respect to the Employer's Elective Contribution made
pursuant to Section 4.l(a), to each Participant's Elective Account in
amount equal to each such Participant's Deferred Compensation for the
year.
(2) With respect to the Employer's Matching Contribution made
pursuant to Section 4.l(b), to each Participant's Account, or
Participant's Elective Account as selected in E3 of the Adoption
Agreement, in accordance with Section 4.1(b).
Except, however, a Participant who is not credited with a Year of Service
during any Plan Year shall or shall not share in the Employer's Matching
Contribution for that year as provided in E3 of the Adoption Agreement.
However, for Plan Years beginning after 1989, if this is a standardized
Plan, a Participant shall share in the Employer's Matching Contribution
regardless of Hours of Service.
(3) With respect to the Employer's Non-Elective Contribution made
pursuant to Section 4.1(c), to each Participant's Account in accordance
with the provisions of E4 of the Adoption Agreement.
However, if an integrated allocation formula is selected at E4 of the
Adoption Agreement, then such contribution shall be allocated to each
Participant's Combined Account in a dollar amount equal to 5.7 % of the
sum of each Participant's total Compensation plus Excess Compensation. If
the Employer does not contribute such amount for all Participants, each
Participant will be allocated a share of the contribution in the same
proportion that his total Compensation plus his total Excess Compensation
for the Plan Years bears to the total Compensation plus the total Excess
Compensation of all Participants for that year. The balance of the
contribution, if any, will be allocated in the same proportion that his
total Compensation bears to the total Compensation of all Participant's
eligible to share in the allocation.
Regardless of the preceding, 4.3% shall be substituted for 5.7% above if
Excess Compensation is based on more than 20% and less than or equal to
80% of the Taxable Wage Base. If Excess Compensation is based on less
than 100% and more than 80% of the Taxable Wage Base, then 5.4% shall be
substituted for 5.7% above.
(4) With respect to the Employer's Qualified Non-Elective
Contribution made pursuant to Section 4.1(d), to each Participant's
Qualified Non-Elective Contribution Account in the same proportion that
each such Participant's Compensation for the year bears to the total
Compensation of all Participants for such year.
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(5) Regardless of the preceding, a Participant who is not credited
with a Year of Service during a Plan Year shall not share in the
allocation of the Employer's Non-Elective Contribution made pursuant to
Section 4.1(c) and the Employer's Qualified Non-Elective Contribution
made pursuant to Section 4.1(d), unless reduced pursuant to Section
4.4(h). However, for Plan Years beginning after 1989, for a standardized
plan, and if elected in the non-standardized Adoption Agreement, a
Participant shall share in the allocation of such contributions
regardless of whether Year of Service was completed during the Plan Year.
(c) As of each Anniversary Date or other valuation date, before
allocation of Employer contributions and Forfeitures, any earnings or losses
(net appreciation or net depreciation) of the Trust Fund shall be allocated
in the same proportion that each Participant's and Former Participant's
nonsegregated accounts bear to the total of all Participants and Former
Participants nonsegregated accounts as of such date. If any nonsegregated
account of a Participant has been distributed prior to the Anniversary Date
or other valuation date subsequent to a Participant's termination of
employment, no earnings or losses shall be credited to such account.
Notwithstanding the above, with respect to contributions made to a 401(k)
Plan after the previous Anniversary Date or allocation date, the method
specified in the Adoption Agreement shall be used.
(d) Participants' Accounts shall be debited for any insurance or annuity
premiums paid, if any, and credited with any dividends or interest received
on insurance contracts.
(e) As of each Anniversary Date any amounts which became Forfeitures
since the last Anniversary Date shall first be made available to reinstate
previously forfeited account balances of Former Participants, if any, in
accordance with Section 6.4(g)(2) or be used to satisfy any contribution
that may be required pursuant to Section 3.5 and/or 6.9. The remaining
Forfeitures, if any, shall be treated in accordance with the Adoption
Agreement. Provided, however, that in the event the allocation of
Forfeitures provided herein shall cause the "annual addition" (as defined in
Section 4.9) to any Participant's Account to exceed the amount allowable by
the Code, the excess shall be allocated in accordance with Section 4.10.
Except, however, for any Plan Year beginning prior to January 1, 1990, and
if elected in the non-standardized Adoption Agreement for any Plan Year
beginning on or after January 1, 1990, a Participant who performs less than
a Year of Service during any Plan Year shall not share in the Plan
Forfeitures for that year, unless there is a Short Plan Year or a
contribution required pursuant to Section 4.4(h).
(f) Minimum Allocations Required for Top Heavy Plan Years:
Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the
Employer's contributions and Forfeitures allocated to the Participant's
Combined Account of each Non-Key Employee shall be equal to at least three
percent (3%) of such Non-Key Employee's "415 Compensation" (reduced by
contributions and forfeitures, if any, allocated to each Non-Key Employee in
any defined contribution plan included with this plan in a Required
Aggregation Group). However, if (i) the sum of the Employer's contributions
and Forfeitures allocated to the Participant's Combined Account of each Key
Employee for such Top Heavy Plan Year is less than three percent (3%) of
each Key Employee's "415 Compensation" and (ii) this Plan is not required
to be included in an Aggregation Group to enable a defined benefit plan to
meet the requirements of Code Section 401(a)(4) or 410, the sum of the
Employer's contributions and Forfeitures allocated to the Participant's
Combined Account of each Non-Key Employee shall be equal to the largest
percentage allocated to the Participant's Combined Account of any Key
Employee. However, for Plan Years beginning after December 31, 1988, in
determining whether a Non-Key Employee has received the required minimum
allocation, such Non-Key Employee's Deferred Compensation and matching
contributions used to satisfy the "Actual Deferral Percentage" test pursuant
to Section 4.5(a) or the "Actual Contribution Percentage" test of Section
4.7(a) shall not be taken into account.
If this is an integrated Plan, then for any Top Heavy Plan Year the
Employer's contribution shall be allocated as follows:
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(1) An amount equal to 3% multiplied by each Participant's
Compensation for the Plan Year shall be allocated to each Participant's
Account. If the Employer does not contribute such amount for all
Participants, the amount shall be allocated to each Participant's Account
in the same proportion that his total Compensation for the Plan Year
bears to the total Compensation of all Participants for such year.
(2) The balance of the Employer's contribution over the amount
allocated under subparagraph (1) hereof shall be allocated to each
Participant's Account in a dollar amount equal to 3% multiplied by a
Participant's Excess Compensation. If the Employer does not contribute
such amount for all Participants, each Participant will be allocated a
share of the contribution in the same proportion that his Excess
Compensation bears to the total Excess Compensation of all Participants
for that year.
(3) The balance of the Employer's contribution over the amount
allocated under subparagraph (2) hereof shall be allocated to each
Participant's Account in a dollar amount equal to 2.7% multiplied by the
sum of each Participant's total Compensation plus Excess Compensation. If
the Employer does not contribute such amount for all Participants, each
Participant will be allocated a share of the contribution in the same
proportion that his total Compensation plus his total Excess Compensation
for the Plan Year bears to the total Compensation plus the total Excess
Compensation of all Participants for that year.
Regardless of the preceding 1.3% shall be substituted for 2.7 % above if
Excess Compensation is based on more than 20% and less than or equal to
80% of the Taxable Wage Base. If Excess Compensation is based on less
than 100% and more than 80% of the Taxable Wage Base, then 2.4% shall be
substituted for 2.7% above.
(4) The balance of the Employer's contributions over the amount
allocated above, if any, shall be allocated to each Participant's Account
in the same proportion that his total Compensation for the Plan Year
bears to the total Compensation of all Participants for such year.
For each Non-Key Employee who is a Participant in this Plan and another
non-paired defined contribution plan maintained by the Employer, the
minimum 3% allocation specified above shall be provided as specified in F3
of the Adoption Agreement.
(g) For purposes of the minimum allocations set forth above, the
percentage allocated to the Participant's Combined Account of any Key
Employee shall be equal to the ratio of the sum of the Employer's
contributions and Forfeitures allocated on behalf of such Key Employee
divided by the "415 Compensation" for such Key Employee.
(h) For any Top Heavy Plan Year, the minimum allocations set forth above
shall be allocated to the Participant's Combined Account of all Non-Key
Employees who are Participants and who are employed by the Employer on the
last day of the Plan Year, including Non-Key Employees who have (1) failed
to complete a Year of Service; or (2) declined to make mandatory
contributions (if required) or salary reduction contributions to the Plan.
(i) Notwithstanding anything herein to the contrary, in any Plan Year in
which the Employer maintains both this Plan and a defined benefit pension
plan included in a Required Aggregation Group which is top heavy, the
Employer shall not be required to provide a Non-Key Employee with both the
full separate minimum defined benefit plan benefit and the full separate
defined contribution plan allocations. Therefore, if the Employer maintains
both a Defined Benefit and a Defined Contribution Plan that are a Top Heavy
Group, the top heavy minimum benefits shall be provided as follows:
Applies if F1b of the Adoption Agreement is selected -
(1) The requirements of Section 2.1 shall apply except that each Non-
Key Employee who is a Participant in this Plan or a Money Purchase Plan
and who is also a Participant in the Defined Benefit
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Plan shall receive a minimum allocation of five percent (5%) of such
Participant's "415 Compensation" from the applicable Defined Contribution
Plan(s).
(2) For each Non-Key Employee who is a Participant only in the Defined
Benefit Plan, the Employer will provide a minimum non-integrated benefit
in the Defined Benefit Plan equal to 2% of his highest five consecutive
year average "415 Compensation" for each Year of Service while a
Participant in the Plan, in which the Plan is top heavy, not to exceed
ten.
(3) For each Non-Key Employee who is a Participant only in this
Defined Contribution Plan, the Employer will provide a contribution equal
to 3% of his "415 Compensation".
Applies if Flc of the Adoption Agreement is selected -
(4) The minimum allocation specified in Section 4.4(i)(1) shall be 7
1/2% for years in which the Plan is Top Heavy, but not Super Top Heavy.
(5) The minimum benefit specified in Section 4.4(i)(2) shall be 3%
for years in which the Plan is Top Heavy, but not Super Top Heavy.
(6) The minimum allocation specified in Section 4.4(i)(3) shall be 4%
for years in which the Plan is Top Heavy, but not Super Top Heavy.
(j) For the purposes of this Section, "415 Compensation" shall be
limited to $200,000 (unless adjusted in such manner as permitted under Code
Section 415(d)). However, for Plan Years beginning prior to January 1,
1989, the $200,000 limit shall apply only for Top Heavy Plan Years and
shall not be adjusted.
(k) Notwithstanding anything herein to the contrary, participants who
terminated employment during the Plan Year shall share in the salary
reduction contributions made by the Employer for the year of termination
without regard to the Hours of Service credited.
(1) Notwithstanding anything herein to the contrary (other than Sections
4.4(k) and 6.6(h)(1)), any Participant who terminated employment during the
Plan Year for reasons other than death, Total and Permanent Disability, or
retirement shall or shall not share in the allocations of the Employer's
Matching Contribution made pursuant to Section 4.1(b), the Employer's Non-
Elective Contributions made pursuant to Section 4.l(c), the Employer's
Qualified Non-Elective Contribution made pursuant to Section 4. l(d), and
Forfeitures as provided in the Adoption Agreement. Notwithstanding the
foregoing, for Plan Years beginning after 1989, if this is a standardized
Plan, any such terminated Participant shall share in such allocations
provided the terminated Participant completed more than 500 Hours of
Service.
(m) Notwithstanding anything herein to the contrary, Participants
terminating for reasons of death, Total and Permanent Disability, or
retirement shall share in the allocation of the Employer's Matching
Contribution made pursuant to Section 4.1(b), the Employer's Non-Elective
Contributions made pursuant to Section 4.l(c), the Employer's Qualified
Non-Elective Contribution made pursuant to Section 4.l(d), and Forfeitures
as provided in this Section regardless of whether they completed a Year of
Service during the Plan Year.
(n) If a Former Participant is reemployed after five (5) consecutive 1-
Year Breaks in Service, then separate accounts shall be maintained as
follows:
(1) one account for nonforfeitable benefits attributable to pre-
break service; and
(2) one account representing his status in the Plan attributable to
post-break service.
(o) Notwithstanding any election in the Adoption Agreement to the
contrary, if this is a non-standardized Plan that would otherwise fail to
meet the requirements of Code Sections 401(a)(26),
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410(b)(1), or 410(b)(2)(A)(i) and the Regulations thereunder because
Employer matching Contributions made pursuant to Section 4.1(b), Employer
Non-Elective Contributions made pursuant to Section 4.1(c) or Employer
Qualified Non-Elective Contributions made pursuant to Section 4. l(d) have
not been allocated to a sufficient number or percentage of Participants
for a Plan Year, then the following rules shall apply:
(1) Allocations of the respective contribution and Forfeitures shall
first be made to all active Participants who are employed on the last day
of the Plan Year, regardless of the number of Hours of Service completed;
and
(2) If after application of paragraph (1) above, the applicable test
is still not satisfied, then the group of Participants eligible to share
in the Employer's contribution and Forfeitures for the Plan Year shall be
further expanded to include the minimum number of Participants who are
not actively employed on the last day of the Plan Year as are necessary
to satisfy the applicable test. The specific Participants who shall
become eligible to share shall be those Participants, when compared to
similarly situated Participants, who have completed the greatest number
of Hours of Service in the Plan Year before terminating employment.
Nothing in this Section shall permit the reduction of a Participant's
accrued benefit. Therefore any amounts that have previously been allocated
to Participants may not be reallocated to satisfy these requirements. In
such event, the Employer shall make an additional contribution equal to the
amount such affected Participants would have received had they been
included in the allocations, even if it exceeds the amount which would be
deductible under Code Section 404. Any adjustment to the allocations
pursuant to this paragraph shall be considered a retroactive amendment
adopted by the last day of the Plan Year.
4.5 ACTUAL DEFERRAL PERCENTAGE TESTS
(a) Maximum Annual Allocation: For each Plan Year beginning after
December 31, 1986, the annual allocation derived from Employer Elective
Contributions and Qualified Non-Elective Contributions to a Participant's
Elective Account and Qualified Non-Elective Account shall satisfy one of
the following tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral Percentage"
of the Non-Highly Compensated Participant group multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the Highly
Compensated Participant group over the "Actual Deferral Percentage" for
the Non-Highly Compensated Participant group shall not be more than two
percentage points. Additionally, the "Actual Deferral Percentage" for the
Highly Compensated Participant group shall not exceed the "Actual
Deferral Percentage" for the Non-Highly Compensated Participant group
multiplied by 2. The provisions of Code Section 401(k)(3) and Regulation
1.401(k)-l(b) are incorporated herein by reference.
However, for Plan Years beginning after December 31, 1988, to
prevent the multiple use of the alternative method described in (2) above
and Code Section 401(m)(9)(A), any Highly Compensated Participant
eligible to make elective deferrals pursuant to Section 4.2 and to make
Employee contributions or to receive matching contributions under this
Plan or under any other plan maintained by the Employer or an Affiliated
Employer shall have his actual contribution ratio reduced pursuant to
Regulation 1.401(m)-2, the provisions of which are incorporated herein by
reference.
(b) For the purposes of this Section "Actual Deferral Percentage" means,
with respect to the Highly Compensated Participant group and Non-Highly
Compensated Participant group for a Plan Year, the average of the ratios,
calculated separately for each Participant in such group, of the amount of
Employer Elective Contributions and Qualified Non-Elective Contributions
allocated to each Participant's Elective Account and Qualified Non-Elective
Account for such Plan Year, to such Participant's "414(s) Compensation" for
such Plan Year. The actual deferral ratio for each Participant and the
"Actual Deferral Percentage" for each
26
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group, for Plan Years beginning after December 31, 1988, shall be
calculated to the nearest one-hundredth of one percent of the Participant's
"414(s) Compensation". Employer Elective Contributions allocated to each
Non-Highly Compensated Participant's Elective Account shall be reduced by
Excess Deferred Compensation to the extent such excess amounts are made
under this Plan or any other plan maintained by the Employer.
(c) For the purpose of determining the actual deferral ratio of a Highly
Compensated Participant who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Participant is either a "five
percent owner" of the Employer or one of the ten (10) Highly Compensated
Employees paid the greatest "415 Compensation" during the year, the
following shall apply:
(1) The combined actual deferral ratio for the family group (which
shall be treated as one Highly Compensated Participant) shall be the
greater of: (i) the ratio determined by aggregating Employer Elective
Contributions and "414(s) Compensation " of all eligible Family Members
who are Highly Compensated Participants without regard to family
aggregation; and (ii)the ratio determined by aggregating Employer
Elective Contributions and "414(s) Compensation " of all eligible Family
Members (including Highly, Compensation Participants). However, in
applying the $200,000 limit to "414(s) Compensation" for Plan Years
beginning after December 31, 1988, Family Members shall include only the
affected Employee's spouse and any lineal descendants who have not
attained age 19 before the close of the Plan Year.
(2) The Employer Elective Contributions and "414(s) Compensation" Of
all Family Members shall be disregarded for purposes of determining the
"Actual Deferral Percentage" of the Non-Highly Compensated Participant
group except to the extent taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are members of
those family groups that include the Participant are aggregated as one
family group in accordance with paragraph (l) and (2) above.
(d) For the purposes of Sections 4.5(a) and 4.6, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any
Employee eligible to make a deferral election pursuant to Section 4.2,
whether or not such deferral election was made or suspended pursuant to
Section 4.2.
(e) For the purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(k), if two or more plans which include cash or deferred
arrangements are considered one plan for the purposes of Code Section
401(a)(4) or 410(b) (other than Code Section 401(b)(2)(A)(ii) as in effect
for Plan Years beginning after December 31, 1988), the cash or deferred
arrangements included in such plans shall be treated as one arrangement. In
addition, two or more cash or deferred arrangements may be considered as a
single arrangement for purposes of determining whether or not such
arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such a
case, the cash or deferred arrangements included in such plans and the
plans including such arrangements shall be treated as one arrangement and
as one plan for purposes of this Section and Code Sections 401(a)(4),
410(b) and 401(k). For plan years beginning after December 31, 1989, plans
may be aggregated under this paragraph (e) only if they have the same plan
year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7)
may not be combined with this Plan for purposes of determining whether the
employee stock ownership plan or this Plan satisfies this Section and Code
Sections 401(a)(4), 410(b) and 401(k).
(f) For the purposes of this Section, if a Highly Compensated
Participant is a Participant under two (2) or more cash or deferred
arrangements (other than a cash or deferred arrangement which is part of an
employee stock ownership plan as defined in Code Section 4975(e)(7) for
Plan Years beginning after December 31, 1988) of the Employer or an
Affiliated Employer, all such cash or deferred arrangements shall be
treated as one cash or deferred arrangement for the purpose of determining
the actual deferral ratio with respect to such Highly Compensated
Participant. However, for Plan Years beginning after December 31, 1988, if
the cash or deferred arrangements have different Plan Years, this paragraph
shall be applied by
27
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treating all cash or deferred arrangements ending with or within the same
calendar year as a single arrangement.
4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions and Qualified Non-Elective Contributions made pursuant to Section
4.4 do not satisfy one of the tests set forth in Section 4.5, for Plan Years
beginning after December 31, 1986, the Administrator shall adjust Excess
Contributions pursuant to the options set forth below:
(a) On or before the fifteenth day of the third month following the end
of each Plan Year, the Highly Compensated Participant having the highest
actual deferral ratio shall have his portion of Excess Contributions
distributed to him and/or at his election recharacterized as a voluntary
Employee contribution pursuant to Section 4.12 until one of the tests set
forth in Section 4.5 is satisfied, or until his actual deferral ratio
equals the actual deferral ratio of the Highly Compensated Participant
having the second highest actual deferral ratio. This process shall
continue until one of the tests set forth in Section 4.5 is satisfied. For
each Highly Compensated Participant, the amount of Excess Contributions is
equal to the Elective Contributions and Qualified Non-Elective
Contributions made on behalf of such Highly Compensated Participant
(determined prior to the application of this paragraph) minus the amount
determined by multiplying the Highly Compensated Participant's actual
deferral ratio (determined after application of this paragraph) by his
"414(s) Compensation". However, in determining the amount of Excess
Contributions to be distributed and/or recharacterized with respect to an
affected Highly Compensated Participant as determined herein, such amount
shall be reduced by any Excess Deferred Compensation previously distributed
to such affected Highly Compensated Participant for his taxable year ending
with or within such Plan Year. Any distribution and/or recharacterization
of Excess Contributions shall be made in accordance with the following:
(1) With respect to the distribution of Excess Contributions pursuant
to (a) above, such distribution:
(i) may be postponed but not later than the close of the Plan
Year following the Plan Year to which they are allocable;
(ii) shall be made first from unmatched Deferred Compensation
and, thereafter, simultaneously from Deferred Compensation which is
matched and matching contributions which relate to such Deferred
Compensation. However, any such matching contributions which are not
Vested shall be forfeited in lieu of being distributed;
(iii) shall be made from Qualified Non-Elective Contributions
only to the extent that Excess Contributions exceed the balance in the
Participant's Elective Account attributable to Deferred Compensation
and Employer matching contributions.
(iv) shall be adjusted for Income; and
(v) shall be designated by the Employer as a distribution of
Excess Contributions (and Income).
(2) With respect to the recharacterization of Excess Contributions
pursuant to (a) above, such recharacterized amounts:
(i) shall be deemed to have occurred on the date on which the last
of those Highly Compensated Participants with Excess Contributions to
be recharacterized is notified of the recharacterization and the tax
consequences of such recharacterization;
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<PAGE>
(ii) for Plan Years ending on or before August 8, 1988, may be
postponed but not later than October 24, 1988;
(iii) shall not exceed the amount of Deferred Compensation on behalf
of any Highly Compensated Participant for any Plan Year;
(iv) shall be treated as voluntary Employee contributions for
purposes of Code Section 401(a)(4) and Regulation 1.401(k)-l(b).
However, for purposes of Sections 2.2 and 4.4(f) recharacterized
Excess Contributions continue to be treated as Employer contributions
that are Deferred Compensation. For Plan Years beginning after
December 31, 1988, Excess Contributions recharacterized as voluntary
Employee contributions shall continue to be nonforfeitable and subject
to the same distribution rules provided for in Section 4.9(f);
(v) which relate to Plan Years ending on or before October 24,
1988, may be treated as either Employee contributions or voluntary
Employee contributions and therefore shall not be subject to the
restrictions of Section 4.2(c);
(vi) are not permitted if the amount recharacterized plus voluntary
Employee contributions actually made by such Highly Compensated
Participant, exceed the maximum mount of voluntary Employee
contributions (determined prior to application of Section 4.7(a)) that
such Highly Compensated Participant is permitted to make under the
Plan in the absence of recharacterization;
(vii) shall be adjusted for Income.
(3) Any distribution and/or recharacterization of less than the entire
amount of Excess Contributions shall be treated pro rata distribution
and/or recharacterization of Excess Contributions and Income.
(4) The determination and correction of Excess Contributions of a
Highly Compensated Participant whose actual deferral ratio is determined
under the family aggregation rules shall be accomplished as follows:
(i) If the actual deferral ratio for the Highly Compensated
Participant is determined in accordance with Section 4.5(c)(1)(ii),
then the actual deferral ratio shall be reduced as required herein and
the Excess Contributions for the family unit shall be allocated among
the Family Members in proportion to the Elective Contributions of
each Family Member that were combined to determine the group actual
deferral ratio.
(ii) If the actual deferral ratio for the Highly Compensated
Participant is determined under Section 4.5(c)(1)(i), then the actual
deferral ratio shall first be reduced as required herein, but not
below the actual deferral ratio of the group of Family Members who are
not Highly Compensated Participants without regard to family
aggregation. The Excess Contributions resulting from this initial
reduction shall be allocated (in proportion to Elective Contributions)
among the Highly Compensated Participants whose Elective Contributions
were combined to determine the actual deferral ratio. If further
reduction is still required, then Excess Contributions resulting from
this further reduction shall be determined by taking into account the
contributions of all Family Members and shall be allocated among them
in proportion to their respective Elective Contributions.
(b) Within twelve (12) months after the end of the Plan Year, the
Employer shall make a special Qualified Non-Elective Contribution on behalf
of Non-Highly Compensated Participants in an amount sufficient to satisfy one
of the tests set forth in Section 4.5(a). Such contribution shall be
allocated to the Participant's Qualified Non-Elective Account of each Non-
Highly Compensated Participant in the same proportion that each Non-Highly
Compensated Participant's Compensation for the year bears to the total
Compensation of all Non-Highly Compensated Participants.
29
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(c) For purposes of this Section, "Income" means the income or loss
allocable to Excess Contributions which shall equal the sum of the
allocable gain or loss for the Plan Year and the allocable gain or loss for
the period between the end of the Plan Year and the date of distribution
("gap period"). The income or loss allocable to Excess Contributions for
the Plan Year and the "gap period" is calculated separately and is
determined by multiplying the income or loss for the Plan Year or the "gap
period" by a fraction. The numerator of the fraction is the Excess
Contributions for the Plan Year. The denominator of the fraction is the
total of the Participant's Elective Account attributable to Elective
Contributions and the Participant's Qualified Non-Elective Account as of
the end of the Plan Year or the "gap period", reduced by the gain allocable
to such total amount for the Plan Year or the "gap period" and increase by
the loss allocable to such total amount for the Plan Year or the "gap
period".
In lieu of the "fractional method" described above, a "safe harbor method"
may be used to calculate the allocable Income for the "gap period". Under
such "safe harbor method", allocable Income for the "gap period" shall be
deemed to equal ten percent (10%) of the Income allocable to Excess
Contributions for the Plan Year of the Participant multiplied by the number
of calendar months in the "gap period". For purposes of determining the
number of calendar months in the "gap period", a distribution occurring on
or before the fifteenth day of the month shall be treated as having been
made on the last day of the preceding month and a distribution occurring
after such fifteenth day shall be treated as having been made on the first
day of the next subsequent month.
Notwithstanding the above, for Plan Years which began in 1987, Income
during the "gap period" shall not be taken into account.
(d) Any amounts not distributed or recharacterized within 2 1/2 months
after the end of the Plan Year shall be subject to the 10% Employer excise
tax imposed by Code Section 4979.
4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) The "Actual Contribution Percentage", for Plan Years beginning after
the later of the Effective Date of this Plan or December 31, 1986, for the
Highly Compensated Participant group shall not exceed the greater of:
(1) 125 percent of such percentage for the Non-Highly Compensated
Participant group; or
(2) the lesser of 200 percent of such percentage for the Non-Highly
Compensated Participant Group, or such percentage for the Non-Highly
Compensated Participant group plus 2 percentage points. However, for Plan
Years beginning after December 31, 1988, to prevent the multiple use of
the alternative method described in this paragraph and Code Section
401(m)(9)(A), any Highly Compensated Participant eligible to make
elective deferrals pursuant to Section 4.2 or any other cash or deferred
arrangement maintained by the Employer or an Affiliated Employer and to
make Employee contributions or to receive matching contributions under
any plan maintained by the Employer or an Affiliated Employer shall have
his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2.
The provisions of Code Section 401(m) and Regulations 1.401(m)-l(b) and
1.401(m)-2 are incorporated herein by reference.
(b) For the purposes of this Section and Section 4.8, "Actual
Contribution Percentage" for a Plan Year means, with respect to the Highly
Compensated Participant group and Non-Highly Compensated Participant group,
the average of the ratios (calculated separately for each Participant in
each group) of:
(1) the sum of Employer matching contributions pursuant to Section
4.1 (b) (to the extent such matching contributions are not used to
satisfy the tests set forth in Section 4.5), voluntary Employee
contributions made pursuant to Section 4.12 and Excess Contributions
recharacterized as voluntary Employee contributions pursuant to Section
4.6(a) contributed under the Plan on behalf of each such Participant for
such Plan Year; to
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(2) the Participant's "414(s) Compensation" for such Plan Year.
(c) For purposes of determining the "Actual Contribution Percentage"
and the amount of Excess Aggregate Contributions pursuant to Section
4.8(e), only Employer matching contributions contributed to the Plan prior
to the end of the succeeding Plan Year shall be considered. In addition,
the Administrator may elect to take into account, with respect to Employees
eligible to have Employer matching contributions made pursuant to Section
4.l(b) or voluntary Employee contributions made pursuant to Section 4.12
allocated to their accounts, elective deferrals (as defined in Regulation
1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code
Section 401(m)(4)(C)) contributed to any plan maintained by the employer.
Such elective deferrals and qualified non-elective contributions shall be
treated as Employer matching contributions subject to Regulation 1.401(m)-
l(b)(2) which is incorporated herein by reference. However, for Plan Years
beginning after December 31, 1988, the Plan Year must be the same as the
plan year of the plan to which the elective deferrals and the qualified
non-elective contributions are made.
(d) For the purpose of determining the actual contribution ratio of a
Highly Compensated Employee who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Employee is either a "five
percent owner" of the Employer or one of the ten (10) Highly Compensated
Employees paid the greatest "415 Compensation" during the year, the
following shall apply:
(1) The combined actual contribution ratio for the family group
(which shall be treated as one Highly Compensated Participant) shall
be the greater of: CO the ratio determined by aggregating Employer
matching contributions made pursuant to Section 4.1(b) (to the extent
such matching contributions arc not used to satisfy the tests set
forth in Section 4.5), voluntarily Employee contributions made
pursuant to Section 4.12, Excess Contributions recharacterized as
voluntary Employee contributions pursuant to Section 4.6(a) and
"414(s) Compensation" of all eligible Family Members who are Highly
Compensated Participants without regard to family aggregation; and
(ii) the ratio determined by aggregating Employer matching
contributions made pursuant to Section 4.1 (b) (to the extent such
matching contributions are not used to satisfy the tests set forth in
Section 4.5), voluntary Employee contributions made pursuant to
Section 4.12, Excess Contributions recharacterized as voluntary
Employee contributions pursuant to Section 4.6(a) and "414(s)
Compensation" of all eligible Family Members ("including Highly
Compensated Participants). However, in applying the $200,000 limit to
"414(s) Compensation " for Plan Years beginning after December 31,
1988, Family Members shall include only the affected Employee's spouse
and any lineal descendants who have not attained age 19 before the
close of the Plan Year.
(2) The Employer matching contributions made pursuant to Section
4. l(b) (to the extent such matching contributions are not used to
satisfy the tests set forth in Section 4.5), voluntary Employee
contributions made pursuant to Section 4.12, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a) and "414(s) Compensation" of all Family Members shall
be disregarded for purposes of determining the "Actual Contribution
Percentage" of the Non-Highly Compensated Participant group except to
the extent taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are members
of those family groups that include the Participant are aggregated as
one family group in accordance with paragraphs (1) and (2) above.
(e) For purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(m), if two or more plans of the Employer to which matching
contributions, Employee contributions, or both, are made are treated as one
plan for purposes of Code Sections 401(a)(4) or 410(b) (other than the
average benefits test under Code Section 410(b)(2)(A)(ii) as in effect for
Plan Years beginning after December 31, 1988), such plans shall be treated
as one plan. In addition, two or more plans of the Employer to which
matching contributions, Employee contributions, or both, are made may be
considered as a single plan for purposes of determining whether or not such
plans satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case,
the aggregated plans must satisfy this Section and Code Sections 401(a)(4),
410(b) and 401(m) as though such
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aggregated plans were a single plan. For plan years beginning after
December 31, 1989, plans may be aggregated under this paragraph only if
they have the same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section
4975(e)(7) may not be aggregated with this Plan for purposes of determining
whether the employee stock ownership plan or this Plan satisfies this
Section and Code Sections 401(a)(4), 410(b) and 401(m).
(f) If a Highly Compensated Participant is a Participant under two or
more plans (other than an employee stock ownership plan as defined in Code
Section 4975(e)(7) for Plan Years beginning after December 31, 1988) which
are maintained by the Employer or an Affiliated Employer to which matching
contributions, Employee contributions, or both, are made, all such
contributions on behalf of such Highly Compensated Participant shall be
aggregated for purposes of determining such Highly Compensated
Participant's actual contribution ratio. However, for Plan Years beginning
after December 31, 1988, if the plans have different plan years, this
paragraph shall be applied by treating all plans ending with or within the
same calendar year as a single plan.
(g) For purposes of Section 4.7(a) and 4.8 Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any
Employee eligible to have matching contributions made pursuant to Section
4.l(b) (whether or not a deferred election was made or suspended pursuant
to Section 4.2(e)) allocated to his account for the Plan Year or to make
salary deferrals pursuant to Section 4.2 (if the Employer uses salary
deferrals to satisfy the provisions of this Section) or voluntary Employee
contributions pursuant to Section 4.12 (whether not voluntary Employee
contributions are made) allocated to his account for the Plan Year.
(h) For purposes of this Section, "Matching Contribution" shall mean
an Employee contribution made to the Plan, or to a contract described in
Code Section 403(b), on behalf of a Participant on account of an Employee
contribution made by such Participant, or on account of a participant's
deferred compensation, under a plan maintained by the Employer.
4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) In the event that for Plan Years beginning after December 31,
1986, the "Actual Contribution Percentage" for the Highly Compensated
Participant group exceeds the "Actual Contribution Percentage" for the Non-
Highly Compensated Participant group pursuant to Section 4.7(a), the
Administrator (on or before the fifteenth day of the third month following
the end of the Plan Year, but in no event later than the close of the
following Plan Year) shall direct the Trustee to distribute to the Highly
Compensated Participant having the highest actual contribution ratio, his
portion of Excess Aggregate Contributions (and Income allocable to such
contributions) or, if forfeitable, forfeit such non-Vested Excess Aggregate
Contributions attributable to Employer matching contributions (and Income
allocable to such Forfeitures) until either one of the tests set forth in
Section 4.7(a) is satisfied, or until his actual contribution ratio equals
the actual contribution ratio of the Highly Compensated Participant having
the second highest actual contribution ratio. This process shall continue
until one of the tests set forth in Section 4.7(a) is satisfied. The
distribution and/or Forfeiture of Excess Aggregate Contributions shall be
made in the following order:
(1) Employer matching contributions distributed and/or forfeited
pursuant to Section 4.6(a)(1);
(2) Voluntary Employee contributions including Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 4.6(a)(2);
(3) Remaining Employer matching contributions.
(b) Any distribution or Forfeiture of less than the entire amount of
Excess Aggregate Contributions (and Income) shall be treated as a pro rata
distribution of Excess Aggregate Contributions and Income.
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Distribution of Excess Aggregate Contributions shall be designated by the
Employer as a distribution of Excess Aggregate Contributions (and Income).
Forfeitures of Excess Aggregate Contributions shall be treated in
accordance with Section 4.4. However, no such Forfeiture may be allocated
to a Highly Compensated Participant whose contributions are reduced
pursuant to this Section.
(c) Excess Aggregate Contributions attributable to amounts other than
voluntary Employee contributions, including forfeited matching
contributions, shall be treated as "Employer contributions for purposes of
Code Sections 404 and 415 even if distributed from the Plan.
(d) For the purposes of this Section and Section 4.7, "Excess
Aggregate Contributions" means, with respect to any Plan Year, the excess
of:
(1) the aggregate amount of Employer matching contributions made
pursuant to Section 4.l(b) (to the extent such contributions are
taken into account pursuant to Section 4.7(b)), voluntary Employee
contributions made pursuant to Section 4.12, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a) and any modified Non-Elective Contributions or elective
deferrals taken into account pursuant to Section 4.7(c) actually made
on behalf of the Highly Compensated Participant group for such Plan
Year, over
(2) the maximum amount of such contributions permitted under the
limitations of Section 4.7(a).
(e) For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the total Employer matching
contributions made pursuant to Section 4.1(b) (to the extent taken into
account pursuant to Section 4.7(b)), voluntary Employee contributions made
pursuant to Section 4.12, Excess Contributions recharacterized as voluntary
Employee contributions pursuant to Section 4.6(a) and any Qualified Non-
Elective Contributions or elective deferrals taken into account pursuant to
Section 4.7(c) on behalf of the Highly Compensated Participant (determined
prior to the application of this paragraph) minus the amount determined by
multiplying the Highly Compensated Participant's actual contribution ratio
(determined after application of this paragraph) by his "414(s)
Compensation". The actual contribution ratio must be rounded to the nearest
one-hundredth of one percent for Plan Years beginning after December 31,
1988. In no case shall the amount of Excess Aggregate Contribution with
respect to any Highly Compensated Participant excess the amount of Employer
matching contributions made pursuant to Section 4.1(b) (to the extent taken
into account pursuant to Section 4.7(b)), voluntary Employee contributions
made pursuant to Section 4.12, Excess Contributions recharacterized as
voluntary Employee contributions pursuant to Section 4.6(a) and any
Qualified Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 4.7(c) on behalf of such Highly Compensated
Participant for such Plan Year.
(f) The determination of the amount of Excess Aggregate Contributions
with respect to any Plan Year shall be made after first determining the
Excess Contributions, if any, to be treated as voluntary Employee
contributions due to recharacterization for the plan year of any other
qualified cash or deferred arrangement (as defined in Code Section 401(k))
maintained by the Employer that ends with or within the Plan Year or which
are treated as voluntary Employee contributions due to recharacterization
pursuant to Section 4.6(a).
(g) The determination and correction of Excess Aggregate
Contributions of a Highly Compensated Participant whose actual contribution
ratio is determined under the family aggregation rules shall be
accomplished as follows:
(1) If the actual contribution ratio for the Highly Compensated
Participant is determined in accordance with Section 4.7(d)(l)(ii),
then the actual contribution ratio shall be reduced and the Excess
Aggregate Contributions for the family unit shall be allocated among
the Family Members in proportion to the sum of Employer matching
contributions made pursuant to Section 4.l(b) (to the extent taken
into account pursuant to Section 4.7(b)), voluntary Employee
contributions made pursuant to Section 4.12, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 4.6(a) and any Qualified Non-Elective Contributions or
elective deferrals taken into account pursuant to Section 4.7(c) of
each Family Member that were combined to determine the group actual
contribution ratio.
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(2) If the actual contribution ratio for the Highly Compensated
Participant is determined under Section 4.7(d)(1)0), then the actual
contribution ratio shall first be reduced, as required herein, but not
below the actual contribution ratio of the group of Family Members who
are not Highly Compensated Participants without regard to family
aggregation. The Excess Aggregate Contributions resulting from this
initial reduction shall be allocate among the Highly Compensated
Participants whose Employer matching Contributions made pursuant to
Section 4.l(b) (to the extent taken into account pursuant to Section
4.7(b)), voluntary Employee contributions made pursuant to Section
4.12, Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 4.6(a) and any Qualified Non-
Elective Contributions or elective deferrals taken into account
pursuant to Section 4.7(c) were combined to determine the actual
contribution ratio. If further reduction is still required, then
Excess Aggregate Contributions resulting from this further reduction
shall be determined by taking into account the contributions of all
Family Members and shall be allocated among them in proportion to
their respective Employer matching contributions made pursuant to
Section 4.l(b) (to the extent taken into account puts to Section
4.7(b)), voluntary Employee contributions made pursuant to Section
4.12, Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 4.6(a) and any Qualified Non-
Elective Contributions or elective deferrals taken into account
pursuant to Section 4.7(c).
(h) Notwithstanding the above, within twelve (12) months after the
end of the Plan Year, the Employer may make a special Qualified Non-
Elective Contribution on behalf of Non-Highly Compensated Participants in
an amount sufficient to satisfy one of the tests set forth in Section
4.7(a). Such contribution shall be allocated to the Participant's Qualified
Non-Elective Account of each Non-Highly Compensated Participant in the same
proportion that each Non-Highly Compensated Participant's Compensation for
the year bears to the total Compensation of all Non-Highly Compensated
Participants. A separate accounting shall be maintained for the purpose of
excluding such contributions from the "Actual Deferral Percentage" tests
pursuant to Code Section 4.5(a).
(i) For purposes of this Section, "Income" means the income or loss
allocable to Excess Aggregate Contributions which shall equal the sum of
the allocable gain or loss for the Plan Year and the allocable gain or loss
for the period between the end of the Plan Year and the date of
distribution ("gap period"). The income or loss allocable to Excess
Aggregate Contributions for the Plan Year and the "gap period" is
calculated separately and is "determined by multiplying the income or loss
for the Plan Year or the "gap period" by a fraction. The numerator of the
fraction is the Excess Aggregate Contributions for the Plan Year. The
denominator, r of the fraction is the total Participant's Account and
Voluntary Contribution Account attributable to Employer matching
contributions subject to Section 4.7, voluntary Employee contributions made
pursuant to Section 4.12, and any Qualified Non-Elective Contributions and
elective deferrals taken into account pursuant to Section 4.7(c) as of the
end of the Plan Year or the "gap period", reduced by the gain allocable to
such total amount for the Plan Year or the "gap period" and increased by
the loss allocable to such total amount for the Plan Year or the "gap
period".
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable Income for the "gap period".
Under such "safe harbor method", allocable Income for the "gap period"
shall be deemed to equal ten percent (10%) of the Income allocable to
Excess Aggregate Contributions for the Plan Year of the Participant
multiplied by the number of calendar months in the "gap period". For
purposes of determining the number of calendar months in the "gap period",
a distribution occurring on or before the fifteenth day of the month shall
be treatable, as having been made on the last day of the preceding month
and a distribution occurring after such fifteenth day shall be treated as
having been made on the first day of the next subsequent month.
The Income allocable to Excess Aggregate Contributions resulting from
recharacterization of Elective Contributions shall be determined and
distributed as if such recharacterized Elective Contributions had been
distributed as Excess Contributions.
Notwithstanding the above, for Plan Years which began in 1987, Income
during the "gap period" shall not be taken into account.
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<PAGE>
4.9 MAXIMUM ANNUAL ADDITIONS
(a) (1) If the Participant does not participate in, and has never
participated in another qualified plan maintained by the Employer, or
a welfare benefit fund (as defined in Code Section 419(e)), maintained
by the Employer, or an individual medical account (as defined in Code
Section 415(1)(2)) maintained by the Employer, which provides Annual
Additions, the amount of Annual Additions which may be credited to the
Participant's accounts for any Limitation Year shall not exceed the
lesser of the Maximum Permissible Amount or any other limitation
contained in this Plan. If the Employer contribution that would
otherwise be contributed or allocated to the Participant's accounts
would cause the Annual Additions for the Limitation Year to exceed the
Maximum Permissible Amount, the amount contributed or allocated will
be reduced so that the Annual Additions for the Limitation Year will
equal the Maximum Permissible Amount.
(2) Prior to determining the Participant's actual Compensation
for the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant on the basis of a reasonable
estimation of the Participant's Compensation on for the Limitation
Year, uniformly determined for all Participants similarly situated.
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for such Limitation
Year shall be determined on the basis of the Participant's actual
compensation for such Limitation Year.
(4) If pursuant to Section 4.9(a)(2) or as a result of the
allocation of Forfeitures, there is an Excess Amount, the excess will
be disposed of as follows:
(i) Any nondeductible Voluntary Employee Contributions,
to the extent they would reduce the Excess Amount, will be
returned to the Participant;
(ii) If, after the application of subparagraph (i), an
Excess Amount still exists, and the Participant is covered by the
Plan at the end of the Limitation Year, the Excess Amount in the
Participant's account will be used to reduce Employer
contributions (including any allocation of forfeitures) for Such
Participant in the next Limitation Year, and each succeeding
Limitation Year if necessary;
(iii) If, after the application of such (i), an Excess
Amount still exists, and the Participant is not covered by the
Plan at the end of a Limitation Year, the Excess Amount will be
held unallocated in a suspense account. The suspense account will
be applied to reduce future Employer contributions (including
allocation of any Forfeitures) for all remaining Participants in
the next Limitation Year, and each succeeding Limitation Year if
necessary;
(iv) If a suspense account is in existence at any time
during a Limitation Year pursuant to this Section, it will not
participate in the allocation of investment gains and losses. If
a suspense account is in existence at any time during a
particular limitation year, all amounts in the suspense account
must be allocated and reallocated to participants" accounts
before any employer contributions or any employee contributions
may be made to the plan for that limitation year. Excess amounts
may not be distributed to participants or former participants.
(b) (1) This subsection applies if, in addition to this Plan, the
Participant is covered under another qualified Prototype defined
contribution plan maintained by the Employer, or a welfare benefit
fund (as defined in Code Section 419(e)) maintained by the Employer,
or an individual medical account (as defined in Code Section
415(1)(2)) maintained by the Employer, which provides Annual
Additions, during any Limitation Year. The Annual Additions which may
be credited to a Participant's accounts under this Plan for any such
Limitation Year shall not exceed the Maximum Permissible Amount
reduced by the Annual Additions credited to a Participant's accounts
under the other plans and welfare
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<PAGE>
benefit funds for the same Limitation Year. If the Annual Additions
with respect to the Participant under other defined contribution plans
and welfare benefit funds maintained by the Employer are less than the
Maximum Permissible Amount and the Employer contribution that would
otherwise be contributed or allocated to the Participant's accounts
under this Plan would cause the Annual Additions for the Limitation
Year to exceed this limitation, the amount contributed or allocated
will be reduced so that the Annual Additions under all such plans and
welfare benefit funds for the Limitation Year will equal the Maximum
Permissible Amount. If the Annual Additions with respect to the
Participant under such other defined contribution plans and welfare
benefit funds in the aggregate are equal to or greater than the
Maximum Permissible Amount, no amount will be contributed or allocated
to the Participant's account under this Plan for the Limitation Year.
(2) Prior to determining the Participant's actual Compensation
for the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant in the manner described in
Section 4.9(a)(2).
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for the Limitation
Year will be determined on the basis of the Participant's actual
Compensation for the Limitation Year.
(4) If, pursuant to Section 4.9(b)(2) or as a, result of the
allocation of Forfeitures, a Participant's Annual Additions under this
Plan and such other plans would result in an Excess Amount for a
Limitation Year, the Excess Amount will be deemed to consist of the
Annual Additions last allocated, except that Annual Additions
attributable to a welfare benefit fund or individual medical account
will be deemed to have been allocated first regardless of the actual
allocation date.
(5) If an Excess Amount was allocated to a Participant on an
allocation date of this Plan which coincides with an allocation date
of another plan, the Excess Amount attributed to this Plan will be the
product of,
(i) the total Excess Amount allocated as of such date,
times
(ii) the ratio of (1) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
Plan to (2) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified defined contribution plans.
(6) Any Excess Amount attributed to this Plan will be disposed
in the manner described in Section 4.9(a)(4).
(c) If the Participant is covered under another qualified defined
contribution plan maintained by the Employer which is not a Prototype Plan,
Annual Additions which may be credited to the Participant's account under
this Plan for any Limitation Year will be limited in accordance with
Section 4.9(b), unless the Employer provides other limitations in the
Adoption Agreement.
(d) If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan the sum of the
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions
which may be credited to the Participant's account under this Plan for any
Limitation Year will be limited in accordance with the Limitation on
Allocations Section of the Adoption Agreement.
(e) For purposes of applying the limitations of Code Section 415, the
transfer of funds from one qualified plan to another is not an "annual
addition". In addition, the following are not Employee contributions for
the purposes of Section 4.9(0(1)(2): (1) rollover contributions (as defined
in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2)
repayments of loans made to a Participant from the Plan; (3) repayments of
distributions received by an Employee pursuant to Code Section 41l
(a)(7)(B) (cash-outs);
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<PAGE>
(4) repayments of distributions received by an Employee pursuant to Code
Section 41l(a)(3)(D) (mandatory contributions); and (5) Employee
contributions to a simplified employee pension excludable from gross income
under Code Section 408(k)(6).
(f) For purposes of this Section, the following terms shall be
defined as follows:
(1) Annual Additions means the sum credited to a Participant's
accounts for any Limitation Year of (1) Employer contributions, (2)
effective with respect to "limitation years" beginning after December
31, 1986, Employee contributions, (3) forfeitures, (4) amounts
allocated, after March 31, 1984, to an individual medical account, as
defined in Code Section 415(1)(2), which is part of a pension or
annuity plan maintained by the Employer and (5) amounts derived from
contributions paid or accrued after December 31, 1985, in taxable
years ending after such date, which are attributable to post-
retirement medical benefits allocated to the separate account of a key
employee (as defined in Code Section 419A(d)(3)) under a welfare
benefit fund (as defined in Code Section 419(e)) maintained by the
Employer. Except, however, the "415 Compensation" percentage
limitation referred to in paragraph (a)(2) above shall not apply to:
(1) any contribution for medical benefits (within the meaning of Code
Section 419A(f)(2)) after separation from service which is otherwise
treated as an "annual addition", or (2) any amount otherwise treated
as an "annual addition" under Code Section 415(1)(1). Notwithstanding
the foregoing, for "limitation years" beginning prior to January 1,
1987, only that portion of Employee contributions equal to the lesser
of Employee contributions in excess of six percent (6%) of "415
Compensation" or one-half of Employee contributions shall be
considered an "annual addition". For this purpose, any Excess Amount
applied under Sections 4.9(a)(4) and 4.9(b)(6) in the Limitation Year
to reduce Employer contributions shall be considered Annual Additions
for such Limitation Year.
(2) Compensation means a Participant's earned income, wages,
salaries, fees for professional services and other amounts received
for personal services actually rendered in the course of employment
with the Employer maintaining the Plan ("including, but not limited
to, commissions paid salesmen, compensation for services on the basis
of a percentage of profits, commissions on insurance premiums, tips,
and bonuses) and excluding the following:
(i) Employer contributions to a plan of deferred
compensation which are not includible in the Employee's gross
income for the taxable year in which contributed, or Employer
contributions under a simplified employee pension plan to the
extent such contributions are excludable from the Employee's
gross income, or any distributions from a plan of deferred
compensation;
(ii) contributions made by the Employer to a plan of
deferred compensation to the extent that all or a portion of such
contributions are recharacterized as a voluntary Employee
contribution;
(iii) amounts realized from the exercise of a non-
qualified stock option, or when restricted stock (or property)
held by an Employee becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(iv) amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and
(v) other amounts which received special tax benefits,
or contributions made by an Employer (whether or not under a
salary reduction agreement) towards the purchase of an annuity
contract described in Code Section 403(b) (whether or not the
contributions are excludable from the gross income of the
Employee).
For purposes of applying the limitations of this Section 4.9,
Compensation for any Limitation Year is the Compensation actually paid
or includible in gross income during such year. Notwithstanding the
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preceding sentence, Compensation for a Participant in a profit-sharing
plan who is permanently and totally disabled (as defined in Code
Section 22(e)(3)) is the Compensation such Participant would have
received for the Limitation Year if the Participant had been paid at
the rate of Compensation paid immediately before becoming permanently
and totally disabled; such imputed Compensation for the disabled
Participant may be taken into account only if the Participant is not a
Highly Compensated Employee and contributions made on behalf of such
Participant are nonforfeitable when made.
(3) Defined Benefit Fraction means a fraction, the numerator of
which is the sum of the Participant's Projected Annual Benefits under
all the defined benefit plans (whether or not terminated) maintained
by the Employer, and the denominator of which is the lesser of 125
percent of the dollar limitation determined for the Limitation Year
under Code Sections 415(b) and (d) or 140 percent of his Highest
Average Compensation including any adjustments under Code Section
415(b).
Notwithstanding the above, if the Participant was a Participant as of
the first day of the first Limitation Year beginning after December
31, 1986, in one or more defined benefit plans maintained by the
Employer which were in existence on May 6, 1986, the denominator of
this fraction on will not be less than 125 percent of the sum of the
annual benefits under such plans which the Participant had accrued as
of the end of the close of the last Limitation Year beginning before
January 1, 1987, disregarding any changes in the terms and conditions
of the plan after May 5, 1986. The preceding sentence applies only if
the defined benefit plans individually and in the aggregate satisfied
the requirements of Code Section 415 for all Limitation Years
beginning before January 1, 1987.
Notwithstanding the foregoing, for any Top Heavy Plan Year, I00 shall
be substituted for 125 unless the extra minimum allocation is being
made pursuant to the Employer's election in F1 of the Adoption
Agreement. However, for any Plan Year in which this Plan is a Super
Top Heavy Plan, 100 shall be substituted for 125 in any event.
(4) Defined Contribution Dollar Limitation means $30,000, or, if
greater, one-fourth of the defined benefit dollar limitation set forth
in Code Section 415(b)(1) as in effect for the Limitation Year.
(5) Defined Contribution Fraction means a fraction, the
numerator of which is the sum of the Annual Additions to the
Participant's account under all the defined contribution plans
(whether or not termination) maintained by the Employer for the
current and all prior Limitation Years, (including the Annual
Additions attributable to the Participant's nondeductible voluntary
employee contributions to any defined benefit plans, whether or not
terminated, maintained by the Employer and the annual additions
attributable to all welfare benefit funds, as defined in Code Section
419(e), and individual medical accounts, as defined in Code Section
415(1)(2), maintained by the Employer), and the denominator of which
is the sum of the maximum aggregate amounts for the current and all
prior Limitation Years of Service with the Employer (regardless of
whether a defined contribution plan was maintained by the Employer).
The maximum aggregate amount in any Limitation Year is the lesser of
125 percent of the Defined Contribution Dollar Limitation or 35
percent of the Participant's Compensation for such year. For
Limitation Years beginning prior to January 1, 1987, the "annual
addition" shall not be recomputed to treat all Employee contributions
as an Annual Addition.
If the Employee was a Participant as of the end of the first day
of the first Limitation Year beginning after December 31, 1986, in one
or more defined, contribution plans maintained by the Employer which
were in existence on May 5, 1986, the numerator of this fraction will
be adjusted if the sum of this fraction and the Defined Benefit
Fraction would otherwise exceed 1.0 under the terms of this Plan.
Under the adjustment, an amount equal to the product of (1) the excess
of the sum of the fractions over 1.0 times (2) the denominator of this
fraction, will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they
would be computed as of the end of the last Limitation Year beginning
before January 1, 1987, and disregarding any changes in the terms and
conditions of the plan made after May 5, 1986, but using the Code
Section 415 limitation applicable to the first Limitation Year
beginning on or after January 1, 1987.
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Notwithstanding the foregoing, for any Top Heavy Plan Year, 100
shall be substituted for 125 unless the extra minimum allocation is
being made pursuant to the Employer's election in F1 of the Adoption
Agreement. However, for any Plan Year in which this Plan is a Super
Top Heavy Plan, 100 shall be substituted for 125 in any event.
(6) Employer means the Employer that adopts this Plan and all
Affiliated Employers, except that for purposes of this Section,
Affiliated Employers shall be determined pursuant to the modification
made by Code Section 415(h).
(7) Excess Amount means the excess of the Participant's Annual
Additions for the Limitation Year over the Maximum Permissible Amount.
(8) Highest Average Compensation means the average Compensation
for the three consecutive Year's of Service with the Employer that
produces the highest average. A Year of Service with the Employer is
the 12 consecutive month period defined in Section E1 of the Adoption
Agreement which is used to determine Compensation under the Plan.
(9) Limitation Year means the Compensation Year (a 12
consecutive month period) as elected by the Employer in the Adoption
Agreement. All qualified plans maintained by the Employer must use the
same Limitation Year. If the Limitation Year is amended to a different
12 consecutive month period, the new Limitation Year must begin on a
date within the Limitation Year in which the amendment is made.
(10) Master or Prototype Plan means a plan the form of which is
the subject of a favorable opinion letter from the Internal Revenue
Service.
(11) Maximum Permissible Amount means the maximum Annual Addition
that may be contributed or allocated to a Participants Account under
the plan for any Limitation Year, which shall not exceed the lesser
of:
(i) the Defined Contribution Dollar Limitation, or
(ii) 25 percent of the Participant's Compensation for the
Limitation Year.
The Compensation Limitation referred to in (ii) shall not
apply to shy contribution for medical benefits (within the
meaning of Code Sections 401(h) or 419A(f)(2)) which is otherwise
treated as an annual addition under Code Sections 415(I)(1) or
419A(d)(2).
If a short Limitation Year is created because of an amendment
changing the Limitation Year to a different 12 consecutive month
period, the Maximum Permissible Amount will not exceed the Defined
Contribution Dollar Contribution multiplied by the following fraction:
number of months in the short Limitation Year
---------------------------------
12
(12) Projected Annual Benefit means the annual retirement benefit
(adjusted to an actuarially equivalent straight life annuity if such
benefit is expressed in a form other than a straight life annuity or
qualified Joint and Survivor Annuity) to which the Participant would
be entitled under the terms of the plan assuming:
(13) the Participant will continue employment until Normal
Retirement Age (or current age, if later), and
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(14) the Participant's Compensation for the current
Limitation Year and all other relevant factors used to determine
benefits under the Plan will remain constant for all future Limitation
Years.
(g) Notwithstanding anything contained in this Section to the
contrary, the limitations, adjustments and other requirements
prescribed in this Section shall at all times comply with the
provisions of Code Section 415 and the Regulations thereunder, the
terms of which are specifically incorporated herein by reference.
4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) If as a result of the allocation of Forfeiture, a reasonable
error in estimating a Participant's annual Compensation, or other
facts and circumstances to which Regulation 1.415-6(b)(6) shall be
applicable, the "annual additions" under this Plan would cause the
maximum provided in Section 4.9 to be exceeded, the Administrator
shall treat the excess in accordance with Section 4.9(a)(4).
4.11 TRANSFERS FROM QUALIFIED PLANS
(a) If specified in the Adoption Agreement and with the consent
of the Administrator, amounts may be transferred from other qualified
plans, provided that the trust from which such funds are transferred
permits the transfer to be made and the transfer will not jeopardize
the tax exempt status of the Plan or create adverse tax consequences
for the Employer. The amounts transferred shall be ~.t up in a
separate account herein referred to as a "Participant's Rollover
Account". Such account shall be fully Vested at all times and shall
not be subject to forfeiture for any reason.
(b) Amounts in a Participant's Rollover Account shall be held by
the Trustee pursuant to the provisions of this Plan and may not be
withdrawn by, or distributed to the Participant, in whole or in part,
except as provided in Paragraphs (c) and (d) of this Section.
(c) Amounts attributable to elective contributions (as defined
in Regulation 1.401(k)-l(g)(4)), including amounts treated as elective
contributions, which are transferred from another qualified plan in a
plan-to-plan transfer shall be subject to the distribution limitations
provided for in Regulation 1.401(k)-l(d).
(d) At Normal Retirement Date, or such other date when the
Participant or his Beneficial shall be entitled to receive benefits,
the fair market value of the Participant's Rollover Account shall be
used to provide additional benefits to the Participant or his
Beneficiary. Any contributions of amounts held in a Participant's
Rollover Account shall be made in a manner which is consistent with
and satisfies the provisions of Section 6.5, including, but not
limited to, all notice and consent requirements of Code Sections
41l(a)(l1) and 417 and the Regulations thereunder. Furthermore, such
amounts shall be considered as part of a Participant's benefit in
determining whether an involuntary cash-out of benefits without
Participant consent may be made.
(e) The Administrator may direct that employee transfers made
after a valuation date be segregated into a separate account for each
Participant until such time as the allocations pursuant to this Plan
have been made, at which time they may remain segregated or be
invested as part of the general Trust Fund, to be determined by the
Administrator.
(f) For purposes of this Section, the term "qualified plan"
shall mean any tax qualified plan under Code Section 401(a). The term
"amounts transferred from other qualified plans" shall mean: (i)
amounts transferred to this Plan directly from another qualified plan;
(ii) lump-sum distributions received by an Employee from another
qualified plan which are eligible for tax free rollover to a qualified
plan and which are transferred by the Employee to this Plan within
sixty (60) days following his receipt thereof; (iii) amounts
transferred to this Plan from a conduit individual retirement account
provided that the conduit individual retirement account has no assets
other than assets which (A) were previously distributed to the
Employee by another qualified plan as a lump-sum distribution (B) were
eligible for tax-free rollover to a qualified plan
40
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and (C) were deposited in such conduit individual retirement account
within sixty (60) days of receipt thereof and other than earnings on said
assets; and (iv) amounts distributed to the Employee from a conduit
individual retirement account meeting the requirements of clause (iii)
above, and transferred by the Employee to this Plan within sixty (60) days
of his receipt thereof from such conduit individual retirement account.
(g) Prior to accepting any transfers to which this Section applies,
the Administrator may require the Employee to establish that the amounts w
be transferred to this Plan meet the requirements of this Section sad may
also require the Employee to provide an opinion of counsel satisfactory to
the Employer that the amounts to be transferred meet the requirements of
this Section.
(h) Notwithstanding anything herein to the contrary, a transfer
directly to this Plan from another qualified plan (or a transaction having
the effect of such a transfer) shall only be permitted if it will not
result in the elimination or reduction of any "section 411(d)(6) protected
benefit" as described in Section 8.1.
4.12 VOLUNTARY CONTRIBUTIONS
(a) If elected in the Adoption Agreement, each Participant may, at
the discretion of the Administrator in a nondiscriminatory manner, elect
to voluntarily contribute a portion of his compensation earned while a
Participant under this Plan. Such contributions shall be paid to the
Trustee within a reasonable period of time but in no event later than 90
days after the receipt of the contribution.
(b) The balance in each Participant's Voluntary Contribution Account
shall be fully Vested at all times and shall not be subject to Forfeiture
for any reason.
(c) A Participant may elect to withdraw his voluntary contributions
from his Voluntary Contribution Account and the actual earnings thereon in
a manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements of
Code Sections 411(a)(11) and 417 and the Regulations thereunder. If the
Administrator maintains sub-accounts with respect to voluntary
contributions (and earnings thereon) which were made on or before a
specified date, at Participant shall be permitted to designate which sub-
account shall be the source for his withdrawal. No Forfeitures shall occur
solely as a result of an Employee's withdrawal of Employee contributions.
In the event such a withdrawal is made, or in the event a Participant
has received a hardship distribution pursuant to Regulation 1.401(k)-
l(d)(2)(iii)(B) from any other plan maintained by the Employer or from his
Participant's Elective Account pursuant to Section 6.11, then such
Participant shall be barred from making say voluntary contributions to the
Trust Fund for a period of twelve (12) months after receipt of the
withdrawal or distribution.
(d) At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive benefits, the
fair market value of the Voluntary Contribution Account shall be used to
provide additional benefits to the Participant or his Beneficiary.
(e) The Administrator may direct that voluntary contributions made
after a valuation date be segregated into a separate account until such
time as the allocations pursuant to this Plan have been made, at which
time they may remain segregated or be invested as part of the general
Trust Fund, to be determined by the Administrator.
4.13 DIRECTED INVESTMENT ACCOUNT
(a) If elected in the Adoption Agreement, all Participants may direct
the Trustee as to the investment of all or a portion of any one or more of
their individual account balances. Participants may direct the Trustee in
writing to invest their account in specific assets as permitted by the
Administrator provided such investments are in accordance with the
Department of Labor regulations and are permitted by the Plan. That
41
<PAGE>
portion of the account of any Participant so directing will thereupon be
considered a Directed Investment Account.
(b) A separate Directed Investment Account shall be established for
each Participant who has directed an investment. Transfers between the
Participant's regular account and their Directed Investment Account shall
be charged and credited as the case may be to each account. The Directed
Investment Account shall not share in Trust Fund Earnings, but it shall be
charged or credited as appropriate with the net earnings, gains, losses
and expenses as well as any appreciation or depreciation in market value
during each Plan Year attributable to such account.
(c) The Administrator shall establish a procedure, to be applied in a
uniform and nondiscriminatory manner, setting forth the permissible
investment options under this Section, how often changes between.
investments may be made, and any other limitations that the Administrator
shall impose on a Participant's right to direct investments.
4.14 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS
(a) If this is an amendment to a Plan that previously permitted
deductible voluntary contributions, then each Participant who made a
"Qualified Voluntary Employee Contribution" within the meaning of Code
Section 219(e)(2) as it existed prior to the enactment of the Tax Reform
Act of 1986, shall have his contribution held in a separate Qualified
Voluntary Employee Contribution Account which shall be fully Vested at all
times. Such contributions, however, shall not be permanent if they are
attributable to taxable years beginning after December 31, 1986.
(b) A Participant may, upon written request delivered to the
Administrator, make withdrawals from his Qualified Voluntary Employee
Contribution Account. Any distribution shall be made in a manner which is
consistent with and satisfies the provisions of Section 6.5, including,
but not limited to, all notice and consent requirements of Code Sections
411(a)(11) and 417 and the Regulations thereunder.
(c) At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive benefits, the
fair market value of the Qualified Voluntary Employee Contribution Account
shall be used to provide additional benefits to the Participant or his
Beneficiary.
(d) Unless the Administrator directs Qualified Voluntary Employee
Contributions made pursuant to this Section be segregated into a separate
account for each Participant, they shall be invested as part of the
general Trust Fund and share in earnings and losses.
4.15 INTEGRATION IN MORE THAN ONE PLAN
If the Employer and/or an Affiliated Employer maintain qualified
retirement plans integrated with Social Security such that any Participant in
this Plan is covered under more than one of such plans, then such plans will be
considered to be one plan and will be considered to be integrated if the extent
of the integration of all such plans does not exceed 100%. For purposes of the
preceding sentence, the extent of integration of a plan is the ratio, expressed
as a percentage, which the actual benefits, benefit rate, offset rate, or
employer contribution rate, whatever is applicable, under the Plan bears to the
limitation applicable to such Plan. If the Employer maintains two or more
standardized paired plans, only one plan may be integrated with Social Security.
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ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary Date,
and at such other dale or dates deemed necessary by the Administrator, herein
called "valuation date", to determine the net worth of the assets comprising the
Trust Fund as it exists on the "valuation date". In determining such net worth,
the Trustee shall value the assets comprising the Trust Fund at their fair
market value as of the "valuation date" and shall deduct all expenses for which
the Trustee has not yet obtained reimbursement from the Employer or the Trust
Fund.
5.2 METHOD OF VALUATION
In determining the fair market value of securities held in the Trust Fund
which are listed on a registered stock exchange, the Administrator shall direct
the Trustee to value the same at the prices they were last traded on such
exchange preceding the close of business on the "valuation date". If such
securities were not traded on the "valuation date", or if the exchange on which
they arc traded was not open for business on the "valuation date", then the
securities shall be valued at the prices at which they were last traded prior to
the "valuation date". Any unlisted security held in the Trust Fund shall be
valued at its bid price next preceding the close of business on the "valuation
date", which bid price shall be obtained from a registered broker or an
investment banker. In determining the fair market value of use other than
securities for which trading or bid prices cam be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer and retire
for the purposes hereof on or after his Normal Retirement Date or Early
Retirement Date. Upon such Normal Retirement Date or Early Retirement Date, all
amounts credited to such Participant's Combined Account shall become
distributable. However, a Participant may postpone the nation of his employment
with the Employer to a later date, in which event the participation of such
Participant in the Plan, including the fight to receive allocations pursuant to
Section 4.4, shall continue until his Late Retirement Date. Upon a Participant's
Retirement Date, or as soon thereafter as is practicable, the Administrator
shall direct the distribution of all amounts credited to such Participant's
Combined Account in accordance with Section 6.5.
6.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his Retirement Date or
other termination of his employment, all amounts credited to such
Participant's Combined Account shall become fully Vested. The Administrator
shall direct, in accordance with the provisions of Sections 6.6 and 6.7,
the distribution of the deceased Participant's accounts to the
Participant's Beneficiary.
(b) Upon the death of a Former Participant, the Administrator shall
direct, in accordance with the provisions of Sections 6.6 and 6.7, the
distribution of any remaining amounts credited to the accounts of such
deceased Former Participant to such Former Participant's Beneficiary.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive payment of the value of the
account of a deceased Participant or Former Participant as the
43
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Administrator may deem desirable. The Administrator's determination of
death and of the right of any person to receive payment shall be
conclusive.
(d) Unless otherwise elected in the manner prescribed in Section 6.6,
the Beneficiary of the Pre-Retirement Survivor Annuity shall be the
Participant's spouse. Except, however, the Participant may designate a
Beneficiary other than his spouse for the Pre-Retirement Survivor Annuity
if:
(1) the Participant and his spouse have validly waived the Pre-
Retirement Survivor Annuity in the manner prescribed in Section 6.6,
and the spouse has waived his or her right to be the Participant's
Beneficiary, or
(2) the Participant is legally separated or has been abandoned
(within the meaning of local law) and the Participant has a court
order to such effect (and there is no "qualified domestic relations
order" as defined in Code Section 414(p) which provides otherwise), or
(3) the Participant has no spouse, or
(4) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be made on a
form satisfactory to the Administrator. A Participant may at any time
revoke his designation of a Beneficiary or change his Beneficiary by filing
written notice of such revocation or change with the Administrator.
However, the Participant's spouse must again consent in writing to any
change in Beneficiary unless the original consent acknowledged that the
spouse had the right to limit consent only to a specific Beneficiary and
that the spouse voluntarily elected to relinquish such right. The
Participant may, at any time, designate a Beneficiary for death benefits
payable under the Plan that are in excess of the Pre-Retirement Survivor
Annuity. In the event no valid designation of Beneficiary exists at the
time of the Participant's death, the death benefit shall be payable to his
estate.
(e) If the Plan provides an insured death benefit and a Participant
dies before any insurance coverage to which he is entitled under the Plan
is effected, his death benefit from such insurance coverage shall be
limited to the standard rated premium which was or should have been used
for such purpose.
(f) In the event of any conflict between the terms of this Plan and
the terms of any Contract issued hereunder, the Plan provisions shall
control.
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability prior to his
Retirement Date or other termination of his employment, all amounts credited to
such Participation's Combined Account shall become fully Vested. In the event of
a Participant's Total and Permanent Disability, the Administrator, in accordance
with the provisions of Sections 6.5 and 6.7, shall direct the distribution to
such Participant of all amounts credited to such Participant's Combined Account
as though he had retired.
6.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) On or before the Anniversary Date coinciding with or subsequent
to the termination of a Participant's employment for any reason other than
retirement, death, or Total and Permanent Disability, the Administrator may
direct the Trustee to segregate the amount of the Vested portion of such
Terminated Participant's Combined Account and invest the aggregate amount
thereof in a separate, federally insured savings account, certificate of
deposit, common or collective trust fund of a bank or a deferred annuity.
In the event the Vested portion of a Participant's Combined Account is not
segregated, the amount shall remain in a separate account for the
Terminated Participant and share in allocations pursuant to Section 4.4
until such time as a distribution is made to the Terminated Participant.
The amount of the portion of the
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Participant's Combined Account which is not Vested may be credited to a
separate account (which will always share in gains and losses of the Trust)
and at such time as the amount becomes a Forfeiture shall be treated in
accordance with the provisions of the Plan regarding Forfeitures.
Regardless of whether distributions in kind are permitted, in the
event that the amount of the Vested portion of the Terminated Participant's
Combined Account equals or exceeds the fair market value of any insurance
Contracts, the Trustee, when so directed by the Administrator and agreed to
by the Terminated Participant, shall assign, transfer, and set over to such
Terminated Participant all Contracts on his life in such form or with such
endorsements, so that the settlement options and forms of payment are
consistent with the provisions of Section 6.5. In the event that the
Terminated Participant's Vested portion does not at least equal the fair
market value of the Contracts, if any, the Terminated Participant may pay
over to the Trustee the sum needed to make the distribution equal to the
value of the Contracts being assigned or transferred, or the Trustee,
pursuant to the Participant's election, may borrow the cash value of the
Contracts from the Insurer so that the value of the Contracts is equal to
the Vested portion of the Terminated Participant's Combined Account and
then assign the Contracts to the Terminated Participant.
Distribution of the funds due to a Terminated Participant shall be
made on the occurrence of an event which would result in the distribution
had the Terminated Participant remained in the employ of the Employer (upon
the Participant's death, Total and Permanent Disability, Early or Normal
Retirement). However, at the election of the Participant, the Administrator
shall direct that the entire Vested portion of the Terminated Participant's
Combined Account to be payable to such Terminated Participant provided the
conditions, if any, set forth in the Adoption Agreement have been
satisfied. Any distribution under this paragraph shall be made in a manner
which is consistent with and satisfied the provisions of Section 6.5,
including but not limited to, all notice and consent requirements of Code
Sections 41l(a)(l1) and 417 and the Regulations thereunder.
Notwithstanding the above, if the value of a Terminated Participant's
Vested benefit derived from Employer and Employee contributions does not
exceed, and at the time of any prior distribution, has never exceeded
$3,500, the Administrator shall direct that the entire Vested benefit be
paid to such Participant in a single lump-sum without regard to the consent
of the Participant or the Participant's spouse. A Participant's Vested
benefit shall not include Qualified Voluntary Employee Contributions within
the meaning of Code Section 72(o)(5)(B) for Plan Years beginning prior to
January 1, 1989.
(b) The Vested portion of any Participant's Account shall be a
percentage of such Participant's Account determined on the basis of the
Participant's number of Years of Service according to the vesting schedule
specified in the Adoption Agreement.
(c) For any Top Heavy Plan Year, one of the minimum top heavy vesting
schedules as elected by the Employer in the Adoption Agreement will
automatically apply to the Plan. The minimum top heavy vesting schedule
applies to all benefits within the meaning of Code Section 411(a)(7)except
those attributable to Employee contributions, including benefits rue before
the effective date of Code Section 416 and benefits accrued before the Plan
became top heavy. Further, no decrease in a Participant's Vested percentage
may occur in the event the Plan's status as top heavy changes for any Plan
Year. However, this Section does not apply to the account balances of any
Employee who does not have an Hour of Service after the Plan has initially
become top heavy and the Vested percentage of such Employee's Participant's
Account shall be determined without regard to this Section 6.4(c).
If in any subsequent Plan Year, the Plan ceases to be a Top Heavy
Plan, the Administrator shall continue to use the vesting schedule in
effect while the Plan was a Top Heavy Plan for each Employee who had an
Hour of Service during a Plan Year when the Plan was Top Heavy.
(d) Notwithstanding the vesting schedule above, upon the complete
discontinuance of the Employer's contributions to the Plan or upon any full
or partial termination of the Plan, all amounts credited to the account of
any affected Participant shall become 100% Vested and shall not thereafter
be subject to Forfeiture.
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(e) If this is an amended or restated Plan, then notwithstanding the
vesting schedule specified in the Adoption Agreement, the Vested percentage
of a Participant's Account shall not be less than the Vested percentage
attained as of the later of the effective date or adoption date of this
amendment and restatement. The computation of a Participant's
nonforfeitable percentage of his interest in the Plan shall not be reduced
as the result of any direct or indirect amendment to this Article, or due
to changes in the Plan's status as a Top Heavy Plan.
(f) If the Plan's vesting schedule is amended, or if the Plan is
amended in any way that directly or indirectly affects the computation of
the Participant's nonforfeitable percentage or if the Plan is deemed
amended by an automatic change to a top heavy vesting schedule, then each
Participant with at least 3 Years of Service as of the expiration date of
the election period may elect to have his nonforfeitable percentage
computed under the Plan without regard to such amendment or change.
Notwithstanding the foregoing, for Plan Years beginning before January 1,
1989, or with respect to Employees who fail to complete at least one (1)
Hour of Service in a Plan Year beginning after December 31, 1988, five (5)
shall be substituted for three (3) in the preceding sentence. If a
Participant fails to make such election, then such Participant shall be
subject to the new vesting schedule. The Participant's election period
shall commence on the adoption date of the amendment and shall end 60 days
after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of the
amendment from the Employer or Administrator.
(g) (1) If any Former Participant shall be reemployed by the
Employer before a l-Year Break in Service occurs, he shall continue to
participate in the Plan in the same manner as if such termination had not
occurred.
(2) If any Former Participant shall be reemployed by the
Employer before five (5) consecutive 1-Year Breaks in Service, and such
Former Participant had received a distribution of his entire Vested
interest prior to his reemployment, his forfeited account shall be
reinstated only if he repays the full amount distributed to him before the
earlier of five (5) years after the first date on which the Participant is
subsequently reemployed by the Employer or the close of the first period of
5 consecutive l-Year Breaks in Service commencing after the distribution.
If a distribution occurs for any reason other than a separation from
service, the time for repayment may not end earlier than five (5) years
after the date of separation. In the event the Former Participant does
repay the full amount distributed to him, the undistributed portion of the
Participant's Account must be restored in full, unadjusted by any gains or
losses occurring subsequent to the Anniversary Date or other valuation date
preceding his termination. If an employee receives a distribution pursuant
to this section and the employee resumes employment covered under this
plan, the employee's employer-derived account balance will be restored to
the amount on the date of distribution if the employee repays to the plan
the full amount of the distribution attributable to employer contributions
before the earlier of 5 years after the first date on which the participant
is subsequently re-employed by the employer, or the date the participant
incurs 5 consecutive l-year breaks in service following the date of the
distribution. If a non-Vested Former Participant was deemed to have
received a distribution and such Former Participant is reemployed by the
Employer before five (5) consecutive 1-Year Breaks in Service, then such
Participant will be deemed to have repaid the deemed distribution as of the
date of reemployment.
(3) If any Former Participant is reemployed after a l-Year Break
in Service has occurred, Years of Service shall include Years of Service
prior to his l-Year Break in Service subject to the following rules:
(i) Any Former Participant who under the Plan does not have
a nonforfeitable right to any interest in the Plan resulting from
Employer contributions shall lose credits if his consecutive
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1-Year Breaks in Service equal or exceed the greater of (A) five
(5) or (B) the aggregate number of his pre-break Years of
Service;
(ii) After five (5) consecutive l-Year Breaks in Service,
a Former Participant's Vested Account balance attributable to
pre-break service shall not be increased as a result of post-
break service;
(iii) A Former Participant who is reemployed and who has
not had his Years of Service before a l-Year Break in Service
disregarded pursuant to (i) above, shall participate in the Plan
as of his date of reemployment;
(iv) If a Former Participant completes a Year of Service
(a 1-Year Break in Service previously occurred, but employment
had not terminated), he shall participate in the Plan
retroactively from the first day of the Plan Year during which he
completes one (1) Year of Service.
(h) In determining Years of Service for purposes of vesting under the
Plan, Years of Service shall be excluded as specified in the Adoption
Agreement.
6.5 DISTRIBUTION OF BENEFITS
(a) (1) Unless otherwise elected as provided below, a Participant
who is married on the "annuity starting date" and who does not die
before the "annuity starting date" shall receive the value of all of
his benefits in the form of a Joint and Survivor Annuity. The Joint
and Survivor Annuity is an annuity that commences immediately and
shall be equal in value to a single life annuity. Such joint and
survivor benefits following the Participant's death shall continue to
the spouse during the spouse's lifetime at a rate equal to 50% of the
rate at which such benefits were payable to the Participant. This
Joint and Survivor Annuity shall be considered the designated
qualified Joint and Survivor Annuity and automatic form of payment for
the purposes of this Plan. However, the Participant may elect to
receive a smaller annuity benefit with continuation of payments to the
spouse at a rate of seventy-five percent (75%) or one hundred percent
(100%) of the rate payable to a Participant during his lifetime which
alternative Joint and Survivor Annuity shall be equal in value to the
automatic Joint and 50% Survivor Annuity. An unmarried Participant
shall receive the value of his benefit in the form of a life annuity.
Such unmarried Participant, however, may elect in writing to waive the
life immunity. The election must comply with the provisions of this
Section as if it were an election to waive the Joint and Survivor
Annuity by a married Participant, but without the spousal consent
requirement. The Participant may elect to have any annuity provided
for in this Section distributed upon the attainment of the "earliest
retirement age" under the Plan. The "earliest retirement age" is the
earliest date on which, under the Plan, the Participant could elect to
receive retirement benefits.
(2) Any election to waive the Joint and Survivor Annuity must be
made by the Participant in writing during the election period and be
consented to by the Participant's spouse. If the spouse is legally
incompetent to give consent, the spouse's legal guardian, even if such
guardian is the Participant, may give consent. Such election shall
designate a Beneficiary (or a form of benefits) that may not be
changed without spousal consent (unless the consent of the spouse
expressly permits designations by the Participant without the
requirement of further consent by the spouse). Such spouse's consent
shall be irrevocable and must acknowledge the effect of such election
and be witnessed by a Plan representative or a notary public. Such
consent shall not be required if it is established to the satisfaction
of the Administrator that the required consent cannot be obtained
because there is no spouse, the spouse cannot be located, or other
circumstances that may be prescribed by Regulations. The election made
by the Participant and consented to by his spouse may be revoked by
the Participant in writing without the consent of the spouse at any
time during the election period. The number of revocations shall not
be limited. Any new election must comply with the requirements of this
paragraph. A former spouse's waiver shall not be binding on a new
spouse.
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(3) The election period to waive the Joint and Survivor Annuity shall
be the 90 day period ending on the "annuity starting date."
(4) For purposes of this Section and Section 6.6, the "annuity
starting date" means the first day of the first period for which an
amount is paid as an annuity, or, in the case of a benefit not payable in
the form of an annuity, the first day on which all events have occurred
which entities the Participant to such benefit.
(5) With regard to the election, the Administrator shall provide to
the Participant no less than 30 days and no more than 90 days before the
"annuity starting date" a written explanation of:
(i) the terms and conditions of the Joint and Survivor Annuity,
and
(ii) the Participant's right to make and the effect of an
election to waive the Joint and Survivor Annuity, and
(iii) the right of the Participant's spouse to consent to any
election to waive the Joint and Survivor Annuity, and
(iv) the right of the Participant to revoke such election, and
the effect of such revocation.
(b) In the event a married Participant duly elects pursuant to paragraph
(a)(2) above not to receive his benefit in the form of a Joint and Survivor
Annuity, or if such Participant is not married, in the form of a life
annuity, the Administrator, pursuant to the election of the Participant,
shall direct the distribution to a Participant or his Beneficiary any
amount to which he is entitled under the Plan in one or more of the
following methods which are permitted pursuant to the Adoption Agreement:
(1) One lump-sum payment in cash or in property;
(2) Payments over a period certain in monthly, quarterly,
semiannual, or annual cash installments. In order to provide such
installment payments, the Administrator may direct that the Participant's
interest in the Plan be segregated and invested separately, and that the
funds in the segregated account be used for the payment of the
installments. The period over which such payment is to be made shall not
extend beyond the Participant's life expectancy (or the life expectancy
of the Participant and his designated Beneficiary);
(3) Purchase of or providing an annuity. However, such annuity may
not be in any form that will provide for payments over a period extending
beyond either the life of the Participant (or the lives of the
Participant and his designated Beneficiary) or the life expectancy of the
Participant (or the life expectancy of the Participant and his designated
Beneficiary).
(c) The present value of a Participant's Joint and Survivor Annuity
derived from Employer and Employee contributions may not be paid without
his written consent if the value exceeds, or has ever exceeded at the time
of any prior distribution, $3,500. Further, the spouse of a Participant
must consent in writing to any immediate distribution. If the value of the
Participant's benefit derived from Employer and Employee contributions does
not exceed $3,500 and has never exceeded $3,500 at the time of any prior
distribution, the Administrator may immediately distribute such benefit
without such Participant's consent. No distribution may be made under the
preceding sentence after the "annuity starting date" unless the Participant
and his spouse consent in writing to such distribution. Any written consent
required under this paragraph must be obtained not more than 90 days before
commencement of the distribution and shall be made in a manner consistent
with Section 6.5(a)(2).
(d) Any distribution to a Participant who has a benefit which exceeds, or
has ever exceeded at the time of any prior distribution, $3,500 shall
require such Participant's consent if such distribution commences prior to
the later of his Normal Retirement Age or age 62. With regard to this
required consent:
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(1) No consent shall be valid unless the Participant has received a
general description of the material features and an explanation of the
relative values of the optional forms of benefit available under the Plan
that would satisfy the notice requirements of Code Section 417.
(2) The Participant must be informed of his right to defer receipt of
the distribution. If a Participant fails to consent, it shall be deemed
an election to defer the commencement of payment of any benefit. However,
any election to defer the receipt of benefits shall not apply with
respect to distributions which are required under Section 6.5(e).
(3) Notice of the rights specified under this paragraph shall be
provided no less than 30 days and no more than 90 days before the
"annuity starting date".
(4) Written consent of the Participant to the distribution must not
be made before the Participant receives the notice and must not be made
more than 90 days before the "annuity starting date".
(5) No consent shall be valid if a significant detriment is imposed
under the Plan on any Participant who does not consent to the
distribution.
(e) Notwithstanding any provision in the Plan to the contrary, the
distribution of a Participant's benefits, made on or after January 1, 1985,
whether under the Plan or through the purchase of an annuity Contract,
shall be made in accordance with the following requirements and shall
otherwise comply with Code Section 401(a)(9) and the Regulations
thereunder (including Regulation Section 1.401(a)(9)-2), the provisions of
which are incorporated herein by reference:
(1) A Participant's benefits shall be distributed to him not later
than April 1st of the calendar year following the later of (i) the
calendar year in which the Participant attains age 70 1/2 or (ii) the
calendar year in which the Participant retires, provided, however, that
this clause (ii) shall not apply in the case of a Participant who is a
"five (5) percent owner" at any time during the five (5) Plan Year period
ending in the calendar year in which he attains age 70 1/2 or, in the
case of a Participant who becomes a "five (5) percent owner" during any
subsequent Plan Year, clause (ii) shall no longer apply and the required
beginning date shall be the April 1st of the calendar year following the
calendar year in which such subsequent Plan Year ends. Alternately,
distributions to a Participant must begin no later than the applicable
April 1st as determined under the preceding sentence and must be made
over the life of the Participant (or the lives of the Participant and the
Participant's designated Beneficiary) or, if benefits are paid in the
form of a Joint and Survivor Annuity, the life expectancy of the
Participant (or the life expectancies of the Participant and his
designated Beneficiary) in accordance with Regulations. For Plan Years
beginning after December 31, 1988, clause (ii) above shall not apply to
any Participant unless the Participant had attained age 70 1/2 before
January 1, 1988 and was not a "five (5) percent owner" at any time during
the Plan Year ending with or within the calendar year in which the
Participant attained age 66 1/2 or any subsequent Plan Year.
(2) Distributions to a Participant and his Beneficiaries shall only
be made in accordance with the incidental death benefit requirements of
Code Section 401(a)(9)(G) and the Regulations thereunder.
Additionally, for calendar years beginning before 1989, distributions
may also be made under an alternative method which provides that the then
present value of the payments to be made over the period of the
Participant's life expectancy exceeds fifty percent (50%) of the then
present value of the total payments to be made to the Participant and his
Beneficiaries.
(f) For purposes of this Section, the life expectancy of a Participant
and a Participant's spouse (other than in the case of a life annuity) shall
be redetermined annually in accordance with Regulations if permitted
pursuant to the Adoption Agreement. If the Participant or the Participant's
spouse may elect whether recalculations will be made, then the election,
once made, shall be irrevocable. If no election is made by the time
distributions must commence, then the life expectancy of the Participant
and the Participant's spouse
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shall not be subject to recalculation. Life expectancy and joint and last
survivor expectancy shall be computed using the return multiples in Tables
V and VI of Regulation 1.72-9.
(g) All annuity Contracts under this Plan shall be non-transferable when
distributed. Furthermore, the terms of any annuity Contract purchased and
distributed to a Participant or spouse shall comply with all of the
requirements of this Plan.
(h) Subject to the spouse's right of consent afforded under the Plan, the
restrictions imposed by this Section shall not apply if a Participant has,
prior to January 1, 1984, made a written designation to have his retirement
benefit paid in an alternative method acceptable under Code Section 401(a)
as in effect prior to the enactment of the Tax Equity and Fiscal
Responsibility Act of 1982.
(i) If a distribution is made at a time when a Participant who has not
terminated employment is not fully Vested in his Participant's Account and
the Participant may increase the Vested percentage in such account:
(1) A separate account shall be established for the Participant's
interest in the Plan as of the time of the distribution, and
(2) At any relevant time the Participant's Vested portion of the
separate account shall be equal to an amount ("X") determined by the
formula:
X equals P(AB plus (RxD)) - (R x D)
For purposes of applying the formula: P is the Vested percentage at
the relevant time, AB is the account balance at the relevant time, D is
the amount of distribution, and R is the ratio of the account balance at
the relevant time to the account balance after distribution.
6.6 DISTRIBUTION OF BENEFITS UPON DEATH
(a) Unless otherwise elected as provided below, a Vested Participant who
dies before the annuity starting date and who has a surviving spouse shall
have the Pre-Retirement Survivor Annuity paid to his surviving spouse. The
Participant's spouse may direct that payment of the Pre-Retirement Survivor
Annuity commence within a reasonable period after the Participant's death.
If the spouse does not so direct, payment of such benefit will commence at
the time the Participant would have attained the later of his Normal
Retirement Age or age 62. However, the spouse may elect a later
commencement date. Any distribution to the Participant's spouse shall be
subject to the rules specified in Section 6.6(h).
(b) Any election to waive the Pre-Retirement Survivor Annuity before the
Participant's death must be made by the Participant in writing during the
election period and shall require the spouse's irrevocable consent in the
same manner provided for in Section 6.5(a)(2). Further, the spouse's
consent must acknowledge the specific nonspouse Beneficiary.
Notwithstanding the foregoing, the nonspouse Beneficiary need not be
acknowledged, provided the consent of the spouse acknowledges that the
spouse has the right to limit consent only to a specific Beneficiary and
that the spouse voluntarily elects to relinquish such right.
(c) The election period to waive the Pre-Retirement Survivor Annuity
shall begin on the first day of the Plan Year in which the Participant
attains age 35 and end on the date of the Participant's death. An earlier
waiver (with spousal consent) may be made provided a written explanation of
the Pre-Retirement Survivor Annuity is given to the Participant and such
waiver becomes invalid at the beginning of the Plan Year in which the
Participant turns age 35. In the event a Vested Participant separates from
service prior to the beginning of the election period, the election period
shall begin on the date of such separation from service.
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(d) With regard to the election, the Administrator shall provide each
Participant within the applicable period, with respect to such Participant
(and consistent with Regulations), a written explanation of the Pre-
Retirement Survivor Annuity containing comparable information to that
required pursuant to Section 6.5(a)(5). For the purposes of this paragraph,
the term "applicable period" means, with respect to a Participant,
whichever of the following periods ends last:
(1) The period beginning with the first day of the Plan Year in
which the Participant attains age 32 and ending with the close of the
Plan Year preceding the Plan Year in which the Participant attains age
35;
(2) A reasonable period after the individual becomes a Participant.
For this purpose, in the case of an individual who becomes a Participant
after age 32, the explanation must be provided by the end of the three-
year period beginning with the first day of the first Plan Year for which
the individual is a Participant;
(3) A reasonable period ending after the Plan no longer fully
subsidizes the cost of the Pre-Retirement Survivor Annuity with respect
to the Participant;
(4) A reasonable period ending after Code Section 401(a)(11)
applies to the Participant; or
(5) A reasonable period after separation from service in the case
of a Participant who separates before attaining age 35. For this purpose,
the Administrator must provide the explanation beginning one year before
the separation from service and ending one year after separation.
(e) The Pre-Retirement Survivor Annuity provided for in this Section
shall apply only to Participants who are credited with an Hour of Service
on or after August 23, 1984. Former Participants who are not credited with
an Hour of Service on or after August 23, 1984 shall be provided with
rights to the Pre-Retirement Survivor Annuity in accordance with Section
303(e)(2) of the Retirement Equity Act of 1984.
(f) If the value of the Pre-Retirement Survivor Annuity derived from
Employer and Employee contributions does not exceed $3,500 and has never
exceeded $3,500 at the time of any prior distribution, the Administrator
shall direct the immediate distribution of such amount to the Participant's
spouse. No distribution may be made under the preceding sentence after the
annuity starting date unless the spouse consents in writing. If the value
exceeds, or has ever exceed at the time of any prior distribution, $3,500,
an immediate distribution of the entire amount may be made to the surviving
spouse, provided such surviving spouse consents in writing to such
distribution. Any written consent required under this paragraph must be
obtained not more than 90 days before commencement of the distribution and
shall be made in a manner consistent with Section 6.5(a)(2).
(g) (1) In the event there is an election to waive the Pre-Retirement
Survivor Annuity, and for death benefits in excess of the Pre-Retirement
Survivor Annuity, such death benefits shall be paid to the Participant's
Beneficiary by either of the following methods, as elected by the
Participant (or if no election has been made prior to the Participant's
death, by his Beneficiary) subject to the rules specified in Section 6.6(h)
and the selections made in the Adoption Agreement:
(i) One lump-sum payment in cash or in property;
(ii) Payment in monthly, quarterly, semi-annual, or annual cash
installments over a period to be determined by the Participant or his
Beneficiary. After periodic installments commence, the Beneficiary
shall have the right to reduce the period over which such periodic
installments shall be made, and the cash amount of such periodic
installments shall be adjusted accordingly.
(iii) If death benefits in excess of the Pre-Retirement Survivor
Annuity are to be paid to the surviving spouse, such benefits may be
paid pursuant to (i) or (ii) above, or used to purchase an annuity so
as to increase the payments made pursuant to the Pre-Retirement
Survivor Annuity;
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(2) In the event the death benefit payable pursuant to Section 6.2 is
payable in installments, then, upon the death of the Participant, the
Administrator may direct that the death benefit be segregated and
invested separately, and that the funds accumulated in the segregated
account be used for the payment of the installments.
(h) Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant made on or after January 1,
1985, shall be made in accordance with the following requirements and shall
otherwise comply with Code Section 401(a)(9) and the Regulations
thereunder.
(1) If it is determined, pursuant to Regulations, that the
distribution of a Participant's interest has begun and the Participant
dies before his entire interest has been distributed to him, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution selected pursuant to Section
6.5 as of his date of death.
(2) If a Participant dies before he has begun to receive any
distributions of his interest in the Plan or before distributions are
deemed to have begun pursuant to Regulations, then his death benefit
shall be distributed to his Beneficiaries in accordance with the
following rules subject to the selections made in the Adoption Agreement
and Subsections 6.6(h)(3) and 6.6(i) below:
(i) The entire death benefit shall be distributed to the
Participant's Beneficiaries by December 31st of the calendar year in
which the fifth anniversary of the Participant's death occurs;
(ii) The 5-year distribution requirement of (i) above shall not
apply to any portion of the deceased Participant's interest which is
payable to or for the benefit of a designated Beneficiary. In such
event, such portion shall be distributed over the life of such
designated Beneficiary (or over a period not extending beyond the
life expectancy of such designated Beneficiary) provided such
distribution begins not later than December 31st of the calendar
year immediately following the calendar year in which the
Participant died;
(iii) However, in the event the Participant's spouse (determined
as of the date of the Participant's death) is his designated
Beneficiary, the provisions of (ii) above shall apply except that
the requirement that distributions commence within one year of the
Participant's death shall not apply. In lieu thereof, distributions
must commence on or before the later of: (1) December 31st of the
calendar year immediately following the calendar year in which the
Participant died; or (2) December 31st of the calendar year in which
the Participant would have attained age 70 1/2. If the surviving
spouse dies before distributions to such spouse begin, then the 5-
year distribution requirement of this Section shall apply as if the
spouse was the Participant.
(3) Notwithstanding subparagraph (2) above, or any selections made
in the Adoption Agreement, if a Participant's death benefits are to be
paid in the form of a Pre-Retirement Survivor Annuity, then distributions
to the Participant's surviving spouse must commence on or before the
later of: (1) December 31st of the calendar year immediately following
the calendar year in which the Participant died; or (2) December 31st of
the calendar year in which the Participant would have attained age 70
1/2.
(i) For purposes of Section 6.6(h)(2), the election by a designated
Beneficiary to be excepted from the 5-year distribution requirement (if
permitted in the Adoption Agreement) must be made no later than December
31st of the calendar year following the calendar year of the Participant's
death. Except, however, with respect to a designated Beneficiary who is the
Participant's surviving spouse, the election must be made by the earlier
of: (1) December 31st of the calendar year immediately following the
calendar year in which the Participant died or, if later, the calendar year
in which the Participant would have attained age 70 1/2; or (2) December
31st of the calendar year which contains the fifth anniversary of the date
of the Participant's death. An election by a designated Beneficiary must be
in writing and shall be irrevocable as of the last day
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of the election period state herein. In the absence of an election by the
Participant or a designated Beneficiary, the 5-year distribution
requirement shall apply.
(j) For purposes of this Section, the life expectancy of a Participant
and a Participant's spouse (other than in the case of a life annuity) shall
or shall not be redetermined annually as provided in the Adoption Agreement
and in accordance with Regulations. If the Participant or the Participant's
spouse may elect, pursuant to the Adoption Agreement, to have life
expectancies recalculated, then the election, once made shall be
irrevocable. If no election is made by the time distributions must
commence, then the life expectancy of the Participant and the Participant's
spouse shall not be subject to recalculation. Life expectancy and joint and
last survivor expectancy shall be computed using the return multiples in
Tables V and VI of Regulation Section 1.72-9.
(k) In the event that less than 100% of a Participant's interest in the
Plan is distributed to such Participant's spouse, the portion of the
distribution attributable to the Participant's Voluntary Contribution
Account shall be in the same proportion that the Participant's Voluntary
Contribution Account bears to the Participant's total interest in the Plan.
(l) Subject to the spouse's right of consent afforded under the Plan,
the restrictions imposed by this Section shall not apply if a Participant
has, prior to January 1, 1984, made a written designation to have his death
benefits paid in an alternative method acceptable under Code Section 401(a)
as in effect prior to the enactment of the Tax Equity and Fiscal
Responsibility Act of 1982.
6.7 TIME OF SEGREGATION OR DISTRIBUTION
Except as limited by Sections 6.5 and 6.6, whenever a distribution is to be
made, or a series of payments are to commence, on or as of an Anniversary Date,
the distribution or series of payments may be made or begun on such date or as
soon thereafter as is practicable, but in no event later than 180 days after the
Anniversary Date. However, unless at Former Participant elects in writing to
defer the receipt of benefits (such election may not result in a death benefit
that is more than incidental), the payment of benefits shall begin not later
than the 60th day after the close of the Plan Year in which the latest of the
following events occurs: (a) the date on which the Participant attains the
earlier of age 65 or the Normal Retirement Age specified herein; (b) the 10th
anniversary of the year in which the Participant commenced participation in the
Plan; or (c) the date the Participant terminates his service with the Employer.
Notwithstanding the foregoing, the failure of a Participant and, if
applicable, the Participant's spouse, to consent to a distribution pursuant to
Section 6.5(d), shall be deemed to be an election to defer the commencement of
payment of any benefit sufficient to satisfy this Section.
6.8 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal guardian,
or if none, to a parent of such Beneficiary or a responsible adult with whom the
Beneficiary maintains his residence, or to the custodian for such Beneficiary
under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted
by the laws of the state in which said Beneficiary resides. Such a payment to
the legal guardian, custodian or parent of a minor Beneficiary shall fully
discharge the Trustee, Employer, and Plan from further liability on account
thereof.
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to a
Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid
solely by reason of the inability of the Administrator, after sending a
registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such Participant
or his Beneficiary, the amount so distributable shall be treated as a Forfeiture
pursuant to the Plan. In the event a Participant or
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Beneficiary is located subsequent to his benefit being reallocate, such benefit
shall be restored, first from Forfeitures, if any, and then from an additional
Employer contribution if necessary.
6.10 PRE-RETIREMENT DISTRIBUTION
If elected in the Adoption Agreement, at such time as a Participant shall
have attained the age specified in the Adoption Agreement, the Administrator, at
the election of the Participant, shall direct the Trustee to distribute up to
the entire amount then credited to the accounts maintained on behalf of the
Participant. However, no such distribution may be made to any Participant unless
his Participant's Account has become fully Vested. In the event that the
Administrator makes such a distribution, the Participant shall continue to be
eligible to participate in the Plan on the same basis as any other Employee. Any
distribution made pursuant to this Section shall be made in a manner
consistent with Section 6.5, including but not limited to, all notice and
consent requirements required by Code Sections 411(a)(11) and 417 and the
Regulations thereunder.
Notwithstanding the above, pre-retirement distributions from a
Participant's Elective Account and Qualified Non-Elective Account shall not be
permitted prior to the Participants 59 1/2 except as otherwise permitted under
the terms of the Plan.
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) The Administrator, at the election of the Participant, shall direct
the Trustee to distribute to any Participant in any one Plan Year up to the
lesser of (1) 100%; of his accounts as specified in the Adoption Agreement
valued as of the last Anniversary Date or other valuation date or (2) the
amount necessary to satisfy the immediate and heavy financial need of the
Participant. Any distribution made pursuant to this Section shall be deemed
to be made as of the first day of the Plan Year or, if later, the valuation
date immediately preceding the date of distribution, and the account from
which the distribution is made shall be reduce accordingly. Withdrawal
under this Section shall be authorized only if the distribution is on
account of one of the following or any other items permitted by the
Internal Revenue Service:
(1) Medical expenses described in Code Section 213(d) incurred by the
Participant, his spouse, or any of his dependents (as defined in Code
Section 152);
(2) The purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Funeral expenses for a member of the Participant's family;
(4) Payment of tuition for the next semester or quarter of post-
secondary education for the Participant, his spouse, children, or
dependents; or
(5) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence.
(b) No such distribution shall be made from the Participant's Account
until such Account has become fully Vested.
(c) No distribution shall be made pursuant to this Section unless the
Administrator, based upon the Participant's representation and such other
facts as are known to the Administrator, determines that all of the
following conditions are satisfied:
(1) The distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant;
(2) The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently available
under all plans maintained by the Employer;
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(3) The Plan, and all other plans maintained by the Employer, provide
that the Participant's elective deferrals and voluntary Employee
contributions will be suspended for at least twelve (12) months after
receipt of the hardship distribution; and
(4) The Plan, and all other plans maintained by the Employer, provide
that the Participant may not make elective deferrals for the
Participant's taxable year immediately following the taxable year of the
hardship distribution in excess of the applicable limit under Code
Section 402(g) for such next taxable year less the amount of such
Participant's elective deferrals for the taxable year of the hardship
distribution.
(d) Notwithstanding the above, distributions from the Participant's
Elective Account and Qualified Non-Elective Account pursuant to this
Section shall be limited solely to the Participant's Deferred Compensation
and any income attributable thereto credited to the Participant's Elective
Account as of December 31, 1988.
(e) Any distribution made pursuant to this Section shall be made in a
manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements of
Code Sections 411(a)(11) and 417 and the Regulations thereunder.
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a Participant in
this Plan shall be subject to the rights afforded to any "alternate payee" under
a "qualified domestic relations order." Furthermore, a distribution to an
"alternate payee" shall be permitted if such distribution is authorized by a
"qualified domestic relations order," even if the affected Participant has not
reached the "earliest retirement age" under the Plan. For the purposes of this
Section, "alternate payee," "qualified domestic relations order" and "earliest
retirement age" shall have the meaning set forth under Code Section 414(p).
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS
If elected in the Adoption Agreement, the following shall apply to a
Participant in a Profit Sharing Plan and to any distribution, made on or after
the first day of the first plan year beginning after December 31, 1988, from or
under a separate account attributable solely to accumulated deductible employee
contributions, as defined in Code Section 72(o)(5)(B), and maintained on behalf
of a participant in a money purchase pension plan, (including a target benefit
plan):
(a) The Participant shall be prohibited from electing benefits in the
form of a life annuity;
(b) Upon the death of the Participant, the Participant's entire Vested
account balances will be paid to his or her surviving spouse, or, if there
is no surviving spouse or the surviving spouse has already consented to
waive his or her benefit, in accordance with Section 6.6, to his designated
Beneficiary; and
(c) Except to the extent otherwise provided in this Section and Section
6.5(h), the other provisions of Sections 6.2, 6.5 and 6.6 regarding spousal
consent and the forms of distributions shall be inoperative with respect to
this Plan.
This Section shall not apply to any Participant if it is determined that
this Plan is a direct or indirect transferee of a defined benefit plan or money
purchase plan, or a target benefit plan, stock bonus or profit sharing plan
which would otherwise provide for a life annuity form of payment to the
Participant.
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ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) Consistent with the "funding policy and method" determined by the
Employer to invest, manage, and control the Plan assets subject, however,
to the direction of an Investment Manager if the Employer should appoint
such manager as to all or a portion of the assets of the Plan;
(b) At the direction of the Administrator, to pay benefits required
under the Plan to be paid to Participants, or, in the event of their death,
to their Beneficiaries;
(c) To maintain records of receipts and disbursements and furnish to the
Employer and/or Administrator for each Plan Year a written annual report
per Section 7.7; and
(d) If there shall be more than one Trustee, they shall act by a majority
of their number, but may authorize one or more of them to sign papers on
their behalf.
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) The Trustee shall, except as provided in the Adoption Agreement,
invest and reinvest the Trust Fund to keep the Trust Fund invested without
distinction between principal and income and in such securities or
property, real or personal, wherever situated, as the Trustee shall deem
advisable, including, but not limited to, stocks, common or preferred,
bonds and other evidences of indebtedness or ownership, and real estate or
any interest therein. The Trustee shall at all times in making investments
of the Trust Fund consider, among other factors, the short and long-term
financial needs of the Plan on the basis of information on furnished by the
Employer. In making such investments, the Trustee shall not be restricted
to securities or other property of the character expressly authorized by
the applicable law for trust investments; however, the Trustee shall give
due regard to any limitations imposed by the Code or the Act so that at all
times this Plan may qualify as a qualified Plan and Trust.
(b) The Trustee may employ a bank or trust company pursuant to the terms
of its usual and customary bank agency agreement, under which the duties of
such bank or trust company shall be of a custodial, clerical and record-
keeping nature.
(c) Notwithstanding Section 7.2(a), the Employer, in writing to the
Trustee, may delegate investment responsibility to the Administrator. If
the Administrator has been delegated such authority, the Trustee shall
invest trust assets in accordance with the Administrator's direction,
unless the Trustee determines, in the exercise of its responsibility under
ERISA as a co-fiduciary of the Plan, that such investments are not
permitted under the terms of the Plan, Trust, or the Act. The Trustee shall
not be liable or responsible for losses or unfavorable results arising from
the Trustee's compliance with directions received from the Administrator.
(d) The Trustee may from time to time transfer to a common, collective,
or pooled trust fund maintained by any corporate Trustee hereunder pursuant
to Revenue Ruling 81-100, all or such part of the Trust Fund as the Trustee
may deem advisable, and such part or all of the Trust Fund so transferred
shall be subject to all the terms and provisions of the common, collective,
or pooled trust fund which contemplate the commingling for investment
purposes of such trust assets with trust assets of other trusts. The
Trustee may withdraw from such common, collective, or pooled trust fund all
or such part of the Trust Fund as the Trustee may deem advisable.
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(e) The Trustee, at the direction of the Administrator and pursuant to
instructions from the individual designated in the Adoption Agreement for
such purpose and subject to the conditions set forth in the Adoption
Agreement, shall ratably apply for, own, and pay all premiums on Contracts
on the lives of the Participants. Any initial or additional Contract
purchased on behalf of a Participant shall have a face amount of not less
than $1,000, the amount set forth in the Adoption Agreement, or the
limitation of the Insurer, whichever is greater. If a life insurance
Contract is to be purchased for a Participant, the aggregate premium for
ordinary life insurance for each Participant must be less than 50% of the
aggregate contributions and Forfeitures allocated to a Participant's
Combined Account. For purposes of this limitation, ordinary life insurance
Contracts are Contracts with both non-decreasing death benefits and non-
increasing premiums. If term insurance or universal life insurance is
purchased with such contributions, the aggregate premium must be 25% or
less of the aggregate contributions and Forfeitures allocated to a
Participant's Combined Account. If both term insurance and ordinary life
insurance are purchased with such contributions, the amount expended for
term insurance plus one-half of the premium for ordinary life insurance may
not in the aggregate exceed 25% of the aggregate Employer contributions
and Forfeitures allocated to a Participant's Combined Account. The Trustee
must distribute the Contracts to the Participant or convert the entire
value of the Contracts at or before retirement into cash or provide for a
periodic income so that no portion of such value may be used to continue
life insurance protection beyond retirement. Notwithstanding the above, the
limitations imposed herein with respect to the purchase of life insurance
shall not apply, in the case of a Profit Sharing Plan, to the portion of a
Participant's Account that has accumulated for at least two (2) Plan Years.
Notwithstanding anything hereinabove to the contrary, amounts credited to
a Participant's Qualified Voluntary Employee Contribution Account pursuant
to Section 4.14, shall not be applied to the purchase of life insurance
contracts.
(f) The Trustee will be the owner of any life insurance Contract
purchased under the terms of this Plan. The Contract must provide that the
proceeds will be payable to the Trustee; however, the Trustee shall be
required to pay over all proceeds of the Contract to the Participant's
designated Beneficiary in accordance with the distribution provisions of
Article VI. A Participant's spouse will be the designated Beneficiary
pursuant to Section 6.2, unless a qualified election has been made in
accordance with Sections 6.5 and 6.6 of the Plan, if applicable. Under no
circumstances shall the Trust retain any part of the proceeds. However, the
Trustee shall not pay the proceeds in a method that would violate the
requirements of the Retirement Equity Act, as stated in Article VI of the
Plan, or Code Section 401(a)(9) and the Regulations thereunder.
7.3 OTHER POWERS OF THE TRUSTEE.
The Trustee, in addition to all powers and authorities under common law,
statutory authority, including the Act, and other provisions of this Plan, shall
have the following powers and authorities, except as provided in the Adoption
Agreement, to be exercised in the Trustee's sole discretion:
(a) To purchase, or subscribe for, any securities or other property and
to retain the same. In conjunction with the purchase of securities, margin
accounts may be opened and maintained;
(b) To sell, exchange, convey, transfer, grant options to purchase, or
otherwise dispose of any securities or other property held by the Trustee,
by private contract or at public auction. No person dealing with the
Trustee shall be bound to see to the application of the purchase money or
to inquire into the validity, expediency, or propriety of any such sale or
other disposition, with or without advertisement;
(c) To vote upon any stocks, bonds, or other securities; to give general
or special proxies or powers of attorney with or without power of
substitution; to exercise any conversion privileges, subscription rights or
other options, and to make any payments incidental thereto; to oppose, or
to consent to, or otherwise participate in, corporate reorganizations or
other changes affecting corporate securities, and to delegate discretionary
powers, and to pay any assessments or charges in connection therewith; and
generally to exercise any of the powers of an owner with respect to stocks,
bonds, securities, or other property. However,
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the Trustee shall not vote proxies relating to securities for which it has
not been assigned full investment management responsibilities. In those
cases where another party has such investment authority or discretion, be
it the Administrator or an outside Investment Manager, the Trustee will
deliver all proxies to said party who will then have full responsibility
for voting those proxies;
(d) To cause any securities or other property to be registered in the
Trustee's own name or in the name of one or more of the Trustee's nominees,
and to hold any investments in bearer form, but the books and records of
the Trustee shall at all times show that all such investments are part of
the Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such
amount, and upon such terms and conditions, as the Trustee shall deem
advisable; and for any sum so borrowed, to issue a promissory note as
Trustee, and to secure the repayment thereof by pledging all, or any part,
of the Trust Fund; and no person lending money to the Trustee shall be
bound to see to the application of the money lent or to inquire into the
validity, expediency, or propriety of any borrowing;
(f) To keep such portion of the Trust Fund in cash or cash balances as
the Trustee may, from time to time, deem to be in the best interests of the
Plan, without liability for interest thereon;
(g) To accept and retain for such time as the Trustee may deem advisable
any securities or other property received or acquire as Trustee hereunder,
whether or not such securities or other property would normally be
purchased as investments hereunder,
(h) To make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be
necessary or appropriate to carry out the powers herein granted;
(i) To settle, compromise, or submit to arbitration any claims, debts,
or damages due or owing to or from the Plan, to commence or defend suits
or legal or administrative proceedings, and to represent the Plan in all
suits and legal and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation, and such agent or counsel may or may not be
agent or counsel for the Employer,
(k) To apply for and procure from the Insurer as an investment of the
Trust Fund such annuity, or other Contracts (on the life of any Participant
as the Administrator shall deem proper; to exercise, at any time or from
time to time, whatever rights and privileges may be granted under such
annuity, or other Contracts; to collect, receive, and settle for the
proceeds of all such annuity, or other Contracts as and when entitled to do
so under the provisions thereof;
(l) To invest funds of the Trust in time deposits or savings accounts
bearing a reasonable rate of interest in the Trustee's bank;
(m) To invest in Treasury Bills and other forms of United States
government obligations;
(n) To sell, purchase and acquire put or call options if the options are
traded on and purchased through a national securities exchange registered
under the Securities Exchange Act of 1934, as amended, or, if the options
are not traded on a national securities exchange, are guaranteed by a
member firm of the New York Stock Exchange;
(o) To deposit monies in federally insured savings accounts or
certificates of deposit in banks or savings and loan associations;
(p) To pool all or any of the Trust Fund, from time to time, with assets
belonging to any other qualified employee pension benefit trust created by
the Employer or any Affiliated Employer, and to commingle such assets and
make joint or common investments and carry joint accounts on behalf of this
Plan
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and such other trust or trusts, allocating undivided shares or interests in
such investments or accounts or any pooled assests of the two or more
trusts in accordance with their respective interests;
(q) To do all such acts and exercise all such rights and privileges,
although not specifically mentioned herein, as the Trustee may deem
necessary to carry out the purposes of the Plan.
(r) Directed Investment Account. The powers granted to the Trustee shall
be exercised in the sole fiduciary discretion of the Trustee. However, if
elected in the Adoption Agreement, each Participant may direct the Trustee
to separate and keep separate all or a portion of his interest in the Plan;
and further each Participant is authorized and empowered, in his sole and
absolute discretion, to give directions to the Trustee in such form as the
Trustee may require concerning the investment of the Participant's Directed
Investment Account, which directions must be followed by the Trustee
subject, however, to restrictions on payment of life insurance premiums.
Neither the Trustee nor any other persons including the Administrator or
otherwise shall be under any duty to question any such direction of the
Participant or to review any securities or other property, real or
personal, or to make any suggestions to the Participant in connection
therewith, and the Trustee shall comply as promptly as practicable with
directions given by the Participant hereunder. Any such direction may be of
a continuing nature or otherwise and may be revoked by the Participant at
any time in such form as the Trustee may require. The Trustee may refuse to
comply with any direction from the Participant in the event the Trustee, in
its sole and absolute discretion, deems such directions improper by virtue
of applicable law, and in such event, the Trustee shall not be responsible
or liable for any loss or expense which may result. Any costs and expense
related to compliance with the Participant's directions shall be borne by
the Participant's Directed Investment Account.
Notwithstanding anything hereinabove to the contrary, the Trustee shall
not, at any time after December 31, 1981, invest any portion of a Directed
Investment Account in "collectibles" within the meaning of that term as
employed in Code Section 408(m).
7.4 LOANS TO PARTICIPANTS
(a) If specified in the Adoption Agreement, the Trustee may, in the
Trustee's sole discretion, make loans to Participants or Beneficiaries
under the following circumstances: (1) loans shall be made available to all
Participants and Beneficiaries on a reasonably equivalent basis; (2) loans
shall not be made available to Highly Compensated Employees in an amount
greater than the amount made available to other Participants; (3) loans
shall bear at reasonable rate of interest; (4) loans shall be adequately
secured; and (5) shall provide for periodic repayment over a reasonable
period of time.
(b) Loans shall not be made to any Shareholder-Employee or Owner-
Employee unless an exemption for such loan is obtained pursuant to Act
Section 408 and further provided that such loan would not be subject to tax
pursuant to Code Section 4975.
(c) Loans shall not be granted to any Participant that provide for a
repayment period extending beyond such Participant's Normal Retirement
Date.
(d) Loans made pursuant to this Section (when added to the outstanding
balance of all other loans made by the Plan to the Participant) shall be
limited to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest
outstanding balance of loans from the Plan to the Participant during the
one year period ending on the day before the date on which such loan is
made, over the outstanding balance of loans from the Plan to the
Participant on the date on which such loan was made, or
(2) one-half (1/2) of the present value of the non-forfeitable
accrued benefit of the Employee under the Plan.
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For purposes of this limit, all plans of the Employer shall be considered
one plan. Additionally, with respect to any loan made prior to January 1,
1987, the $50,000 limit specified in (1) above shall be unreduced.
(e) No Participant loan shall take into account the present value of
such Participant's Qualified Voluntary Employee Contribution Account.
(f) Loans shall provide for level amortization with payments to be made
not less frequently than quarterly over a period not to exceed five (5)
years. However, loans used to acquire any dwelling unit which, within a
reasonable time, is to be used (determined at the time the loan is made) as
a principal residence of the Participant shall provide for periodic
repayment over a reasonable period of time that may exceed five (5) years.
Notwithstanding the foregoing, loans made prior to January 1, 1987 which
are used to acquire, construct, reconstruct or substantially
rehabilitate any dwelling unit which, within a reasonable period of time is
to be used (determined at the time the loan is made) as a principal
residence of the Participant or a member of his family (within the meaning
of Code Section 267(c)(4)) may provide for periodic repayment over a
reasonable period of time that may exceed five (5) years. Additionally,
loans made prior to January 1, 1987, may provide for periodic payments
which are made less frequently than quarterly and which do not necessarily
result in level amortization.
(g) An assignment or pledge of any portion of a Participant's interest
in the Plan and a loan, pledge, or assignment with respect to any insurance
Contract purchased under the Plan, shall be treated as a loan under this
Section.
(h) Any loan made pursuant to this Section after August 18, 1985 where
the Vested interest of the Participant is used to secure such loan shall
require the written consent of the Participant's spouse in a manner
consistent with Section 6.5(a) provided the spousal consent requirements of
such Section apply to the Plan. Such written consent must be obtained
within the 90-day period prior to the date the loan is made. Any security
interest held by the Plan by reason of an outstanding loan to the
Participant shall be taken into account in determining the amount of the
death benefit or Pre-Retirement Survivor Annuity. However, no spousal
consent shall be required under this paragraph if the total accrued benefit
subject to the security is not in excess of $3,500.
(i) With regard to any loans granted or renewed on or after the last day
of the first Plan Year beginning after December 31, 1988, a Participant
loan program shall be established which must include, but need not be
limited to, the following:
(1) the identity of the person or positions authorized to administer
the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts Of loans offered,
including what constitutes a hardship or financial need if selected in
the Adoption Agreement;
(5) the procedure under the program for determining a reasonable rate
of interest;
(6) the types of collateral which may secure a Participant loan; and
(7) the events constituting default and the steps that will be taken
to preserve plan assets.
Such Participant loan program shall be contained in a separate written
document which, when properly executed, is hereby incorporated by reference
and made a part of this plan. Furthermore, such Participant loan program
may be modified or amended in writing from time to time without the
necessity of amending this Section of the Plan.
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7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time to
time, in accordance with the terms of the Plan, make payments out of the Trust
Fund. The Trustee shall not be responsible in any way for the application of
such payments.
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as set forth in the
Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in
writing by the Employer and the Trustee. An individual serving as Trustee who
already receives full-time pay from the Employer shall not receive compensation
from this Plan. In addition, the Trustee shall be reimbursed for any reasonable
expenses, including reasonable counsel fees incurred by it as Trustee. Such
compensation and expenses shall be paid from the Trust Fund unless paid or
advanced by the Employer. All taxes of any kind and all kinds whatsoever that
may be levied or assessed under existing or future laws upon, or in respect of,
the Trust Fund or the income thereof, shall be paid from the Trust Fund.
7.7 ANNUAL REPORT OF THE TRUSTEE
Within a reasonable period of time after the later of the Anniversary Date
or receipt of the Employer's contribution for each Plan Year, the Trustee, or
its agent, shall furnish to the Employer and Administrator a written statement
of account with respect to the Plan Year for which such contribution was made
setting forth:
(a) the net income, or loss, of the Trust Fund;
(b) the gains, or losses, realized by the Trust Fund upon sales or other
disposition of the assets;
(c) the increase, or decrease, in the value of the Trust Fund;
(d) all payments and distributions made from the Trust Fund; and
(e) such further information as the Trustee and/or Administrator deems
appropriate. The Employer, forthwith upon its receipt of each such
statement of account, shall acknowledge receipt thereof in writing and
advise the Trustee and/or Administrator of its approval or disapproval
thereof. Failure by the Employer to disapprove any such statement of
account within thirty (30) days after its receipt thereof shall be deemed
an approval thereof. The approval by the Employer of any statement of
account shall be binding as to all matters embraced therein as between the
Employer and the Trustee to the same extent as if the account of the
Trustee had been settled by judgment or decree in an action for a judicial
settlement of its account in a court of competent jurisdiction in which the
Trustee, the Employer and all persons having or claiming an interest in the
Plan were parties; provided, however, that nothing herein contained shall
deprive the Trustee of its right to have its accounts judicially settled if
the Trustee so desires.
7.8 AUDIT
(a) If an audit of the Plan's records shall be required by the Act and
the regulations thereunder for any Plan Year, the Administrator shall
direct the Trustee to engage on behalf of all Participants an independent
qualified public accountant for that purpose. Such accountant shall, after
an audit of the books and records of the Plan in accordance with generally
accepted auditing standards, within a reasonable period after the close of
the Plan Year, furnish to the Administrator and the Trustee report of his
audit setting forth his opinion as to whether any statements, schedules or
lists, that are required by Act Section 103 or the Secretary of Labor to be
filed with the Plan's annual report, are presented fairly in conformity
with generally accepted accounting principles applied consistently.
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(b) All auditing and accounting fees shall be an expense of and may, at
the election of the Administrator, be paid from the Trust Fund.
(c) If some or all of the information necessary to enable the
Administrator to comply with Act Section 103 is maintained by a bank,
insurance company, or similar institution, regulated and supervised and
subject to periodic examination by a state or federal agency, it shall
transmit and certify the accuracy of that information to the Administrator
as provided in Act Section 103(b) within one hundred twenty (120) days
after the end of the Plan Year or such other date as may be prescribed
under regulations of the Secretary of Labor.
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the Employer, at
least thirty (30) days before its effective date, a written notice of his
resignation.
(b) The Employer may remove the Trustee by mailing by registered or
certified mail, addressed to such Trustee at his last known address, at
least thirty (30) days before its effective date, a written notice of his
removal.
(c) Upon the death, resignation, incapacity, or removal of any Trustee,
a successor may be appointed by the Employer; and such successor, upon
accepting such appointment in writing and delivering same to the Employer,
shall, without further act, become vested with all the estate, rights,
powers, discretions, and duties of his predecessor with like respect as if
he were originally named as a Trustee herein. Until such a successor is
appointed, the remaining Trustee or Trustees shall have full authority to
act under the terms of the Plan.
(d) The Employer may designate one or more successors prior to the
death, resignation, incapacity, or removal of a Trustee. In the event a
successor is so designated by the Employer and accepts such designation,
the successor shall, without further act, become vested with all the
estate, rights, powers, discretions, and duties of his predecessor with
the like effect as if he were originally named as Trustee herein
immediately upon the death, resignation, incapacity, or removal of his
predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he shall
furnish to the Employer and Administrator a written statement of account
with respect to the portion of the Plan Year during which he served as
Trustee. This statement shall be either (i) included as part of the annual
statement of account for the Plan Year required under Section 7.7 or (ii)
set forth in a special statement. Any such special statement of account
should be rendered to the Employer no later than the due date of the annual
statement of account for the Plan Year. The procedures set forth in Section
7.7 for the approval by the Employer of annual statements of account shall
apply to any special statement of account rendered hereunder and approval
by the Employer of any such special statement in the manner provided in
Section 7.7 shall have the same effect upon the statement as the Employer's
approval of an annual statement of account. No successor to the Trustee
shall have any duty or responsibility to investigate the acts or
transactions of any predecessor who has rendered all statements of account
required by Section 7.7 and this subparagraph.
7.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the Trustee at
the direction of the Administrator shall transfer the Vested interest, if any,
of such Participant in his account to another trust forming part of a pension,
profit sharing, or stock bonus plan maintained by such Participant's new
employer and represented by said employer in writing as meeting the requirements
of Code Section 401(a), provided that the trust to which such transfers are made
permits the transfer to be made.
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7.11 TRUSTEE INDEMNIFICATION
The Employer agrees to indemnify and save harmless the Trustee against any
and all claims, losses, damages, expenses and liabilities the Trustee may incur
in the exercise and performance of the Trustee's powers and duties hereunder,
unless the same are determined to be due to gross negligence or willful
misconduct.
7.12 EMPLOYER SECURITIES AND REAL PROPERTY
The Trustee shall be empowered to acquire and hold "qualifying Employer
securities" and "qualifying Employer real property," as those terms are defined
in the Act. However, no more than 100% of the fair market value of all the
assets in the Trust Fund may be invested in "qualifying Employer securities" and
"qualifying Employer real property".
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT
(a) The Employer shall have the right at any time to amend this Plan
subject to the limitations of this Section. However, any amendment which affects
the rights, duties or responsibilities of the Trustee and Administrator may only
be made with the Trustee's and Administrator's written consent. Any such
amendment shall become effective as provided therein upon its execution. The
Trustee shall not be required to execute any such amendment unless the amendment
affects the duties of the Trustee hereunder.
(b) The Employer may (1) change the choice of options in the Adoption
Agreement, (2) add overriding language in the Adoption Agreement when such
language is necessary to satisfy Code Sections 415 or 416 because of the
required aggregation of multiple plans, and (3) add certain model amendments
published by the Internal Revenue Service which specifically provide that their
adoption will not cause the Plan to be treated as an individually designed plan.
An Employer that amends the Plan for any other reason, including a waiver of the
minimum funding requirement under Code Section 412(d), will no longer
participate in this Prototype Plan and will be considered to have an
individually designed plan.
Furthermore, an Employer may not use this Plan and will be deemed to have
an individually designed plan if the Employer does not maintain a product of the
sponsor of the Plan or any of its affiliates or subsidiaries.
(c) The Employer expressly delegates authority to the sponsoring
origination of this Plan, the right to amend this Plan by submitting at copy of
the amendment to each Employer who has adopted this Plan after first having
received a ruling or favorable determination from the Internal Revenue Service
that the Plan as amended qualifies under Code Section 401(a) and the Act. For
purposes of this Section, the mass submitter shall be recognized as the agent of
the sponsoring organization. If the sponsoring organization does not adopt the
amendments made by the mass submitter, it will no longer be identical to or a
minor modifier of the mass submitter plan.
(d) No amendment to the Plan shall be effective if it authorizes or
permits any part of the Trust Fund (other than such part as is required to pay
taxes and administration expenses) to be used for or diverted to any purpose
other than for the exclusive benefit of the Participants or their Beneficiaries
or estates; or causes any reduction in the amount credited to the account of any
Participant; or causes or permits any portion of the Trust Fund to revert to or
become property of the Employer.
(e) Except as permitted by Regulations (including Regulation 1.411(d)-4),
no Plan amendment or transaction having the effect of a Plan amendment (such as
a merger, plan transfer or similar transaction) shall be effective if it
eliminates or reduces any "section 41l(d)(6) protected benefit" or adds or
modifies
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conditions relating to "Section 41l(d)(6) protected benefits" the result of
which is a further restriction on such benefit unless such protected
benefits are preserved with respect to benefits accrued as of the later of
the adoption date or effective date of the amendment. "Section 411(d)(6)
protected benefits" are benefits described in Code Section 41l(d)(6)(A),
early retirement benefits and retirement-type subsidies, and optional forms
of benefit.
8.2 TERMINATION
(a) The Employer shall have the right at any time to terminate the Plan
by delivering to the Trustee and Administrator written notice of such
termination. Upon any full or partial termination all amounts credited to
the affected Participants" Combined Accounts shall become 100% Vested and
shall not thereafter be subject to forfeiture, and all unallocated amounts
shall be allocated to the accounts of all Participants in accordance with
the provisions hereof.
(b) Upon the full termination of the Plan, the Employer shall direct the
distribution of the assets to Participants in a manner which is consistent
with and satisfies the provisions of Section 6.5. Distributions to a
Participant shall be made in cash (or in property if permitted in the
Adoption Agreement) or through the purchase of irrevocable nontransferable
deferred commitments from the Insurer. Except as permitted by Regulations,
the termination of the Plan shall not result in the reduction of "Section
41l(d)(6) protected benefits" as described in Section 8.1.
8.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or
liabilities may be transferred to any other plan only if the benefits which
would be received by a Participant of this Plan, in the event of a termination
of the plan immediately after such transfer, merger or consolidation, are at
least equal to the benefits the Participant would have received if the Plan had
terminated immediately before the transfer, merger or consolidation and such
merger or consolidation does not otherwise result in the elimination or
reduction of any "Section 411(d)(6) protected benefits" as described in Section
8.1(e).
ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS
(a) Any organization may become the Employer hereunder by executing the
Adoption Agreement in form satisfactory to the Trustee, and it shall
provide such additional information as the Trustee may require. The consent
of the Trustee to act as such shall be signified by its execution of the
Adoption Agreement.
(b) Except as otherwise provided in this Plan, the affiliation of the
Employer and the participation of its Participants shall be separate and
apart from that of any other employer and its participants hereunder.
9.2 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the Employer
and any Participant or to be a consideration or an inducement for the employment
of any Participant or Employee. Nothing contained in this Plan shall be deemed
to give any Participant or Employee the right to be retained in the service of
the Employer or to interfere with the right of the Employer to discharge any
Participant or Employee at any time regardless of the effect which such
discharge shall have upon him as a Participant of this Plan.
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9.3 ALIENATION
(a) Subject to the exceptions provided below, no benefit which shall be
payable to any person (including a Participant or his Beneficiary) shall be
subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, and any attempt to anticipate,
alienate, sell, transfer, assign, pledge, encumber, or charge the same
shall be void; and no such benefit shall in any manner be liable for, or
subject to, the debts, contracts, liabilities, engagements, or torts of any
such person, nor shall it be subject to attachment or legal process for or
against such person, and the same shall not be recognized except to such
extent as may be required by law.
(b) This provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, for any reach, under any provision of
this Plan. At the time a distribution is to be made to or for a
Participant's or Beneficiary's benefit, such proportion of the amount to be
distributed as shall equal such indebtedness shall be paid to the Plan, to
apply against or discharge such indebtedness. Prior to making a payment,
however, the Participant or Beneficiary must be given written notice by the
Administrator that such indebtedness is to be so paid in whole or part from
his Participant's Combined Account. If the Participant or Beneficiary does
not agree that the indebtedness is a valid claim against his Vested
Participant's Combined Account, he shall be entitled to a review of the
validity of the claim in accordance with procedures provided in Sections
2.12 and 2.13.
(c) This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic relations
orders permitted to be so treated by the Administrator under the provisions
of the Retirement Equity Act of 1984. The Administrator shall establish a
written procedure to determine the qualified status of domestic relations
orders and to administer distributions under such qualified orders.
Further, to the extent provided under a "qualified domestic relations
order", a former spouse of a Participant shall be treated as the spouse or
surviving spouse for all purposes under the Plan.
9.4 CONSTRUCTION OF PLAN
This Plan and Trust shall be construed and enforced according to the Act
and the laws of the State or Commonwealth in which the Employer's principal
office is located, other than its laws respecting choice of law, to the extent
not pre-empted by the Act.
9.5 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply, and whenever any words are used herein
in the singular or plural form, they shall be construed as though they were also
used in the other form in all cases where they would so apply.
9.6 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the Trust
and/or Plan established hereunder to which the Trustee or the Administrator may
be a party, and such claim, suit, or proceeding is resolved in favor of the
Trustee or Administrator, they shall be entitled to be reimbursed from the Trust
Fund for any and all costs, attorney's fees, and other expenses pertaining
thereto incurred by them for which they shall have become liable.
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically permitted by
law, it shall be impossible by operation of the Plan or of the Trust, by
termination of either, by power of revocation or amendment, by the
happening of any contingency, by collateral arrangement or by any other
means, for any part of the corpus or income of any Trust Fund maintained
pursuant to the Plan or any funds contributed thereto to be
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used for, or diverted to, purposes other than the exclusive benefit of
Participants, Retired Participants, or their Beneficiaries.
(b) In the event the Employer shall make a contribution under a mistake
of fact pursuant to Section 403(c)(2)(A) of the Act, the Employer may
demand repayment of such contribution at any time within one (1) year
following the time of payment and the Trustees shall return such amount to
the Employer within the one (1) year period. Earnings of the Plan
attributable to the contributions may not be returned to the Employer but
any losses attributable thereto must reduce the amount so returned.
9.8 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted by
the Act and regulations thereunder, shall be bonded in an amount not less than
10% of the amount of the funds such Fiduciary handles; provided, however, that
the minimum bond shall [so $1,000 and the maximum bond, $500,000. The amount of
funds handled shall be determined at the beginning of each Plan Year by the
amount of funds handled by such person, group, or class to be covered and their
predecessors, if any, during the preceding Plan Year, or if there is no
preceding Plan Year, then by the remount of the funds to be handled during the
then current year. The bond shall provide protection to the Plan against any
loss by reason of acts of fraud or dishonesty by the Fiduciary stone or in
connivance with others. The surety shall be a corporate surety company (as such
term is used in Act Section 412(a)(2)), and the bond shall be in a form approved
by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary,
the cost of such bonds shall be an expense of and may, at the election of the
Administrator, be paid from the Trust Fund or by the Employer.
9.9 INSURER'S PROTECTIVE CLAUSE
The Insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects of
this Plan. The Insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty to
see to the application of any funds paid to the Trustee, nor be required to
question any actions directed by the Trustee. Regardless of any provision of
this Plan, the Insurer shall not be required to take or permit any action or
allow any benefit or privilege contrary to the terms of any Contract which it
issues hereunder, or the rules of the Insurer.
9.10 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary, or
to any guardian or committee appointed for such Participant or Beneficiary in
accordance with the provisions of this Plan, shall, to the extent thereof, be in
full satisfaction of all claims hereunder against the Trustee and the Employer.
9.11 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or required
to do or perform any act or matter or thing, it shall be done and performed by a
person duly authorized by its legally constituted authority.
9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Employer, (2) the
Administrator, (3) the Trustee, and (4) any Investment Manager appointed
hereunder. The named Fiduciaries shall have only those specific powers, duties,
responsibilities, and obligations as are specifically given them under the Plan.
In general, the Employer shall have the sole responsibility for making the
contributions provided for under Section 4.1; and shall have the sole authority
to appoint and remove the Trustee and the Administrator; to formulate the Plan's
"funding policy and method"; and to amend the elective provisions of the
Adoption Agreement or terminate, in whole or in part, the Plan. The
Administrator shall have the sole responsibility for the administration of the
Plan, which responsibility is specifically described in the Plan. The Trustee
shall have the sole responsibility of management of the assets held under the
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Trust, except those assets, the management of which has been assigned to an
Investment Manager or Administrator, who shall be solely responsible for the
management of the assets assigned to it, all as specifically provided in the
Plan. Each named Fiduciary warrants that any directions given, information
furnished, or action taken by it shall be in accordance with the provisions of
the Plan, authorizing or providing for such direction, information or action.
Furthermore, each named Fiduciary may rely upon any such direction, information
or action of another named Fiduciary as being proper under the Plan, and is not
required under the Plan to inquire into the propriety of any such direction,
information or action. It is intended under the Plan that each named Fiduciary
shall be responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under the Plan. No named Fiduciary shall
guarantee the Trust Fund in any manner against investment loss or depreciation
in asset value. Any person, or group may serve in more than one Fiduciary
capacity.
9.13 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
9.14 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary, if, pursuant to a
timely application filed by or in behalf of the Plan, the Commissioner of
Internal Revenue Service or his delegate should determine that the Plan
does not initially qualify as a tax-exempt plan under Code Sections 401 and
501, and such determination is not contested, or if contested, is finally
upheld, then if the Plan is a new plan, it shall be void ab initio and all
amounts contributed to the Plan, by the Employer, less expenses paid, shall
be returned within one year and the Plan shall terminate, and the Trustee
shall be discharged from all further obligations. If the disqualification
relates to an amended plan, then the Plan shall operate as if it had not
been amended and restated. In the event that a contribution is made to the
Plan conditioned upon qualification of the Plan as amended, such
contribution must be returned to Employer upon the determination that the
amended Plan fails to qualify under the Code.
(b) Notwithstanding any provisions to the contrary, except Sections 3.5,
3.6, and 4.1(f), any contribution by the Employer to the Trust Fund is
conditioned upon the deductibility of the contribution by the Employer
under the Code and, to the extent any such deduction is disallowed, the
Employer may within one (1) year following the disallowance of the
deduction, demand repayment of such disallowed contribution and the Trustee
shall return such contribution within one (1) year following the
disallowance. Earnings of the Plan attributable to the excess contribution
may not be returned to the Employer, but any losses attributable thereto
must reduce the amount so returned.
(c) If an Employer's Plan fails to attain or retain qualification, then
such Plan will no longer participate in this Prototype Plan and will be
considered an individually designed plan.
9.15 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a uniform,
nondiscriminatory manner.
9.16 PAYMENT OF BENEFITS
Benefits under this Plan shall be paid, subject to Section 6.10 and Section
6.11 only upon death, Total and Permanent Disability, normal or early
retirement, termination of employment, or upon Plan Termination.
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ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER
Notwithstanding anything herein to the contrary, with the consent of the
Employer and Trustee, any Affiliated Employer may adopt this Plan and all of the
provisions hereof, and participate herein and be known as a Participating
Employer, by a properly executed document evidencing said intent and will of
such Participating Employer.
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Each Participating Employer shall be required to select the same
Adoption Agreement provisions as those selected by the Employer other than
the Plan Year, the Fiscal Year, and such other items that must, by
necessity, vary among employers.
(b) Each such Participating Employer shall be required to use the same
Trustee as provided in this Plan.
(c) The Trustee may, but shall not be required to, commingle, hold and
invest as one Trust Fund all contributions made by Participating Employers,
as well as all increments thereof.
(d) The transfer of any Participant from or to an Employer participating
in this Plan, whether he be an Employee of the Employer or a Participating
Employer, shall not affect such Participant's rights under the Plan, and
all amounts credited to such Participant's Combined Account as well as his
accumulated service time with the transferor or predecessor, and his length
of participation in the Plan, shall continue to his credit.
(e) Any expenses of the Plan which are to be paid by the Employer or
borne by the Trust Fund shall be paid by each Participating Employer in the
same proportion that the total amount standing to the credit of all
Participants employed by such Employer bears to the total standing to the
credit of all Participants.
10.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this Plan;
provided, however, that with respect to all of its relations with the Trustee
and Administrator for the purpose of this Plan, each Participating Employer
shall be deemed to have designated irrevocably the Employer as its agent. Unless
the context of the Plan clearly indicates the contrary, the word "Employer"
shall be deemed to include each Participating Employer as related to its
adoption of the Plan.
10.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between Participating
Employers, and in the event of any such transfer, the Employee involved shall
carry with him his accumulated service and eligibility. No such transfer shall
effect a termination of employment hereunder, and the Participating Employer to
which the Employee is transferred shall thereupon become obligated hereunder
with respect to such Employee in the same manner as was the Participating
Employer from whom the Employee was transferred.
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES
Any contribution or Forfeiture subject to allocation during each Plan Year
shall be allocated among all Participants of all Participating Employers in
accordance with the provisions of this Plan. On the basis of the information
furnished by the Administrator, the Trustee shall keep separate books and
records concerning the affairs
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of each Participating Employer hereunder and as to the accounts and credits of
the Employees of each Participating Employer. The Trustee may, but need not,
register Contracts so as to evidence that a particular Participating Employer is
the interested Employer hereunder, but in the event of an Employee transfer from
one Participating Employer to another, the employing Employer shall immediately
notify the Trustee thereof.
10.6 AMENDMENT
Amendment of this Plan by the Employer at any time when there shall be a
Participating Employer hereunder shall only be by the written action of each and
every Participating Employer and with the consent of the Trustee where such
consent is necessary in accordance with the terms of this Plan.
10.7 DISCONTINUANCE OF PARTICIPATION
Except in the case of a Standardized Plan, any Participating Employer shall
be permitted to discontinue or revoke its participation in the Plan at any time.
At the time of any such discontinuance or revocation, satisfactory evidence
thereof and of any applicable conditions imposed shall be delivery to the
Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and
other Trust Fund assets allocable to the Participants of such Participating
Employer to such new Trustee as shall have been designated by such Participating
Employer, in the event that it has established a separate pension plan for its
Employees provided, however, that no such transfer shall be made if the result
is the elimination or reduction of any "Section 41l(d)(6) protected benefits" in
accordance with Section 8.1(e). If no successor is designated, the Trustee shall
retain such assets for the Employees of said Participating Employer pursuant to
the provisions of Article VII hereof. In no such event shall any part of the
corpus or income of the Trust Fund as it relates to such Participating Employer
be used for or diverted for purposes other than for the exclusive benefit of the
Employees of such Participating Employer.
10.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all necessary rules
or regulations, binding upon all Participating Employers and all Participants,
to effectuate the purpose of this Article.
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from making
a contribution which it would otherwise have made under the Plan by reason of
having no current or accumulated earnings or profits, or because such earnings
or profits are less than the contribution which it would otherwise have made,
then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which
such Participating Employer was so prevented from making may be made, for the
benefit of the participating employees of such Participating Employer, by other
Participating Employers who are members of the same affiliated group within the
meaning of Code Section 1504 to the extent of their current or accumulated
earnings or profits, except that such contribution by each such other
Participating Employer shall be limited to the proportion of its total current
and accumulated earnings or profits remaining after adjustment for its
contribution to the Plan made without regard to this paragraph which the total
prevented contribution bears to the total current and accumulated earnings or
profits of all the Participating Employers remaining after adjustment for all
contributions made to the Plan without regard to this paragraph.
A Participating Employer on behalf of whose employees a contribution is
made under this paragraph shall not be required to reimburse the contributing
Participating Employers.
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AMENDMENT NUMBER TWO TO
AMERICAN CAPITAL MARKETING, INC.
401(K) PLAN & TRUST
1. Section 1.9 is amended by the addition of the following:
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to the contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each employee
taken into account under the plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not exceeding 12
months, over which compensation is determined (determination period) beginning
in such calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual common limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination period, and the
denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in
this plan to the limitation under Section 401(a)(17) of the Code shall mean the
OBRA '93 annual compensation limit set forth in this provision.
If compensation for any prior determination period is taken into
account in determining an employee's benefits accruing in the Current plan year,
the compensation for that prior determination period is subject to the OBRA '93
annual common limit in effect for that prior determination period. For this
purpose, for determination periods beginning before the first day of the plan
year beginning on or after January 1, 1994, the OBRA '93 annual compensation
limit is $150,000.
2. Section 6.13 is mended by the addition of the following:
If a distribution is one to which Section 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less than 30
days after the notice required under Section 1.411(a) - 11(c) of the Income Tax
Regulations is given, provided that:
(1) the plan administrator clearly informs the participant that the
participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and
(2) the participant, after receiving the notice, affirmatively elects a
distribution.
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3. Section 7.10 is mended by the addition of the following:
(a) Notwithstanding any provision of the plan to the contrary, with
respect to distributions made after December 31, 1992, a Participant shall be
permitted to elect to have any "eligible rollover distribution" transferred
directly to an "eligible retirement plan." specified by the Participant. The
Plan provisions otherwise applicable to distributions continue to apply to the
direct transfer option. The Participant shall, in the time and manner prescribed
the Administrator, specify the amount to be directly transferred and the
"eligible retirement plan" to receive the transfer. Any portion of a
distribution which is not transferred shall be distributed to the Participants.
(b) For purposes of this Section, the term "eligible rollover
distribution" means any distribution other than a distribution of substantially
equal periodic payments over the life or life expectancy of the Participant (or
joint life or joint life expectancies of the Participant and the designated
beneficiary) or a distribution over a period certain of ten years or more.
Amounts required to be distributed under Code Section 401(a)(9) are not eligible
rollover distributions. The direct transfer option described in subsection (a)
applies only to eligible rollover distributions which would otherwise be
includible in gross income if not transferred.
(c) For purposes of this Section, the term "eligible retirement plan"
means an individual retirement account as described in Code Section 408(a), an
individual retirement annuity as described in Code Section 408(b), an annuity
plan as described in Code Section 403(a), or a defined contribution plan as
described in Code Section 401(a) which is exempt from tax under Code Section
501(a) and which accepts rollover distributions.
(d) The election described in subsection (a) also applies to the
surviving spouse after the Participant's death; however, distributions to the
surviving spouse may only be transferred to an individual retirement account or
individual retirement annuity. For proposes of subsection (a), a spouse or
former spouse who is the alternate payee under a qualified domestic relations
order as defined in Code Section 414(p) will be treated as the Participant.
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AMENDMENT NUMBER ONE TO
AMERICAN CAPITAL MARKETING, INC.
401(K) PLAN & TRUST
American Capital Marketing, Inc. 401(k) Plan & Trust is hereby amended as
follows:
1. Section 1.9 is amended by replacing the first paragraph with the following
paragraphs:
"Compensation" with respect to any Participant means one of the following
as elected in the Adoption Agreement. However, compensation for any Self-
Employed Individual shall be equal to his Earned Income.
i. Information required to be reported under sections 6041, 6051 and 6052
(Wages, Tips and Other Compensation Box on Form W-2). Compensation is
defined as wages as defined in section 3401(a) and all other payments
of compensation to an employee by the employer (in the course of the
employer's trade or business) for which the employer is required to
furnish the employee a written statement under sections 6041(d) and
6051(a)(3) of the Code. Compensation must be determined without regard
to any rules under section 3401(a) that limit the remuneration
included in wages based on the nature or location of the employment or
the services performed (such as the exception for agricultural labor
in section 3401(a)(2)).
ii. Section 3401(a) wages. Compensation is defined as wages within the
meaning of section 3401(a) for the purposes of income tax withholding
at the source but determined without regard to any rules that limit
the remuneration included in wages based on the nature or location of
the employment or the services performed (such as the exception for
agricultural labor in section 3401(a)(2)).
iii. 415 safe-harbor compensation. Compensation is defined as wages,
salaries, and fees for professional services and other amounts
received (without regard to whether or not an amount is paid in cash)
for personal services actually rendered in the course of employment
with the employer maintaining the plan to the extent that the amounts
are includible in gross income (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profits commissions on insurance premiums, tips,
bonuses, fringe benefits and reimbursements or other expense
allowances under a nonaccountable plan (as described in 1.62-2(e)),
and excluding the following:
a. Employer contributions to a plan of deferred compensation which
are not includible in the Employee's gross income for the taxable
year in which contributed, or employer contributions under a
simplified employee pension plan to the extent such contributions
are deductible by the employee, or any distributions from a plan
of deferred compensation;
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b. Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
c. Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
d. Other amounts which received special tax benefits, or
contributions made by the employer (whether or not under a
salary reduction agreement towards the purchase of an annuity
contract described in section 403(b) of the Code (whether or not
the contributions are actually excludable from the gross income
of the employee).
If, in connection with the adoption of this or any other amendment, the
definition of Compensation has been modified, then, for Plan Years prior
to the Plan Year which includes the adoption date of such amendment,
Compensation means compensation determined pursuant to the Plan then in
effect.
2. Section 1.14 is amended in its entirety to read as follows:
"Elective Contribution" means the Employer's contributions to the Plan that
are made pursuant to the Participant's deferral election pursuant to Section
4.2, excluding any such amounts distributed as "excess annual additions"
pursuant to Section 4.4. In addition, if selected in E3 of the Adoption
Agreement, the Employer's matching contribution shall or shall not be considered
an Elective Contribution for purposes of the Plan, as provided in Section
4.1(b). Elective Contributions shall be subject to the requirements of Sections
4.2(b) and 4.2(c)and shall further be required to satisfy the discrimination
requirements of Regulation 1.40100-1(b)(3), the provisions of which are
specifically incorporated herein by reference.
3. Section 1.20 is amended in its entirety to read as follows:
"Excess Deferred Compensation" means, with respect to any taxable year of a
Participant, the excess of the aggregate amount of such Participant's Deferred
Compensation and the elective deferrals pursuant to Section 4.2(f) actually made
on behalf of such Participant for such taxable year, over the dollar limitation
provided for in Code Section 402(g), which is incorporated herein by reference.
Excess Deferred Compensation shall be treated as an "annual addition" pursuant
to Section 4.9 when contributed to the Plan unless distributed to the affected
Participant not later than the first April 15th following the close of the
Participant's taxable year.
4. Section 1.26 is amended i its entirety to read as follows:
"414(s) Compensation" with respect to any Employee means his Compensation
as defined in Section 1.9. However, for purposes of this Section, Compensation
shall be Compensation paid and, if selected in the Adoption Agreement, shall
only be recognized as of an Employee's effective date of participation. If, in
connection with the adoption of this or any other amendment, the definition of
"414(s)Compensation" has been modified, then, for Plan Years prior to the Plan
Year which includes the adoption date of such amendment, "414(s) Compensation"
means compensation determined pursuant to the Plan then in effect.
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5. Section 1.27 ("415 Compensation") is amended by the addition of the
following paragraph:
If, in connection with the adoption of this or any other amendment, the
definition of "415 Compensation" has been modified, then, for Plan Years prior
the Plan Year which includes the adoption date of such amendment, "415
compensation" means compensation determined pursuant to the Plan then in effect.
6. Section 4.9(a)(4) and 4.9(a)(4)(i) are amended to read as follows:
(4) If there is an excess amount pursuant to Section 4.9(a)(2) or Section
4.10, the excess will be disposed of in one of the following manners,
as uniformly determined by the Plan Administrator for all Participants
similarly situated:
(i) Any Deferred Compensation or nondeductible Voluntary Employee
Contributions, to the extent they would reduce the Excess Amount
will be distributed to the Participant;
7. Section 4.9(f)(2) is amended in its entirety to read as follows:
Compensation means a Participant's Compensation as elected in the Adoption
Agreement. However, regardless of any selection made in the Adoption Agreement,
"415 Compensation" shall exclude compensation which is not currently includible
in the Participant's gross income by reason of the application of Code Sections
125, 402(a)(8), 402(h)(1)(B), or 403(b).
For limitation years beginning after December 31, 1991, for purposes of
applying the limitations of this article, compensation for a limitation year is
the compensation actually paid or made available during such limitation year.
Notwithstanding the preceding sentence, compensation for a participant in a
defined contribution plan who is permanently and totally disabled (as defined in
section 22(e)(3) of the Internal Revenue Code) is the compensation such
participant would have received for the limitation year if the participant had
been paid at the rate of compensation paid immediately before becoming
permanently and totally disabled; such imputed compensation for the disabled
participant may be taken into account only if the participant is not a Highly
Compensated Employee and contributions made on behalf of such participant are
nonforfeitable when made.
8. Section 4.10 is amended in its entirety to read as follows:
(a) If as a result of the allocation of Forfeitures, a reasonable error in
estimating a Participant's annual compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of Code Section
402(g)(3)) that may be made with respect to any Participant under the limits of
Section 4.9, or other acts and circumstances to which Regulation 1.415-6(b)(6)
shall be applicable, the "annual additions" under this Plan would cause the
maximum provided in Section 4.9 to be exceeded, the Administrator shall treat
the excess in accordance with Section 4.9(a)(4).
3
<PAGE>
9. Sections 6.11(a)(1) and (a)(4) are amended in their entirety to read as
follows"
(1) Medical expenses described in Code Section 213(d) incurred by the
Participant, his spouse, or any of his dependents (as defined in Code Section
152) or expenses necessary for these persons to obtain medical care;
(4) Payment of tuition and related educational fees for the next 12 months
of post-secondary education for the Participant, his spouse, children, or
dependents;
10. Section 7.10 is mended by the addition of the following paragraphs:
(a) Notwithstanding any provision of the plan to the contrary, with
respect to distributions made after December 31, 1992, a Participant shall be
permitted to elect to have any "eligible rollover distribution" transferred
directly to an "eligible retirement plan" specified by the Participant. The Plan
provisions otherwise applicable to distributions continue to apply to the direct
transfer option. The Participant shall, in the time and manner prescribed by the
Administrator, specify the amount to be directly transferred and the "eligible
retirement plan" to receive the transfer. Any portion of a distribution which is
not transferred shall be distributed to the Participant.
(b) For purposes of this Section, the term "eligible rollover
distribution" means any distribution other than a distribution of substantially
equal periodic payments over the life or life expectancy of the Participant (or
joint life or joint life expectancies of the Participant and the designated
beneficiary) or a distribution over a period certain of ten years or more.
Amounts required to be distributed under Code Section 401(a)(9) are not eligible
rollover distributions. The direct transfer option described in subsection (a)
applies only to eligible rollover distributions which would otherwise be
includible in gross income if not transferred.
(c) For purposes of this Section, the term "eligible retirement plan"
means an individual retirement account as described in Code Section 408(a), an
individual retirement annuity as described in Code Section 408(b), an annuity
plan as described in Code Section 403(a), or a defined contribution plan as
described in Code Section 401(a) which is exempt from tax under Code Section
501(a) and which accepts rollover distributions.
(d) The election described in subsection (a) also applies to the surviving
spouse after the Participant's death; however, distributions to the surviving
spouse may only be transferred to an individual retirement account or individual
retirement annuity. For purposes of subsection (a), a spouse or former spouse
who is the alternate payee under a qualified domestic relations order as defined
in Code Section 414(p) will be treated as the Participant.
11. Section 4.2(d) is amended in its entirety to read as follows:
(d) In any Plan Year beginning after December 31, 1986, a Participant's
Deferred Compensation made under this Plan and all other plans, contracts or
arrangements of the Employer maintaining this Plan shall not exceed the
limitation imposed by Code Section 402(g), as in effect for the calendar year in
which such Plan Year began. If such dollar limitation is exceeded solely from
elective deferrals made under this Plan or any other Plan maintained by the
Employer, a Participant will be deemed to have notified the Administrator of
such excess amount which shall be distributed in a manner consistent with
Section 4.2(f). This dollar limitation shall be adjusted annually pursuant to
the method provided in Code Section 415(d) in accordance with Regulations.
4
<PAGE>
12. Section 4.2(f) is amended by the addition of the following paragraph after
paragraph (f)(3) to read as follows:.
Any distribution under this Section shall be made first from unmatched
Deferred Compensation and, thereafter, simultaneously from Deferred Compensation
which is matched and matching contributions which relate to such Deferred
Compensation. However, any such matching contributions which are not Vested
shall be forfeited in lieu of being distributed.
13. Section 4.2(f) is amended by the addition of the following paragraph as
the second to the last paragraph of such subsection:
Notwithstanding the above, for any distribution under this Section which is
made after August 15, 1991, such distribution shall not include any income for
the "gap period". Further provided, for any distribution under this Section
which is made after August 15, 1991, the amount of Income may be computed using
a reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for the
Plan Year.
14. Section 4.6(c) is amended by the addition of the following paragraph as
the second to the last paragraph of such subsection:
Notwithstanding the above, for any distribution under this Section which is
made after August 15, 1991, such distribution shall not include any income for
the "gap period". Further provided, for any distribution under this Section
which is made after August 15, 1991, the amount of Income may be computed using
a reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for the
Plan Year.
15. Section 4.7(c) is amended in its entirety to read as follows:
(c) For purposes of determining the "Actual Contribution Percentage" and
the amount of Excess Aggregate Contributions pursuant to Section 4.8(d), only
Employer matching contributions (excluding matching contributions forfeited or
distributed pursuant to Section 4.2(0, 4.6(a), or 4.8(a)) contributed to the
Plan prior to the end of the succeeding Plan Year shall be considered. In
addition, the Administrator may elect to take into ac. count, with respect to
Employees eligible to have Employer matching contributions made pursuant to
Section 4.1(b)or voluntary Employee contributions made pursuant to Section 4.12
allocated to their accounts, elective deferrals (as defined in Regulation
1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code
Section 401(m)(4)(C)) contributed to any plan maintained by the Employer. Such
elective deferrals and qualified non-elective contributions shall be treated as
Employer matching contributions subject to Regulation 1.401(m)-1(b)(2) which is
incorporated herein by reference. However, for Plan Years beginning after
December 31, 1988, the Plan Year must be the same as the plan year of the plan
to which the elective deferrals and the qualified non-elective contributions are
made.
5
<PAGE>
16. Section 4.8(i) is amended by the addition of the following paragraph as
the second to the last paragraph of such subsection:
Notwithstanding the above, for any distribution under this Section which is
made after August 15, 1991, such distribution shall not include any Income for
the "gap period". Further provided, for any distribution under this Section
which is made after August 15, 1991, the amount of Income may be computed using
a reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for the
Plan Year.
17. Section 6.11(c)(1) is amended in its entirety to read as follows:
(1) The distribution is not in excess of the amount of the immediate and
heavy financial need of the Participant. The amount of the immediate and heavy
financial need may include any amounts necessary to pay any federal, state or
local income taxes or penalties reasonably anticipated to result from the
distribution.
18. Article IV is amended by the addition of the following:
Notwithstanding anything in this Article to the contrary, effective as of
the Plan Year in which this amendment becomes effective, the Actual Deferral
Percentage Test and the Actual Contribution Percentage Test shall be applied
(and adjusted) by applying the family Member aggregation rules of Code Section
414(q)(6).
19. Section Ela. of the Adoption Agreement is amended in its entirety to read
as follows:
Compensation with respect to any Participant means:
1. ( ) Wages, Tips and other Compensation (Box 10 on Form W-2).
2. ( ) Section 3401(a) wages (wages for withholding purposes).
3. (X) 415 Safe-harbor compensation.
AND Compensation
(x) shall
( ) shall not
exclude (even if includible in gross income) reimbursements or other
expense allowances, fringe benefits (cash or noncash), moving expenses,
deferred compensation, and welfare benefits.
20. Section E3 of the 40100 Adoption Agreement(s) is amended by the addition
of the following:
( ) Notwithstanding anything in the Plan to the contrary, all matching
contributions which relate to distributions of Excess Deferred
Compensation, Excess Contributions and Excess Aggregate Contributions
shall be Forfeited. (Select this option only if it is applicable.)
6
<PAGE>
NOTE: THIS AMENDMENT ONLY NEEDS TO BE EXECUTED BELOW BY THE EMPLOYER IF THE PLAN
IS BEING AMENDED TO UTILIZE THE MODIFICATIONS MADE TO SECTION E1 OR E3 OF HE
ADOPTION AGREEMENT.
IN WITNESS WHEREOF, the Employer hereby causes this amendment to be
executed on this _____ day of __________________ ,19___ .
EMPLOYER: PARTICIPATING EMPLOYER:
Tut Systems, Inc.
- --------------------------------- -----------------------------------
(enter name) (enter name)
By:------------------------------ By:------------------------------
7
<PAGE>
EXHIBIT 10.5
FOURTH AMENDED AND RESTATED
SHAREHOLDERS' RIGHTS AGREEMENT
This Fourth Amended and Restated Shareholders' Rights Agreement (this
"Agreement") is made and entered into as of December 16, 1997 by and among Tut
Systems, Inc., a California corporation (the "Company"), and the shareholders of
the Company set forth on Exhibits A, B, C, D and E hereto (each individually a
"Shareholder" and collectively, the "Shareholders").
WHEREAS, the Company and the Shareholders set forth on Exhibits A, B, C and
D are parties to that certain Third Amended and Restated Shareholders' Rights
Agreement dated as of July 1, 1996 (the "Third Amended and Restated
Shareholders' Rights Agreement") providing for, among other things, certain
registration rights, rights to financial information and rights of first
refusal;
WHEREAS, the Company and at least a majority of the Shareholders have
agreed to amend and restate the Third Amended and Restated Shareholders' Rights
Agreement to reflect the sale and issuance by the Company of shares of Series G
Preferred Stock to the shareholders set forth on Exhibit E hereto;
NOW, THEREFORE, THE THIRD AMENDED AND RESTATED SHAREHOLDERS' RIGHTS
AGREEMENT IS HEREBY AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS:
1. DEFINITIONS. For purposes of this Agreement:
-----------
(a) Registration. The terms "register," "registered," and
------------ -------- ----------
"registration" refer to a registration effected by preparing and filing a
- -------------
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
(b) Registrable Securities. The term "Registrable Securities" means:
---------------------- ----------------------
(1) all the shares of Common Stock of the Company issued or issuable upon the
conversion of any shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, Series F Preferred and Series
G Preferred held by the Shareholders, (2) any 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 shares of Common Stock
described in clause (1) of this subsection (b); excluding however, any
---------
Registrable Securities sold by a person in a transaction in which rights under
Section 3 are not assigned in accordance with this Agreement or any Registrable
Securities sold to the public or sold pursuant to Rule 144 promulgated under the
Securities Act.
<PAGE>
(c) Registrable Securities Then Outstanding. The number of shares of
---------------------------------------
"Registrable Securities then outstanding" shall mean the number of shares of
---------------------------------------
Common Stock which are Registrable Securities and (1) are then issued and
outstanding or (2) are then issuable pursuant to the exercise or conversion of
then outstanding and then exercisable options, warrants or convertible
securities.
(d) Holder. For purposes of Section 3, the term "Holder" means any
------ ------
person owning of record Registrable Securities that have not been sold to the
public or pursuant to Rule 144 promulgated under the Securities Act or any
assignee of record of such Registrable Securities to whom rights under Section 3
have been duly assigned in accordance with this Agreement; provided, however,
-------- -------
that for purposes of this Agreement, a record holder of shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred convertible into such
Registrable Securities shall be deemed to be the Holder of such Registrable
Securities; and provided, further, that the Company shall in no event be
-------- -------
obligated to register shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, Series F Preferred or Series
G Preferred or options or warrants to acquire Common Stock, and that Holders of
Registrable Securities will not be required to convert their shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred into Common Stock or
exercise any options or warrants in order to exercise the registration rights
granted hereunder, until immediately before the closing of the offering to which
the registration relates.
(e) Form S-3. The term "Form S-3" means such form under the
-------- --------
Securities Act as is in effect on the date hereof or any successor registration
form under the Securities Act subsequently adopted by the SEC which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
(f) SEC. The term "SEC" or "Commission" means the U.S. Securities
--- --- ----------
and Exchange Commission.
(g) Securities Act. The term "Securities Act" means the Securities
-------------- --------------
Act of 1933, as amended.
(h) Exchange Act. The term "Exchange Act" means the Securities
------------ ------------
Exchange Act of 1934, as amended.
2. INFORMATION RIGHTS.
------------------
2.1 Financial Information. The Company agrees that so long as a
---------------------
Shareholder (together with any affiliated holder) is a holder of shares of
Preferred Stock, convertible into 100,000 or more shares of Common Stock
("Conversion Stock") or a holder of 100,000 or more shares of the
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<PAGE>
Conversion Stock, or any combination thereof totaling 100,000 or more shares
(adjusted for stock dividends, stock splits, combinations and
recapitalizations), the Company will:
(a) Annual Reports. Furnish to such Shareholder, as soon as
--------------
practicable and in any event within 120 days after the end of each fiscal year,
a consolidated Balance Sheet as of the end of such fiscal year, and a
consolidated Statement of Income and a consolidated Statement of Cash Flows of
the Company and its subsidiaries for such year, setting forth in each case in
comparative form the figures from the Company's previous fiscal year (if any),
all prepared in accordance with generally accepted accounting principles and
practices and audited by one of the "Big Four" independent certified public
accounting firms selected by the Company;
(b) Quarterly Reports. Furnish to such Shareholder, as soon as
-----------------
practicable and in any event within 45 days after the end of each fiscal quarter
of the Company (except the last quarter of the Company's fiscal year), quarterly
unaudited consolidated financial statements, including an unaudited consolidated
Balance Sheet, an unaudited consolidated Statement of Income and an unaudited
Statement of Cash Flows;
(c) Inspection Rights. Permit such Shareholder, at such
-----------------
Shareholder's expense and upon reasonable notice, 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 as may be
reasonably requested by Purchaser.
2.2 Termination of Certain Rights. The Company's obligations under
-----------------------------
Section 2.1 shall terminate upon the earliest of (i) the closing of the
Company's initial public offering of Common Stock pursuant to a registration
statement filed with and declared effective by the SEC under the Securities Act
(the "Company's Initial Public Registration"), or (ii) acquisition (by merger,
-------------------------------------
consolidation or otherwise) of the Company where the surviving entity is subject
to the reporting requirements of the Exchange Act.
3. REGISTRATION RIGHTS.
-------------------
3.1 Piggyback Registrations. The Company shall notify all Holders of
-----------------------
Registrable Securities in writing at least twenty (20) days prior to filing any
registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Company (other than any registration
statement relating to any registration under Section 3.2 of this Agreement or to
any employee benefit plan or a corporate reorganization) and will afford each
such Holder an opportunity to include in such registration statement all or any
part of the Registrable Securities then held by such Holder. Each Holder
desiring to include in any such registration statement all or any part of the
Registrable Securities held by such Holder shall, within twenty (20) days after
receipt of the above-described notice from the Company, so notify the Company in
writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any
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<PAGE>
registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) Underwriting. If a registration statement under which the
------------
Company gives notice under this Section 3.1 is for an underwritten offering,
then the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 3.1 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
-----
Company, and second, to each of the Holders requesting inclusion of their
------
Registrable Securities in such registration statement on a pro rata basis based
on the total number of Registrable Securities then held by each such Holder,
provided that although shares of Registrable Securities may be excluded entirely
from the Company's initial public offering, the shares of Registrable Securities
may not be limited to less than twenty-five percent (25%) of any subsequent
public offering. In the event that Registrable Securities are included in the
Company's initial public offering, the holders of Common Stock issued upon
conversion of the Series A Preferred Stock shall be entitled to sell not less
than twenty (20%), the holders of Common Stock issued upon conversion of the
Series B, Series C, Series D, Series E, Series F and Series G Preferred Stock
shall be entitled to sell not less than eighty (80%) of the total number of
Registrable Securities to be included in such registration statement, provided
that within each such group the allocation shall be made based upon the number
of shares of Registrable Securities held by such holder. In the event that
Registrable Securities are included in any offering after the Company's initial
public offering, the participation shall be allocated among all holders based
upon the number of shares of Registrable Securities held by such holder. To
facilitate allocation of the Shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by written notice
to the Company and the underwriter, delivered at least ten (10) business days
prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration. For any Holder which is a partnership or
corporation, the partners, retired partners and shareholders 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 "Holder", and any pro rata reduction with
-4-
<PAGE>
respect to such "Holder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "Holder", as defined in this sentence.
(b) Expenses. All expenses incurred in connection with a
--------
registration pursuant to this Section 3.1 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company and reasonable fees and
disbursements of one counsel for the selling Holders (not to exceed $20,000)
shall be borne by the Company.
3.2 Form S-3 Registration. In case the Company shall receive from
---------------------
any Holder or Holders of 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, provided the number of
shares requested to be sold would have an aggregate price to the public of at
least $1,000,000, then the Company will:
(a) Notice. Promptly give written notice of the proposed
------
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and
(b) Registration. 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 3.2:
(i) if Form S-3 is not available for such offering by the
Holders;
(ii) if the Company shall furnish to the Holders a
certificate signed by the President or Chief Executive Officer of the
Company stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the
Form S-3 registration statement no more than once during any twelve (12)
month period for a period of not more than ninety (90) days after receipt
of the request of the Holder or Holders under this Section 3.2;
-5-
<PAGE>
(iii) 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; or
(iv) on more than two (2) occasions in any twelve (12)
month period.
Subject to the foregoing, the Company shall file a Form S-3 registration
statement covering the Registrable Securities and other securities so requested
to be registered pursuant to this Section 3.2 as soon as practicable after
receipt of the request or requests of the Holders for such registration.
(c) Expenses. All expenses incurred in connection with a
--------
registration pursuant to this Section 3.2 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company and reasonable fees and
disbursements of one counsel for the selling Holders (not to exceed $20,000)
shall be borne by the Company.
3.3 Obligations of the Company. Whenever required to effect the
--------------------------
registration of any Registrable Securities under this Agreement, 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 120 days.
(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 Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
(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.
-6-
<PAGE>
(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(s) 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 Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact 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.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such Registrable
Securities are delivered to the underwriters for sale, 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 as of 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 if there are no
underwriters, to the Holders requesting registration of Registrable Securities
and (ii) a "comfort" letter dated as of 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 if
there are no underwriters, to the Holders requesting registration of Registrable
Securities.
3.4 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to Sections 3.1 or 3.2
that the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of their Registrable Securities.
3.5 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under Sections 3.1 or 3.2.
(a) By the Company. To the extent permitted by law, the
--------------
Company will indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Exchange Act against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Securities 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"):
-7-
<PAGE>
(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 Securities Act, the Exchange Act, any federal or state securities law
or any rule or regulation promulgated under the Securities Act, the
Exchange Act or any federal or state securities law in connection with the
offering covered by such registration statement;
and the Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided however, that the
-------- -------
indemnity agreement contained in this subsection 3.5(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 such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
(b) By Selling Holders. 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 have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter (as defined in the Securities Act) and any other Holder
selling securities under such registration statement or any of such other
Holder's partners, directors or officers or any person who controls such
underwriter or other Holder within the meaning of the Securities Act or the
Exchange Act, against any losses, claims, damages or liabilities (joint or
several) to which the Company or any such director, officer, controlling person,
underwriter or other such Holder, partner or director, officer or controlling
person of such underwriter or other Holder may become subject under the
Securities 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 reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or other Holder, partner, officer, director or
controlling person of such other Holder or underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
- -------- -------
3.5(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such
-8-
<PAGE>
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; and provided further, that the total amounts
-------- -------
payable in indemnity by a Holder under this Section 3.5(b) in respect of any
Violation shall not exceed the net proceeds received by such Holder in the
registered offering out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party
------
under this Section 3.5 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 3.5,
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 shall
-------- -------
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of 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 3.5, 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 3.5.
(d) Defect Eliminated in Final Prospectus. The foregoing
-------------------------------------
indemnity agreements of the Company and Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus), such indemnity agreement shall not inure to the benefit of any
indemnified party if a copy of the Final Prospectus was furnished to the
indemnified party and the indemnified party was required to, but did not,
furnish the Final Prospectus to the person asserting the loss, liability, claim
or damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable
------------
contribution to joint liability under the Securities Act in any case in which
either (i) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 3.5 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 3.5 provides
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
3.5; then, and in each such case, the Company and such Holder will contribute to
the
-9-
<PAGE>
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such Holder is
responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by and sold under the
registration statement bears to the public offering price of all securities
offered by and sold under such registration statement, and the Company and other
selling Holders are responsible for the remaining portion; provided, however,
-------- -------
that, in any such case, (A) no such Holder will be required to contribute more
than the net proceeds received by such holder from all such Registrable
Securities offered and sold by such Holder pursuant to such registration
statement; and (B) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
(f) Survival. The obligations of the Company and Holders
--------
under this Section 3.5 shall survive the completion of any offering of
Registrable Securities in a registration statement, and otherwise.
3.6 "Market Stand-Off" Agreement. Each Holder hereby agrees that it
---------------------------
shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any
Registrable Securities or other shares of stock of the Company then owned by
such Holder (other than to donees or partners of the Holder who agree to be
similarly bound) for up to 180 days following the effective date of a
registration statement of the Company filed under the Securities Act; provided,
--------
however, that:
- -------
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers securities to be sold on its
behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(b) all executive officers and directors of the Company then
holding Common Stock of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period. Each Holder further agrees that the provisions of
this Section 3.6 shall be applicable to any transferee of shares from such
Holder and such transferee as a condition of the transfer shall agree to this
Section 3.6 and that this Section 3.6 shall be applicable to all subsequent
transferees.
3.7 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable
-10-
<PAGE>
Securities to the public without registration, after such time as a public
market exists for the Common Stock of the Company, the Company agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date of the first registration under the Securities Act
filed by the Company for an offering of its securities to the general public;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) So long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Securities Act and the Exchange Act (at any time after it has become subject
to the reporting requirements of the Exchange Act), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company as a Holder may reasonably request in availing itself of any rule
or regulation of the Commission allowing a Holder to sell any such securities
without registration (at any time after the Company has become subject to the
reporting requirements of the Exchange Act).
3.8 Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the Registrable Securities then
outstanding enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under this
Section 3 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of his securities will not reduce the amount of
the Registrable Securities of the Holders which is included, or (b) to allow
such holder or prospective holder the right to initiate a registration.
3.9 Assignment of Registration Rights. The rights of a Shareholder
---------------------------------
under this Section 3 may be assigned by any party who is a partnership to any of
its partners and to any party who acquires a minimum of 100,000 shares of
Registrable Securities or shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred convertible into a minimum of 100,000 shares of
Registrable Securities in a transfer not involving a distribution or offering of
such shares to the public and not made pursuant to Rule 144 promulgated under
the Securities Act, who agrees in writing with the Company to be bound by all of
the provisions of this Section 3.
-11-
<PAGE>
3.10 Termination of Registration Rights. The registration rights
----------------------------------
granted pursuant to this Section 3 will terminate at the earlier of ten years
after the Company's Initial Public Registration (as defined in Section 2.2) or,
with respect to any Holder, at such time after two years (or in the case of a
Holder owning at least 100,000 shares of Registrable Securities after three
years) after the Company's Initial Public Registration as all Registrable
Securities held by such Holder and such Holder's affiliates may be resold in a
ninety (90) day period under Rule 144.
4. RIGHT OF FIRST OFFER TO SUBSCRIBE TO NEW ISSUANCES.
--------------------------------------------------
4.1 General. Each Shareholder shall have the right of first offer
-------
to purchase New Securities (as defined in Section 4.3 below) that the Company
may, from time to time, propose to sell and issue, as provided in this Section
4.
4.2 Mechanics of Right. In the event that the Company proposes to
------------------
issue New Securities, it shall give each Shareholder written notice (the
"Company Notice") of its intention to issue such New Securities, describing the
--------------
type of New Securities, the number of New Securities the Company proposes to
issue, and the price and the general terms upon which the Company proposes to
issue such New Securities.
(a) Pro Rata Rights. Each Shareholder shall have twenty (20)
---------------
days after the date of the giving of the Company Notice to agree to purchase up
to its Pro Rata Share (as defined in Section 4.3 below) of the New Securities
offered by the Company Notice for the price and upon the general terms specified
in the Company Notice by giving to the Company within such twenty day period,
written notice (a "Purchase Notice") stating its election to purchase New
---------------
Securities and the quantity of New Securities the Shareholders elect to purchase
(not to exceed such Shareholder's Pro Rata Share).
(b) Company Right. In the event that the Shareholders fail to
-------------
exercise in full its right of first offer under this Section 4 within the time
periods required as set forth above in this Section 4, then the Company shall
have the right, for 180 days thereafter, to sell the New Securities with respect
to which the rights of first offer under this Section 4 were not exercised, at a
price and upon general terms no more favorable to the purchasers thereof than
specified in the Company Notice. In the event that the Company has not sold the
New Securities within such 180 day period, the Company shall not thereafter
issue or sell any New Securities without again first offering such New
Securities to the Shareholders pursuant to this Section 4.
-12-
<PAGE>
4.3 Certain Definitions. For the purposes of this Section 4:
-------------------
(a) "New Securities" shall mean any shares of the Company's
--------------
Common Stock or Preferred Stock, of any class or series, whether now authorized
or not, and rights, options or warrants to purchase such Common Stock or
Preferred Stock, and securities of any type whatsoever that are, or may become,
convertible or exchangeable into such Common Stock or Preferred Stock; provided,
--------
however, that the term "New Securities" does not include:
- ------- ---
(i) shares of the Company's Common Stock (and/or related
options to purchase Common Stock) issued to employees, officers, directors
or consultants, independent contractors or advisers of the Company pursuant
to incentive agreements or plans approved by the Board of Directors of the
Company;
(ii) securities issuable upon conversion of or with respect
to Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, Series F Preferred or Series G Preferred;
(iii) shares of the Company's Common Stock or Preferred
Stock issued in connection with any stock split, subdivision, stock
dividend, reverse stock split, combination or reclassification of the
Company's shares;
(iv) securities offered to the public pursuant to a
registration statement filed under the Securities Act;
(v) securities issued by the Company pursuant to the
acquisition of another corporation or entity by the Company by merger,
purchase of substantially all of the assets, or other reorganization after
which the Company owns not less than a majority of the voting power of such
other corporation or a majority of the ownership of such other entity; or
(vi) securities issued to any real property lessor, any
equipment lessor, or any bank or other lending institution in connection
with such entity providing funds to the Company.
(b) The "Pro Rata Share" of a Shareholder for purposes of this
--------------
Section 4 shall be calculated as of the date of the relevant Company Notice and
shall be the ratio of:
(i) the sum of (A) the number of outstanding shares of
Common Stock then held by the Shareholder plus (B) the number of shares of
Common Stock issuable upon conversion in full of all shares of outstanding
Preferred Stock of the Company then held by such Shareholder; to
-13-
<PAGE>
(ii) the sum of (A) the total number of shares of Common
Stock then outstanding held by all Shareholders, plus (B) the total number
of shares of Common Stock issuable upon conversion in full of all Preferred
Stock of the Company then outstanding held by all Shareholders.
4.4 Termination. The rights of first offer under this Section 4
-----------
shall not apply to and shall terminate immediately before the closing of the
Company's Initial Public Registration.
4.5 Assignment of Right of First Offer. The rights of a Shareholder
----------------------------------
under this Section 4 may be assigned by any party who is a partnership to any of
its partners and to any party who acquires a minimum of 100,000 shares of Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred, Series F Preferred or Series G Preferred and/or Common Stock into
which such shares of Preferred Stock have been converted.
5. RIGHT OF FIRST REFUSAL.
----------------------
5.1 Company's Right of First Refusal. The Company shall have a right
--------------------------------
of first refusal (the "Right of First Refusal") on the terms set forth in this
----------------------
Section 5 to purchase shares of the Company's Registrable Securities which the
Shareholder proposes to sell, assign, transfer or otherwise dispose of.
5.2 Definitions. As used in this Section 5, any sale, assignment,
-----------
transfer or other disposition of the Company's Registrable Securities by the
Holder is referred to as a "Transfer"; any shares of Registrable Securities of
--------
the Company which the Shareholder proposes to transfer are referred to as
"Transfer Stock"; and the person to whom the Shareholder proposes to Transfer
--------------
any shares of Registrable Securities is referred to as a "Transferee".
----------
5.3 Notice. In the event the Shareholder proposes to Transfer any
------
shares of the Company's Registrable Securities, the Shareholder shall deliver a
"Notice of Proposed Transfer" to the Company. This Notice of Proposed Transfer
---------------------------
shall set forth (i) the Shareholder's bona fide intention to Transfer the
shares, (ii) the number of shares the Shareholder proposes to Transfer, (iii)
the price and material terms and conditions on which the Shareholder proposes to
Transfer such shares, and (iv) the name of the proposed Transferee.
-14-
<PAGE>
5.4 Election of Right of First Refusal.
----------------------------------
(a) The Company shall have the assignable Right of First Refusal
to purchase all shares of Transfer Stock. In order to elect its Right of First
Refusal hereunder, the Company shall deliver a written Company Notice of
Election to the Shareholder within fifteen (15) days after delivery to the
Company of the Notice of Proposed Transfer. The Company Notice of Election shall
specify the number of shares of Transfer Stock that the Company elects to
purchase. The Company shall pay for such shares of Transfer Stock within thirty
(30) days after delivery to the Company of the Notice of Proposed Transfer.
(b) In the event the Company declines to exercise its Right of
First Refusal as to all of the shares of Transfer Stock, the Company may assign
its rights hereunder to an assignee of its choice. Any purchase made by such
assignee shall be made within forty-five (45) days after delivery to the Company
of the Notice of Proposed Transfer.
(c) All shares of Transfer Stock must be purchased for the price
as is specified in the Notice of Proposed Transfer. If the terms of payment set
forth in the Notice of Proposed Transfer provide that the shares are to be
Transferred for consideration other than cash, then the Company shall pay the
fair market value for the shares of Transfer Stock to be purchased, determined
as provided in Section 5.5 hereof. At the option of the Company or its assignee,
payment may be made in cash, by cancellation of any outstanding indebtedness
owing by the Shareholder to the Company or such assignee, or by a combination
thereof.
5.5 Determination of Fair Market Value. The determination of fair
----------------------------------
market value of any shares of Transfer Stock purchased by the Company shall be
determined by the Board of Directors of the Company in good faith.
5.6 Permitted Transfers. Any Transfer Stock which is not purchased
-------------------
pursuant to the Right of First Refusal may be Transferred by the Shareholder to
any person named in the Notice of Proposed Transfer. Such Transfer Stock must be
sold at the price specified in the Notice of Proposed Transfer, and upon other
terms and conditions not materially different than those specified in the Notice
of Proposed Transfer. Any Transfer permitted under this Section 5.6 must be
consummated within ninety (90) days after the date of delivery of the Notice of
Proposed Transfer to the Company and the Purchasers.
5.7 Exempt Transfers. The provisions of this Agreement shall not
----------------
apply to a Transfer of shares of Transfer Stock by the Shareholder to its
estate, to ancestors, descendants or spouse, or any custodian or trustee for the
account of the Shareholder or its ancestors, descendants or spouse or the
transfer of shares of Transfer Stock by a corporate shareholder to any or all of
its shareholders or by a partnership shareholder to any or all of its partners
or former partners; provided that in each such case any such Transferee shall
receive and hold the Transfer Stock subject to the
-15-
<PAGE>
provisions of this Agreement and there shall be no further Transfer of such
shares unless in accordance herewith.
5.8 No Transfer on Corporate Books. The Company shall not be
------------------------------
required (i) to transfer on its books any shares of its capital stock which
shall have been sold or transferred in violation of any of the provisions of
this Agreement, or (ii) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so transferred.
5.9 Termination. The Rights of First Refusal under this Section 5
-----------
shall not apply to and shall terminate immediately before the Company's Initial
Public Registration.
6. SHAREHOLDER CONFIDENTIALITY.
---------------------------
Each Shareholder hereby agrees to safeguard against disclosure to
third parties all confidential information concerning the business of the
Company that may be disclosed to such Shareholder by reason of such
Shareholder's access to the books, records, properties or personnel of the
Company before or after the date hereof (collectively, "Company Confidential
--------------------
Information") by using reasonable secrecy measures and in no event less than the
- -----------
same degree of care as such Shareholder uses for such Shareholder's own similar
proprietary information. However, a Shareholder shall not be obligated to
maintain any such Company Confidential Information in confidence to the extent
that: (i) the Company Confidential Information is or becomes public knowledge
other than through the fault of such Shareholder; (ii) the Company Confidential
Information is or becomes available on an unrestricted basis to such Shareholder
from a source other than the Company; or (iii) the Company Confidential
Information is required to be disclosed by such Shareholder, under a court order
or governmental action, provided that such Shareholder provides not less than
ten (10) days' prior written notification to the Company of such obligation and
seeks, or allows the Company to seek, an appropriate protective order, and
provided further that disclosure solely pursuant to this clause (iii) shall not
release a Shareholder from such Shareholder's obligation to maintain
confidentiality.
7. BOARD OF DIRECTORS.
------------------
Each Shareholder acknowledges that: the holders of the Common Stock, voting
as a separate class, shall be entitled to elect one (1) director of the
Corporation. The holders of the Series A Preferred, voting as a separate class,
shall be entitled to elect one (1) director of the Corporation. The holders of
the Series B Preferred and Series C Preferred, voting together as a single
class, shall be entitled to elect one (1) director of the Corporation. The
holders of the Series D Preferred, voting as a separate class, shall be entitled
to elect two (2) directors of the Corporation. The holders of the Series G
Preferred, voting as a separate class, shall be entitled to elect one (1)
director of the Corporation. The holders of the Common Stock, the Series A
Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred, the Series E Preferred, the Series F Preferred, and the
-16-
<PAGE>
Series G Preferred, voting together as a single class, shall be entitled to
elect four (4) directors of the Corporation.
8. ANTIDILUTION RIGHTS.
-------------------
In the event that the Company grants to any purchaser of its securities
antidilution rights more favorable to such purchaser than the antidilution
rights of the holders of Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred the Company shall take such
actions as are necessary to grant to the holders of Series C Preferred, Series D
Preferred, Series E Preferred, Series F Preferred and Series G Preferred
equivalent antidilution rights.
9. MISCELLANEOUS.
-------------
9.1 Successors and Assigns. 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.
9.2 Governing Law. This Agreement shall be governed by and construed
-------------
under the internal laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California, without reference to principles of conflict of laws or choice of
laws.
9.3 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
9.4 Headings. The headings and captions used in this Agreement are
--------
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
9.5 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given (i) upon personal delivery to the party to be notified, (ii)
one (1) business day after delivery via facsimile or (iii) three (3) days after
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the Company at its principal place of business
and to the Shareholders at their respective addresses as shown on the stock
records of the Company.
9.6 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), with the written consent of the Company and Shareholders holding
a majority of the shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, Series F Preferred, Series G
Preferred and/or Common Stock into which such shares of Preferred Stock have
been converted, voting together as a
-17-
<PAGE>
class, provided that such amendment or waiver affects each class of stock
equally. In the event that such amendment or waiver would affect classes of the
Company's stock differently, then Shareholders holding a majority of the shares
of each class of stock affected, voting as separate classes, must also approve
such amendment or waiver. In the event of a subsequent closing with an investor
as provided for in Section 1.2 of that certain Series G Preferred Stock Purchase
Agreement, dated of even date herewith, by and among the Company and the
investors named therein, such investor shall become a party to this Agreement as
a "Shareholder" upon receipt from such investor of a fully executed signature
page hereto.
9.7 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms to the maximum extent possible.
9.8 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto, constitutes the entire understanding and agreement of the
parties with respect to the subject matter hereof and supersedes all prior
negotiations, correspondence, agreements, understandings, duties or obligations
among the parties with respect to the subject matter hereof.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
TUT SYSTEMS, INC.
a California corporation
By:____________________________
Name:__________________________
Title:_________________________
SHAREHOLDERS
By:____________________________
Name:__________________________
Title:_________________________
**FOURTH AMENDED AND RESTATED SHAREHOLDERS' RIGHTS AGREEMENT ***
<PAGE>
EXHIBIT A
SHAREHOLDERS OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK
---------------------------------------------------------------
Keith L. Agre
Katsuei Aoyagi
Robert J. Arthur
Bass Associates
Elijah Carter, M.D.
Pension Plan FBO
Janet Carter and Elijah Carter,
Trustees of the Elijah and Janet Carter
Revocable Trust dated July 12, 1991
Cazenove & Company
Center for Digestive Disorders Medical
Group Inc. Money Purchase Pension and
Profit Sharing Plan Trust
FBO Richard I. Levine
Roger N. Cooper & Nancy S. Cooper,
Trustees of the Cooper Family Living Trust
dated December 2, 1992, General Partner of
the C&W Family Enterprise
Ron and Zorrelle Cornell
Donald R. Dixon
Richard H. Foster
Martin & Selma Graham,
Trustees for the Graham 1987 Revocable
Trust
Charles Gray, as Trustee of the Charles M.
Gray Revocable Living Trust Dated
July 29, 1985
Harry J. Gray
Richard L. Greene
John Q. Hearne
Lee Herzikoff
HMB 1991 Gift Trust
Trustees: Gilda R. Buchbinder &
Allan B. Muchin
Individuals' Venture Fund (1995) L.P.
Maryellie K. Johnson,
Separate Property
Woodward Kingman
Howard A. Lee and Donna R. Lee
TTEES FBO The Howard Lee
and Donna Lee Family Trust
Dated 4/13/93
Irwin Lieber
Walter Jr. and Karen Loewenstern,
Trustees of the Loewenstern Family
Community Property Trust U/D/T
dated 2/19/90
John J. & Judy Machado
Robert B. Marshall
James K. McWilliams & Anne G.
McWilliams as Tenants in Common
2288 Broadway #8
San Francisco, CA 94115
Merrill Lynch, Pierce, Fenner &
Smith FBO Allan Littman IRA 270-87k09
3840 S. Wadsworth Blvd.
Lakewood, CO 80235
<PAGE>
Peter S. Redfield & Alice D. Redfield,
Trustees under Trust Agreement dated
January 2, 1979, as amended
Rosetree Partners General Partnership
Dennis E. & Renee R. Ross,
Trustees for the Dennis E. and Renee R. Ross
Intervivos Trust
Slayton & Associates, Inc.
Stanley Sokoloff
Edward Spivak & K.M. Spivak
as Community Property
George & Helene Strauss
Arthur H. & Fredna C. Stromberg
Edwin H. Taylor
Matthew Taylor
Danielson Trust Company,
TTEE FBO Edwin H. Taylor
James H. Trevor
Wedbush Morgan Securities CUST
FBO Herbert Wenks
WS Investments
Charles P. Wernig
-2-
<PAGE>
EXHIBIT B
SHAREHOLDERS OF SERIES D PREFERRED STOCK
----------------------------------------
Keith L. Agre
Patricia B. Arthur
Bass Associates
Michael Boyle
Peter T. Boyle
Gold Medal Enterprises, Inc.
Profit Sharing Plan
Janet Carter and Elijah Carter,
Trustees of the Elijah and Janet Carter
Revocable Trust, dated July 12, 1991
Cassin Family Partners, a California
Limited Partnership
Brendan Joseph Cassin and Isabel B. Cassin,
Trustees of the Cassin Family Trust
U/D/T dated January 31, 1996
James A. Chafoulias
Andrew Chase and Laura Chase
TTEES of the Chase 1991 Revocable Trust
DTD 4-2-91
Chickering, Crist, Fritschi, and Rowe, Inc.
Profit Sharing Plan
City Capital Corporation
Tillie Cohen, Trustor of the Tillie Cohen 1995
Revocable Trust Dated December 1, 1995
Roger N. Cooper & Nancy S. Cooper,
Trustees of the Cooper Family Living Trust
dated December 2, 1992
The Cowan Family Partnership
Robert S. Cowan
Robert T. Crist and Susan F. Crist,
Trustees under the 1990 Crist Trust Dated
March 9, 1990
Harbor Bank as Custodian FBO: Susan Crist
IRA
Harbor Bank as Custodian FBO: Robert Crist
IRA
Darier Hentsch Et Cie
Angelo Dellaporta, Trustee
Dellaporta Family Trust, Dtd. 8-16-82
Gerald C. Down
James Estill
Ferrier Lullian and CIE SA
John R. Fritschi, Jr.
John & Maureen Fritschi
Gael Growth Fund
Larry G. Gerdes
Leonard and Esther Goldsen
HMB 1991 Gift Trust, Trustees:
Gilda R. Buchbinder & Allan B. Muchin
Philip A. Hadley
The Trustees of the Wallace R. Hawley
and Alexandra Hawley Revocable Trust
U/A/D 07/30/92
<PAGE>
IAI Investment Funds IV, Inc.
(IAI Regional Fund)
IAI Investment Funds VI, Inc.
(IAI Emerging Growth Fund)
IAI Investment Funds VI, Inc.
(IAI Midcap Growth Fund)
IAI Investment Funds VII, Inc.
(IAI Growth & Income Fund)
IAI Investment Funds VIII, Inc.
(IAI Value Fund)
Paul K. Joas
Paul R. Kanin
Keating Technologies
Kathleen Kelly
Roy Kirkorian
Tom Kurvers
Maimon Leavitt & Peggy B. Leavitt
Intervivos Family Trust
Howard & Donna Lee
Irwin Lieber
Donald A. Lucas
Donald L. Lucas, Successor Ttee
Profit Sharing Trust dated 1-1-84
Richard M. Lucas Cancer Foundation
Robert B. Marshall
William G. Marshall
Elizabeth M. McAllister
Mr. Joel Moline
Motete Corporation
Mr. Joseph Novogratz
Neil J. Obert
Robert J. & Marion E. Oster, Trustees
Oster Family Revocable Trust
Dtd. 10-5-76, as amended
Mr. William O. Patterson
Alberto Perez
Neil Richardson
Rosetree Partners General Partnership
S and A Partners
St. Francis Growth Fund
Sand Hill Financial Company
Abraham Savitzky
Schloss Bros., L.P.
Merrill B. Shattuck
Dennis J. Sheehan
Arnold N. Silverman, Ttee
Silverman Family Trust, dtd. 6-2-88
David A. Smith & Carol A. Smith
as TTEES under David A. Smith/
Carol A. Smith Revocable Living Trust
UTAD 7/6/93
Stanford University
Arthur H. & Fredna C. Stromberg
-2-
<PAGE>
Eric M. Sutherland
Triple T. Partnership
Vanguard IV, L.P.
Dennis Vaske
Gregory and Elizabeth Vaughn
-3-
<PAGE>
EXHIBIT C
SHAREHOLDERS OF SERIES E PREFERRED STOCK
----------------------------------------
9600 Partners
Thomas D. Anderson
APEX Investment Fund II, L.P.
Argentum Capital Partners, L.P.
Patricia Arthur
Robert Arthur
Bolander Brothers, L.P.
Frederick Bolander, IRA
Michael Boyle
Peter T. Boyle
B.J. Cassin & Isabel B. Cassin
Trustees of the Cassin Family Trust
Andrew Chase and Laura Chase
TTEEs Chase 1991 Revocable Trust
Chickering, Crist, Fritschi and Rowe
Profit Sharing Plan
Tillie Cohen, Trustor of the Tillie Cohen 1995
Revocable Trust Dated December 1, 1995
Cooper Family Trust
Richard Earnest
John R. Eickhoff
Environmental Private Equity Fund II
Thomas A. Foster
John R. Fritschi, Jr.
Larry Gerdes
Leonard & Esther Goldsen
Harry Gray
IAI Investment Funds VI, Inc.
(IAI Emerging Growth Fund)
IAI Investment Funds IV, Inc.
(IAI Regional Fund)
Paul R. Kanin
LMRN, L.P., a California LTD
Stella & Leonard Kleinrock
Family Trust
Gary Kreman
John Kujvanhoven
Thomas Kurvers
Howard & Donna Lee
Donald Lucas
Elizabeth M. McAllister
Robert B. Marshall
William Marshall
Mutual Ventures of South Dakota
William O. Patterson
<PAGE>
The Productivity Fund II
Rosetree Partners
Dr. William Sahlman
Abraham Savitzky
Schloss Bros., L.P.
Merrill B. Shattuck
Stanley Sokoloff
George & Helen Strauss
Eric M. Sutherland
Triple T Partnership
Vanguard IV, L.P.
Dennis Vaske
Wedbush Morgan Securities CUST
FBO Herbert Wenks
<PAGE>
EXHIBIT D
SHAREHOLDERS OF SERIES F PREFERRED STOCK
----------------------------------------
APEX Investment Fund II, L.P.
Apex Investment Fund III, L.P.
Venture Fund I, L.P.
AT&T Venture Fund II, L.P.
Brad Peery Capital Inc.
Brad Peery Capital Ventures, L.P.
Brendan Joseph Cassin and Isabel B. Cassin,
Trustees of the Cassin Family Trust U/D/T
dated January 31, 1996
John R. Eickhoff
Environmental Private Equity Fund II, L.P.
IAI Investment Funds VI, Inc.
(IAI Emerging Growth Fund)
IAI Investment Funds IV, Inc.
(IAI Regional Fund)
Individuals' Venture Fund (1994) L.P.
Individuals' Venture Fund (1995) L.P.
Stella and Leonard Kleinrock 1990 Trust
(CUID 8/28/90)
Thomas J. Kurvers
LMRN, L.P., a California Limited Partnership
The Productivity Fund II, L.P.
Linda Seale
Merrill B. Shattuck
Spectrum Equity Investors, L.P.
Unterberg Harris InterActive Media Limited
Partnership, C.V.
Vanguard IV, L.P.
Dennis Vaske
Velocity Technology and Communications
Trust B
<PAGE>
EXHIBIT E
SHAREHOLDERS OF SERIES G PREFERRED STOCK
----------------------------------------
MICROSOFT CORPORATION
ITOCHU INTERNATIONAL, INC.
VENTURE FUND I, L.P.
AT&T VENTURE FUND II, L.P.
SPECTRUM EQUITY INVESTORS, L.P.
VELOCITY TECHNOLOGY AND
COMMUNICATIONS TRUST B
IAI INVESTMENT FUND VI, INC. -- IAI
EMERGING GROWTH FUND
UNTERBERG, HARRIS INTERACTIVE
MEDIA LIMITED PARTNERSHIP C.V.
APEX INVESTMENT FUND II, LP
IAI INVESTMENT FUND IV, INC. --
IAI REGIONAL FUND
THE INDIVIDUALS' VENTURE FUND
(1994) L.P.
APEX INVESTMENT FUND III, LP
VANGUARD IV, L.P.
THE INDIVIDUALS' VENTURE FUND
(1995) L.P.
ARGENTUM CAPITAL PARTNERS, L.P.
BRAD PEERY CAPITAL INC.
RICHARD L. GREENE
JOHN R. FRITSCHI, JR. AND
MAUREEN L. FRITSCHI
ROBERT B. MARSHALL
CPQ HOLDINGS, INC.
ROBERT T. CRIST AND SUSAN F.
CRIST, TRUSTEES UNDER THE 1990
CRIST TRUST DATED MARCH 9, 1990
POINT COMMUNICATIONS COMPANY
CHASE 1991 REVOCABLE TRUST DTD
4-2-91, ANDREW OR LAURA CHASE,
TRUSTEE
CLAUDIA DENCKER
WILLIAM H. WARREN
INTEL CORPORATION
GIORGIO VANZINI
-2-
<PAGE>
ENVIRONMENTAL PRIVATE EQUITY
FUND II, LP
THE PRODUCTIVITY FUND II, LP
PAUL R. KANIN
MERRILL B. SHATTUCK
GRAHAM 1987 REVOCABLE TRUST,
MARTIN & SELMA GRAHAM,
TRUSTEES
-3-
<PAGE>
EXHIBIT 10.6
[LETTERHEAD OF WENBERG REALTY COMPANY APPEARS HERE]
This Lease, made at SAN FRANCISCO, CALIFORNIA this 4TH day of APRIL, 1995, by
and between PLEASANT HILL INDUSTRIAL PARK ASSOCIATES A CALIFORNIA
LIMITED PARTNERSHIP
PARTIES and TUTSYSTEMS, INC.
hereinafter called respectively Lessor and Lessee, without regard
to number or gender,
PURPOSE WITNESSETH: That Lessor hereby leases to Lessee, and Lessee
hires from Lessor, for the purpose of conducting therein the
development, sales and distribution of electronic products and
related uses and for no other purpose, those certain premises
with the appurtenances, situated in the City of Pleasant Hill
PREMISES County of Contra Costa, State of California, and more
particularly described as follows, to-wit
Approximately 11,170 square feet more commonly known and
designated as 2495 Estand Way, Pleasant Hill, California.
TERM The term shall be for THREE (3)---------------------------
years commencing on the 1st day of JUNE , 1995, and ending on the
31st day of MAY , 19 98, at the following rent in lawful money of
the United States of America, which Lessee agrees to pay to
Lessor, without deduction or offset, at such place or places as
may be designated from time to time by Lessor, in installments as
follows:
RENT
The sum of NINE THOUSAND ONE HUNDRED TWENTY-SEVEN AND 50/100
($9,127.50) DOLLARS on the first day of June, 1995 and the
further sum of NINE THOUSAND ONE HUNDRED TWENTY-SEVEN AND 50/L00
($9,127.50) DOLLARS on the first day of each and every month
thereafter to and including the first day of November, 1996;
thereafter the sum of NINE THOUSAND NINE HUNDRED SEVENTY-NINE AND
40/100 ($9,979.40) DOLLARS on the first day of December, 1996 and
the further sum of NINE THOUSAND NINE HUNDRED SEVENTY-NINE AND
40/100 ($9,979.40) DOLLARS on the first day of each and every,
month thereafter to and including the first day of May, 1998.
LEASE All rent payments should be made payable to LOWENBERG
-----------------------------------------------------
CORPORATION.
------------
It is further mutually agreed between the parties as follows:
POSSESSION 1. If Lessor, for any reason whatsoever, cannot deliver
possession of the said premises to Lessee at the commence of
the said term. as hereinbefore specified, this lease shall not be
void or voidable, nor shall Lessor be liable Lessee for any loss
or damage resulting therefrom; but in that event there shall be a
proportionate deduction of recovering the period between the
commencement of the said term and the time when Lessor can
deliver possession.
WASTE 2. Lessee shall not commit, or suffer to be committed, any
ALTERATIONS waste upon the said premises, or any nuisance, or other act or
thing which may disturb the quiet enjoyment of any other tenant
in the building in which the demised premises may be located.
Lessee shall not make, or suffer to be made, any alterations of
the said premises, or any part thereon without the written
consent of Lessor first had and obtained, and any additions to,
or alterations of, the stud premises except movable furniture and
trade fixtures, shall become at once a part of the realty and
belong to Lessor.
<PAGE>
ABANDONMENT 3. Lessee shall not vacate or abandon the premises at any
time during the term; and if Lessee shall abandon, vacate or
surrender said premises, or be dispossessed by process of law, or
otherwise, any personal property belonging to Lessor and left on
the premises shall be deemed to be abandoned, at the option of
Lessor, except such property as may be under a security agreement
with Lessor.
USES 4. Lessee shall not use, or permit said premises, or any
PROHIBITED part thereof, to be used, for any purpose or purposes other than
the purpose or purposes for which the said premises are hereby
leased; and no use shall be made or permitted to made of the said
premises, nor acts done, which will increase the existing rate of
insurance upon the building in which said premises may be
located, or cause a cancellation of any insurance policy covering
said building, or any part there nor shall Lessee sell, or permit
to be kept, used, or sold, in or about said premises, any article
which may be prohibited the standard form of fire insurance
policies. Lessee shall, at his sole cost and expense, comply with
any and all requirements, pertaining to said premises, of any
insurance organization or company, necessary for the maintenance
reasonable fire and public liability insurance, covering said
building and appurtenances.
FREE 5. Lessee shall keep the demised premises and the property
FROM LIENS in which the demised premises are situated, free from: any liens
arising out of any work performed, materials furnished, or
obligations incurred by Lessee.
COMPLIANCE 6. Lessee shall, at his sole cost and expense, comply with
WITH all of the requirements of all Municipal, State and Federal
GOVERNMENTAL authorities now in force, or which may hereafter be in force,
REGULATIONS pertaining to the said premises, and shall faithfully observe
in the use of the premises all Municipal ordinances and State and
Federal statutes now in force or which may hereafter in force.
The judgment of any court of competent jurisdiction, or the
admission of Lessee in any action or proceed against Lessee.
whether Lessor be a party thereto or not, that Lessee has
violated any such ordinance or statute in the of the premises,
shall be conclusive of that fact as between Lessor and Lessee.
INDEMNIFICA- 7. Lessee, as a material part of the consideration to be
TION OF rendered to Lessor, hereby waives all claims against Lessor for
LESSOR damages to goods, wares, merchandise and other personal property,
in, upon or about said premises and for injures to persons in or
about said premises, from any cause arising at any time, and
Lessee will hold Lessor exempt and harm from any damage or injury
to any person, or to the goods, wares, merchandise and other
personal property of any per arising from the use of the premises
by Lessee, or from the failure of Lessee to keep the premises in
good condition repair, as herein provided.
UTILITIES 8. Lessee shall pay for all water, gas, heat, light, power,
telephone service, sewer service charge and all other services:
supplied to the said premises, together with any taxes thereon.
ENTRY BY 9. Lessee shall permit Lessor and his agents to enter into
LESSOR and upon said premises at all reasonable times for the pose of
inspecting the same or for the purpose of maintaining the
building in which said premises are situated, or for purpose of
making repairs, alterations or additions to any other portion of
said building, including the erection maintenance of such
scaffolding, canopies, fences and props as may be required, or
for the purpose of posting notice non-liability for alterations,
additions, or repairs, or for the purpose of placing upon the
property in which the premises are located any usual or ordinary
for sale signs, without any rebate of rent and without any
liability to Lessee for any loss of occupation or quiet enjoyment
of the premises thereby occasioned; and shall permit Lessor, at
any within thirty days prior to the expiration of this lease, to
place upon said premises any usual or ordinary "to signs.
DESTRUCTION 10. In the event of a partial destruction of the said
OF premises during the said term. from any cause. Lessor forthwith
PREMISES repair the same. provided such repairs can be made within sixty
(60)days under the laws and regulations State, Federal, County or
Municipal authorities, but such partial destruction shall in no
wise annul or void this lease except that Lessee shall be
entitled to a proportionate deduction of rent while such repairs
are being made, such proportionate deduction to be based upon the
extent to which the making of such repairs shall interfere with
the business carried on by Lessee in the said premises. If such
repairs cannot be made in sixty (60) days, Lessor may, at his
option, same within a reasonable time, this lease continuing in
full force and effect and the rent to be proportionately rebate
aforesaid in this paragraph provided. In the event that Lessor
does not so elect to make such repairs which cannot made in sixty
(60) days, or such repairs cannot be made under such laws and
regulations, this lease may be terminate the option of either
party. In the event that the building in which the demised
premises may. be situated be destroy the extent of not less than
33 1/3% of the replacement cost thereof, Lessor may elect to
terminate this lease, whether demised premises be injured or not.
A total destruction of the building in which the said premises
may be situated terminate this lease. Lessee waives any right to
terminate this lease as a result of any statutory provision now
or here in effect pertaining to the damage or destruction of the
demised premises or the building of which the demised premises
are a portion except as expressly provided herein.
ASSIGNMENT 11. Lessee may assign this lease or any interest therein and
AND may also sublet the whole of said premises, provide written
SUBLETTING consent of Lessor to any such assignment or subletting is first
obtained by Lessee. If, during the term of this Lessee requests
the written consent of Lessor to any such assignment or
subletting, Lessor's consent thereto shall unreasonably be
withheld. A consent to one assignment or subletting shall not be
deemed to be a consent to any subsequent assignment or
subletting, and any such subsequent assignment or subletting
without Lessor's consent shall be and shall, at Lessor's option,
terminate this lease. This lease shall not, nor any interest
therein, be assignable the interest of Lessee by operation of law
without the written consent of Lessor, but such shall not
unreasonably be withheld. In the event that the demised premises
are assigned or subleased at a rental consideration in excess of
the then current rent, then all of such excess shall be paid to
the lessor as additional rent thereunder.
<PAGE>
INSOLVENCY 12. In addition to any and all rights or remedies of Lessor
OR hereunder or as provided by law, the term of this Lease may be
BANKRUPTCY ended at the option of Lessor and Lessor, at its option, may
reenter and take possession of the demised premise and remove all
persons therefrom and, upon the exercise of such option by
Lessor, Lessee shall have no further claim in or to the demised
premises, and the Lease Agreement and any interest in or to the
demised premises shall no longer be an asset of the Lessee or any
successor in interest, if any one or more of the following events
occur:
(a) Lessee admits in writing its inability to pay its debts
as they come due;
(b) Lessee makes, to its unsecured creditors generally, an
offer of settlement, extension or composition;
(c) Lessee makes an assignment for the benefit of creditors;
(d) Lessee files any petition or action for relief under the
provisions of any bankruptcy, reorganization, insolvency or
moratorium law, or any other law or laws for the relief of, or
relating to, debtors;
(e) Lessee is the subject of an involuntary petition or
similar action for relief under any bankruptcy, reorganization
insolvency, or moratorium law, or any other law or laws for the
relief of, or relating to, debtors;
(f) A receiver or trustee is appointed, with or without
Lessee's consent, to take possession of all or part of the assets
or properties of Lessee.
In the event that any one or more of the preceding events
shall occur, failure by Lessor to assert immediately its right to
reenter and take possession of the demised premises or to
exercise any other rights or remedies granted to Lessor by law,
or hereunder shall not constitute a waiver of any such right or
remedy nor shall Lessor be estopped to assert, at a late time,
any such right or remedy.
DEFAULT 13. In the event of any breach of this lease by Lessee, then
Lessor, besides other rights and remedies he may have shall have
the immediate right of re-entry and may remove all persons and
property from the premises. If Lessor`s right (re-entry is
exercised following abandonment of the premises by Lessee, then
Lessor may consider any personal property belonging to Lessee and
left on the premises to also have been abandoned, in which case
Lessor may dispose of all such personal property in any manner
Lessor shall deem proper and is hereby relieved of all liability
for doing so.
If Lessee breaches this lease and abandons the property
before the end of the term, or if Lessee's right to possession
terminated by Lessor because of a breach of the lease, then in
either such case, Lessor may recover from Lessee a damages
suffered by Lessor, as the result of Lessee's failure to perform
his obligations hereunder, including, but not, restricted to, the
worth at the time of the award by the court having jurisdiction
thereof of the amount by which the re then unpaid hereunder for
the balance of the lease term exceeds the amount of such rental
loss for the same period which Lessee proves could be reasonably
avoided by Lessor, and in such case, Lessor, prior to the award,
may relet the premises for the purpose of mitigating damages
suffered by Lessor because of Lessee s failure to perform his
obligation hereunder; provided, however, that even though Lessee
has abandoned the premises raises following such breach, this
lease shall nevertheless continue in full force and effect for as
long as Lessor does not terminate Lessee's right of possession,
or until such termination, Lessor may enforce all his rights and
remedies under this lease, including the right to recover the
rent from Lessee as it becomes due hereunder.
REPAIRS 14. Lessee shall, at his sole cost, keep and maintain said
premises and appurtenances and every part thereof (excepting
exterior walls and roofs which Lessor agrees to repair),
including glazing, silks adjacent to said premise parking areas,
driveways, lighting standards, landscaping and Striping. any
store front and the interior of the premises in good and sanitary
order, condition and repair, hereby waiving the benefits of any
statute now or hereafter in effect which would otherwise afford
Lessee. the right to make repairs at Lessor's expense or to
terminate this lease because Lessor s failure to keep the
premises in good order, condition and repair. By entry hereunder,
Lessee accepts the premises as being in good and sanitary order,
condition and repair and agrees on the last day of said term. or
sooner termination of this lease, to surrender unto Lessor all
and singular said premises with said appurtenances in the same
condition when received, reasonable use and wear thereof and
damage by fire. act of God or by the elements excepted, and
remove all of Lessee's signs from said premises.
ADVERTISE- 15. Lessee shall not conduct or permit to be conducted any
MENTS AND sale by auction on said premises. Lessee shall not place permit
SIGNS to be placed any projecting sign, marquee or awning on the front
of the said premises without the written consent of Lessor;
Lessee, upon request of Lessor, shall immediately remove any sign
or decoration which Lessee has placed permitted to be placed in,
on, or about the front of the premises and which, in the opinion
of Lessor, is objectionable offensive, and if Lessee fails so to
do, Lessor may enter upon said premises and remove the same.
Lessor has reserved to exclusive right to the two exterior
sidewalls, rear wall and roof of said premises, and Lessee shall
not place or permit to be placed upon the said sidewalls, rear
wall or roof, any sign, advertisement or notice without the
written consent of Lessor.
SURRENDER 16. The voluntary or other surrender of this lease by
OF LEASE Lessee, or a mutual cancellation thereof, shall not work merger,
and shall, at the option of the Lessor, terminate all or any
existing subleases or subtenancies, or may, at the option of
Lessor. operate as an assignment to him of any or all such
subleases or subtenancies.
CONDEMNATION 17. If any part of the demised premises shall be taken or
condemned for a public or quasi-public use, and a part thereof
remains which is susceptible of occupation hereunder, this lease
shall, as to the part so taken, terminate as of the date title
shall vest in the condemnor, and the rent payable hereunder shall
be adjusted so that the Lessee shall be required to pay for the
remainder of the term only such portion of such rent as the value
of the part remaining after condemnation bears to the value of
the entire premises at the date of condemnation; but in such
event Lessor shall have the option to terminate this lease as of
the date when title to the part so condemned vests in the
condemnor. If all of
<PAGE>
demised premises, or such part thereof be taken or condemned so
that there does not remain a portion susceptible for occupation
hereunder, this lease shall thereupon terminate. If a part or all
of the demised premises be taken or co condemned, all
compensation awarded upon such condemnation or taking shall go to
the Lessor and the Lessee shall ha no claim thereto, and the
Lessee hereby irrevocably assigns and transfers to the Lessor any
right to compensation damages to which the Lessee may become
entitled during the term hereof by reason of the condemnation of
all or a part of the demised premises.
ATTORNEY'S 18. In case suit is brought by either party because of the
FEES breach of any term, covenant or condition herein contained the
prevailing party shall be entitled to recover against the other
party a reasonable attorney's fee to be fixed by the court
ARBITRATION 19. In the event of a dispute between Lessor and Lessee
relative to the provisions of this lease, the matter shall
determined by competent and disinterested arbitrators, one of
whom shall be selected and paid by Lessor and c selected and paid
by Lessee. Each party shall notify the other party the name and
address of the arbitrator so select within 15 days after a
written request for arbitration has been given by one party to
the other. In the event these two c not agree within 30 days
after their appointment, the arbitrators shall select a competent
and disinterested party as ~ third arbitrator, the expense to be
borne equally by Lessor and Lessee. In the event these two do not
so select a third arbitrator within the next 15 days. then the
third arbitrator shall be appointed by the President of the
Chamber of Commerce of San Francisco, State of California, upon
the request of either party. The decision of any two of the three
arbitrators so chosen shall be final and conclusive on the
parties hereto. The decision of the arbitrators shall be in
writing and a copy thereof shall be given to Lessor and Lessee
within 90 days after the date of the request for arbitration.
SECURITY 20. Lessee shall deposit with Lessor upon execution hereof
DEPOSIT the sum of $10,223.25 to be transferred from existing deposits on
------------------------------------------------------
2446 and 2450 Estand Way, Pleasant Hill, CA (Lease dated 7/26
-------------------------------------------------------------
Extensions dated ($10,223.25) Dollars as security for Lessee's
-----------------------------
faithful performance of Lessee's obligations hereunder, Lessee
fails to pay rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this lea Lessor may
use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default, for the payment
of any other sum to which Lessor may become obligated by reason
of Lessee's default, or to compensation Lessor for any loss or
damage which Lessor may suffer thereby. If Lessor so uses or
applies all or any portion of such deposit. Lessee shall within
ten (10) days after written demand therefor, deposit cash with
Lessor in an amount sufficient to restore said deposit to the
full amount hereinabove stated and Lessee's failure to do so
shall be a breach of this Lessee and Lessor may at its option
terminate this lease. Lessor shall not be required to keep said
deposit separate from general accounts. If Lessee performs all of
Lessee's obligations hereunder, said deposit or so much thereof
as had theretofore been applied by Lessor, shall be returned
without payment of interest or other increment for its use, to
Lessor (or, at Lessors option, to the last assignee, if any, of
Lessee's interest hereunder) within fifteen (15) days after the
expiration of the term thereof, or after Lessee has vacated the
premises, whichever is later.
TAXES AND 21. In the event that in any tax year during the term of
ASSESSMENTS this lease the amount of the Municipal, State or County Federal
Estate taxes including the amount of any general or special
assessments, or levies or charges made by any municipal political
subdivision for local improvements shall exceed the amount of
such taxes including such general or special assessments, levies
or charges for the fiscal year 1994 - 1995, the Lessee shall pay
to the Lessor for such year upon demand an amount equal to 12 %
of the total increase in such taxes, assessments, levies and
charges upon whole of the land and building upon and within which
the leased premises are situate, whether such increase is caused
increased or added rate or increased assessed valuation or by
increase in, or by reason of any new, general or special
assessment. It is understood that, if the right to pay any
assessments in installments is given to Lessor then for the poses
of this paragraph it shall be deemed that the same are paid in
such installments regardless of whether or not Lessor may pay the
same in one sum or in any larger amounts than the installment
basis.
It is agreed that any increase in taxes caused by an
increase in assessed valuation due to work done in the demised
premises by Lessee or by work done in any other parts of the
building by Lessor or any other tenant in the building s not be
included in computing the amount of increase in taxes to be paid
by Lessee under the preceding paragraph of Paragraph 21, but
shall be computed separately in the following manner:
1. Any increase in taxes caused by an increase in assessed
valuation due to the work done by Lessee in the demised premises
at any time during said term shall be borne entirely by Lessee.
2. If there is any increase in taxes caused by work done in
any other parts of the building by Lessor or by any of tenant in
the building, the Lessee shall not be responsible for any portion
of such increase in taxes.
The amount of Lessee's obligation under this paragraph for
the year in which this lease terminates shall be prorated. in the
proportion that the period this lease is in effect during the tax
year in which this lease terminates bears to the tax year.
Lessee also shall pay, before delinquency, any and all taxes
levied or assessed and which become payable during term hereof
upon Lessee's equipment, furniture, fixtures and other personal
property located in the premises: In a tion to rental and other
charges to be paid by Lessee hereunder, Lessee shall reimburse to
Lessor, upon demand, any all taxes payable by Lessor (other than
net income taxes) whether or not now customary or within the
contemplation the parties hereto; (a) upon, allocable to, or
measured by or on the rental patentable hereunder, including,
without limitation, any gross income tax or excise tax levied by
the State, any political subdivision thereof, or Federal
Government respect to the receipt of such rental: or (b) upon or
with respect to the possession, leasing, operation, management
<PAGE>
maintenance, alteration, repair, use or occupancy by Lessee of
the premises or any portion thereof; or (c) upon or measured by
the value of Lessee's equipment, furniture, fixtures and other
personal property located in the premises or by the cost or
value of any leasehold improvements located in the premises; or
(d) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the
premises; or (e) any tax or charge made by any authority having
jurisdiction upon any automobile parking facilities used by
Lessee and any sewer tax, water control tax or Environmental
Quality Control charge.
ADJUSTMENT 22. The monthly rental in the amount of $9,979.40, set forth
IN RENT above shall be increased on JUNE 1, 1998
in the same proportion that the Consumer Price Index figure
published by the United States Department of Labor Bureau of
Labor Statistics, all items retail for San Francisco-Oakland for
the month prior to the adjustment month bears to the Consumer
Price Index figure for the month prior to the month in which
lease commences (1967 = 100) hereinafter called "basic index
figure, provided, however, that in no event shall the monthly
rental for any such period be less than the monthly rental being
paid by Lessee immediately prior to such adjustment.
If prior to the effective date of any rental adjustment the
Bureau of Labor Statistics should revise or change the methods or
basic data used in calculating the said index, in such a way as
to affect the direct comparabiluty of such revised or changed
index, with the original index used herein, then the Bureau shall
be requested to furnish a conversion factor designed to adjust to
the new basis, the said original index.
If said Consumer Price Index, as now constituted, compiled
and published shall cease to be compiled and publish during the
term hereof, then the Bureau of Labor Statistics shall be
requested to furnish a statement conveying the basis index figure
to a figure that would be comparable in another index published
by the Bureau of Labor Statistics and such other index shall be
used in computing the rental increase provided above.
If no such conversion or other index is available, then the
said rental increase shall be determined by arbitration the
manner provided in Paragraph 19 hereof.
INSURANCE 23. Lessee agrees during the full term of this lease to
carry comprehensive bodily injury insurance covering the demised
premises, its appurtenances and ways immediately adjoining,
including any parking areas and driveways that may be used by
Lessee, in a single limit of $1,000,000 for injury or death to
any number of persons in any one occurrence, property damage
insurance in the amount of $100,000.00 and plate glass insurance
in Companies satisfactory to the Lessor, in the joint names of
the Lessor and Lessee, and to pay the premiums therefor and to
deliver said policies or certificates thereof, unto the Lessor,
and the failure of the Lessee either to effect said insurance in
the names here called for or to pay the premiums therefor or to
deliver said policies, or certificates, thereof, unto the Lessor
shall permit the Lessor to effect said insurance and to pay the
requisite premiums therefor, which premiums shall be repayable un
him with the next installment of rental, and failure to repay the
same shall carry with it the same consequence as failure to pay
any installment of rental. Each insurer mentioned in this
paragraph shall agree, by endorsement upon the policy or policies
issued by it, or by independent instrument furnished to the
Lessor, that it will give the Lessor 30 days written notice
before the policy or policies in question shall be altered or
cancelled.
NOTICE 24. Whenever it is required that any notice be given
hereunder, the same shall be sufficiently served by depositing
the same in the United States Mail, postage prepaid, and
addressed to the addresses set forth below:
To Lessor at: 44 Montgomery Street
San Francisco, California 94104
To Lessee at: 2495 Estand Way
Pleasant Hill, CA 94522
or to such other addresses as a party may designate by written
notice to the other party in the manner herein provided.
LESSOR'S 25. The term "Lessor", as used in this Paragraph, shall mean
LIABILITY only the owner or owners at the time in question of the fee title
or its interest in a ground lease of the Premises, and in the
event of any transfer of such title or interest, Lessor herein
named (and in case of any subsequent transfers the then grantor)
shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be
performed, provided that any funds in the hands Lessor or the
then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grant. The obligations
contained in this Lease to be performed by Lessor shall be
binding on Lessor's Successors and assigns only during their
respective periods of ownership.
WAIVER 26. The waiver by Lessor of any breach of any term, covenant
or condition herein contained shall not be deemed be a waiver of
Such term. covenant or condition or any subsequent breach of the
same or any other term, covenant condition therein contained. The
subsequent acceptance of rent hereunder by Lessor shall not be
deemed to be a wavier of any preceding breach by Lessee of any
term, covenant or condition of this lease, other than the failure
of Lessee to ??? the particular rental so accepted, regardless of
Lessors knowledge of such preceding breach at the time of
acceptance such rent.
<PAGE>
HOLD OVER 27. Any holding over after the expiration of the said term,
with the consent of Lessor, shall be construed to be a tenancy
from month to month, at a rental in the amount of the last
monthly rental plus all other charges payable hereunder, and
shall otherwise be on the terms and conditions herein specified,
so far as applicable.
SUCCESSORS 28. The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of all
of the parties hereto; and all of the parties hereto shall be
jointly and severally liable hereunder.
TIME 29. Time is of the essence of this lease.
CAPTIONS 30. The captions in the margins of this lease are for
convenience only and are not a part of this lease and do not in
any way limit or amplify the terms and provisions of this lease.
SUBORDINATION 31. The Lessee covenants that this lease is and at all times
shall be subject and subordinate to the lien of any mortgage or
deed of trust now existing or which the Lessor or any subsequent
owner of the demised premises shall make covering said demised
premises or the building of which said premiums are a part, and
to any and all advances made or to be made under or upon said
mortgage or deed of trust, and to the interest thereon.
Notwithstanding such subordination Lessee's right to quiet
possession of the premises shall not be disturbed if Lessee is
not in default hereunder and so long as Lessee shall pay the rent
and observe and perform all of the provisions of this lease.
ESTOPPEL 32. Lessee shall at any time and from time to time upon not
CERTIFICATE less than ten (10) days prior written notice from Lessor execute,
acknowledge and deliver to Lessor a statement in writing (i)
certifying that this Lease is unmodified and in full force and
effect (or, if modified stating the nature of such modification
and certifying that this Lease as so modified, is in full force
and effect) and the dates to which the rental and other charges
are paid in advance, if any, and (ii) acknowledging that there
are not, to Lessee's knowledge, any uncured defaults on the part
of Lessor hereunder, or specifying such defaults if any are
claimed. Any such statement may be relied upon by any prospective
purchaser or encumbrancer of all or any portion of the real
property of which the premises are a part. Lessee s failure to
deliver such statement within such time shall be conclusive upon
Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii)
that not more than one month's rental has been paid in advance
SPECIAL 33. Special provisions of this Lease numbered --------34
PROVISIONS ---------through ----------40--------are attached hereto and are
made a part hereof.
34. All base rent, additional rent and all other sums which may
from time to time become due and payable by Lessee to Lessor
under any of the provisions of this Lease shall bear interest
from and after the due date thereof at the greater of ten percent
(10%), or the maximum rate of interest permitted by law.
35. During the full term of this Lease, Lessee shall carry, at
its expense, insurance against loss and damage by fire with an
"All Risk" endorsement for the full insurable value of Lessee's s
merchandise, trade fixtures, furnishings, operating equipment and
personal property, including wall coverings, carpeting and
drapes, if installed by Lessee.
IN WITNESS WHEREOF, the parties hereto have executed this lease
the day and year first above written.
LESSORS LESSEES
PLEASANT HILL INDUSTRIAL PARK TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP BY:/S/ MICHAEL SULLIVAN, V.P.
- ------------------------------------- -------------------------------
LOWENBERG HOLDINGS, GENERAL PARTNER
WILLIAM J. LOWENBERG, ITS PRESIDENT
- -------------------------------------- --------------------------------
- -------------------------------------- --------------------------------
This lease has been prepared for submission to your attorney for his
approval. No representation or recommendation is made by Lowenberg Realty
Company, or its agents or employees as to the legal sufficiency, legal effect,
or tax consequences of this lease or the transaction relating thereto.
<PAGE>
36. Lessee warrants that it shall not make any use of the
Premises which may cause contamination of the building and
improvements, the soil or ground water and hereby indemnifies and
agrees to hold Lessor harmless from any claim for damages arising
from any contamination caused by Lessee's use Of the Premises
including, but not limited to, damage to Lessor's property, the
property of any third party or personal injury to any person, and
any attorneys' fees in connection with any actions which may
arise from any contamination caused by, Lessee or Lessee's
agents. The indemnification given hereunder shall be continuing
and shall survive the termination of the Lease term.
37. Provided Lessee has satisfactorily performed all terms and
conditions of this Lease, Lessee shall have the option to extend
this Lease for one additional consecutive two-year term, at a
rental to be based on the Consumer Price Index and in accordance
with Paragraph 22 of the herein Lease.
Lessee to provide Lessor written notice of its intention to
exercise this option on or before 90 days prior to the expiration
of the initial term of this Lease.
38. If Lessee does not exercise the option to renew as per
Paragraph 37 of this Lease, then Lessee shall pay and deliver to
Lessor on or before the last day of this Lease a check in the
amount of $10,000 for unamortized tenant improvements.
39. Lessor agrees to grant to Lessee a First Right of Refusal on
approximately 5000 square feet currently vacant (adjacent to
their existing space).
Lessee agrees to take this space on an "as is" basis, at a rate
of 65c per square foot per month.
If Lessee, within 3 calendar days after receipt of Lessor's
notice, indicates in writing its agreement to lease the spaces
the space shall be included within the premises and leased to
the. Lessee pursuant to the provisions of this Lease. However,
the rent payable under this lease shall be increased by the
amount of rent attributed to the additional space leased by
Lessee. The parties shall immediately execute an amendment to he
Lease stating the addition of the expansion space, to the
premises.
If the Lessee does not indicate within three calendar days its
agreement to lease the additional space, Lessor thereafter shall
have the right to lease the space to a third party, and this
option to expand premises shall be of no further force and
effect.
40. Each Option granted to Lessee in this Lease is personal to
Lessee and may not be exercised or be assigned voluntarily or
involuntarily, by or to any person or entity other than Lessee.
-7-
<PAGE>
EXTENSION OF LEASE
------------------
This EXTENSION OF LEASE made this 3rd day of March, 1998, by and between
PLEASANT HILL INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP,
LESSOR, AND TUTSYSTEMS, INC., LESSEE herein after respectively called "Lessor"
and "Lessee".
WITNESSETH
1. On April 4, 1995 a Lease was executed and on November 11, 1998 an Amendment
to Lease was executed by and between PLEASANT HILL INDUSTRIAL PARK
ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, Lessor, and TUTSYSTEMS, INC.,
Lessee, for those certain premises commonly known and desigated as 2495
Estand Way, Pleasant Hill, CA.
2. The parties do hereby agree to:
a. Extend the term of the Lease three years from June 1, 1998 to May 31,
2001.
b. The monthly rental shall be payable as follows to LOWENBERG
CORPORATION: The sum of SEVENTEEN THOUSAND TWO HUNDRED SEVENTY-FOUR AND
80/100 ($17,274.80) DOLLARS commencing on the first day of June, 1998
and continuing on the first day of each and every month thereafter to
and including the first day of November, 1999; thereafter, the sum of
EIGHTEEN THOUSAND FOUR HUNDRED ELEVEN AND 30/100 ($18,411.30) DOLLARS
commencing the first day of December 1999 and continuing on the first
day of each and every month thereafter to and including the first day
of May 2001. As additional rent Lessee agrees to pay $200 per month for
water.
c. Provided Lessee has satisfactorily performed all terms and conditions
of this Lease, Lessee shall have the option to extend this Lease for
one additional consecutive two (2) year term at a rental rate to be
negotiated. Lessee to provide Lessor written notice of its intention to
exercise this option on or before 120 days prior to the expiration of
the initial term of this Lease.
d. Each Option granted to Lessee in this Lease are personal to Lessee and
may not be exercised or be assigned voluntarily or involuntarily, by or
to any person or entity other than Lessee.
3. All other terms and conditions of the above Lease shall remain the same.
IN WITNESS WHEREOF, the undersigned "Lessor" and "Lessee" have executed these
presents the day and year first above mentioned.
Lessor: PLEASANT HILL INDUSTRIAL PARK LESSEE: TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA
LIMITED PARTNERSHIP
By /s/William J. Lowenberg By /s/ Nelson B. Caldwell
----------------------------------- -----------------------------------
LOWENBERG HOLDINGS, GENERAL PARTNER
WILLIAM J. LOWENBERG, ITS PRESIDENT
<PAGE>
AMENDMENT TO LEASE
------------------
This AMENDMENT TO LEASE made this 11th day of November, 1996, by and between
PLEASANT HILL INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP,
LESSOR, AND TUTSYSTEMS, INC., LESSEE herein after respectively called "Lessor"
and Lessee".
WITNESSETH
1. On April 4, 1995 a Lease was executed by and between PLEASANT HILL
INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, lessor, and
TUTSYSTEMS, INC., lessee, for those certain premises commonly known and
designated as 2495 Estand Way, Pleasant Hill, CA.
2. The parties do hereby agree to:
a. Increase the rentable square footage by 10,560 square feet as Lessee
--------
agrees to lease the adjacent space to the north of their current unit
in addition to 2495 Estand Way, Pleasant Hill, California. The new
total square footage commencing January 1, 1997 is 22,730 square foot.
b. The monthly rental shall be payable as follows to LOWENBERG
CORPORATION: The sum of SIXTEEN THOUSAND FIVE HUNDRED SEVENTY-NINE AND
40/100 Dollars ($16,579.40) DOLLARS commencing on the first day of
January, 1997 and continuing on the first day of each and every month
thereafter to and including the first day of May, 1998. As additional
rent Lessee agrees to pay $150 per month for water.
c. Lessee shall deposit with Lessor upon execution hereof the sum of Six
Thousand Three Hundred Fifty-Six and 15/100 ($6,356.15) Dollars
payable to Lowenberg Corporation as additional security deposit making
a new total of $16,579.40.
d. The Lessor, at its sole cost and expense shall complete the demolition
in the expansion space and deliver the space in shell condition. Also
the Lessor shall provide two five-ton HVAC units as per plans dated
October 25, 1996 by Craig Hudson. These units were specified as per
Title 24.
e. Provided Lessee has satisfactorily performed all terms and conditions
of this Lease, Lessee shall have the option to extend this Lease for
one additional consecutive 18 month term at a rental rate of 76c per
square foot per month. Lessee to provide Lessor written notice of its
intention to exercise this option on or before 120 days prior to the
expiration of the initial term of this Lease.
f. Paragraphs 8, 14 and 21 of the Lease dated April 4, 1995 shall be
amended to reflect this increase in square footage by increasing
Lessee's percentage of occupancy and prorate share to 22.7% of all
expenses outlined in the paragraphs above.
<PAGE>
3. Lessor and Lessee further agree to delete Paragraphs 22, 37, and 39 of the
Lease dated April 4, 1995. It is further understood and agreed that
Paragraph 38 of said Lease now applies solely to Paragraph 2e of this
Amendment to Lease.
4. All other terms and conditions of the above Lease shall remain the same.
IN WITNESS WHEREOF, the undersigned "Lessor" and "Lessee" have executed these
presents the day and year first above mentioned.
LESSOR: PLEASANT HILL INDUSTRIAL PARK LESSEE: TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA
LIMITED PARTNERSHIP
BY /s/ [SIGNATURE ILLEGIBLE]^^ BY /S/ Sean Laskey
------------------------------------- ---------------------------
LOWENBERG HOLDINGS, GENERAL PARTNER SEAN LASKEY
WILLIAM J. LOWENBERG, ITS PRESIDENT DIRECTOR OF OPERATIONS
<PAGE>
EXHIBIT 10.7
[LOGO OF FORUM PROPERTIES APPEARS HERE]
OFFICE BUILDING LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Addendum One and
1. BASIC LEASE TERMS...................................................... 1
2. PREMISES AND COMMON AREAS LEASED....................................... 2
3. TERM................................................................... 3
4. POSSESSION AND COMMENCEMENT............................................ 3
5. RENT................................................................... 3
6. RENTAL ADJUSTMENT...................................................... 4
Addendum One and
7. SECURITY DEPOSIT....................................................... 5
8. USE.................................................................... 5
9. NOTICES................................................................ 6
10. BROKERS................................................................ 6
11. HOLDING OVER........................................................... 6
12. TAXES ON TENANT'S PROPERTY............................................. 6
13. CONDITION OF PREMISES.................................................. 6
14. ALTERATIONS............................................................ 6
15. REPAIRS................................................................ 7
16. LIENS.................................................................. 7
17. ENTRY ON PREMISES...................................................... 7
18. UTILITIES AND SERVICES................................................. 8
19. BANKRUPTCY............................................................. 8
20. INDEMNIFICATION AND RELEASE............................................ 8
21. EXCLUSIONS............................................................. 8
22. TENANT'S INSURANCE..................................................... 8
23. DAMAGE OR DESTRUCTION.................................................. 9
24. EMINENT DOMAIN......................................................... 9
25. DEFAULTS AND REMEDIES.................................................. 10
26. ASSIGNMENT AND SUBLETTING.............................................. 10
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
27. SUBORDINATION.......................................................... 11
28. ESTOPPEL CERTIFICATE................................................... 11
29. MISCELLANEOUS PROVISIONS............................................... 11
30. LIMITATION ON LIABILITY................................................ 13
31. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE.......................... 13
</TABLE>
ADDENDUM ONE
EXHIBITS
--------
A THE PREMISES
B THE PROJECT
C STANDARDS FOR UTILITIES AND SERVICES
D RULES AND REGULATIONS
E PARKING RULES AND REGULATIONS
INTENTIONALLY OMITTED
INTENTIONALLY OMITTED
INTENTIONALLY OMITTED
H ENVIRONMENTAL DISCLOSURE
I INSURANCE
-ii-
<PAGE>
------------
------------
VFD PM VFM
[LOGO OF FORUM PROPERTIES INC APPEARS HERE]
OFFICE BUILDING LEASE
1. BASIC LEASE TERMS.
a. DATE OF LEASE EXECUTION: 4-25-97
-----------------------------------------------------
b. TENANT: Tut Systems, Inc.
----------------------------------------------------------------------
Trade Name: Same
------------------------------------------------------------------
Address (leased Premises): 8905 SW Nimbus Avenue Suite 160
---------------------------------------------------
Beaverton OR 97008
---------------------------------------------------
Address (For Notices): 2446 Estand Way
---------------------------------------------------
Pleasant Hill CA 94523
- --------------------------------------------------------------------------------
Building/Suite: 12/160
-----------------------------------------------------------------
c. LANDLORD: Petula Assoc., Ltd., an Iowa corporation and Principal Mutual Life
--------------------------------------------------------------------
Insurance Co., an Iowa corporation, doing business as KC Creekside-
--------------------------------------------------------------------
Phase VI.
----------
Address (for Notices):
_______________________________________________________
c/o Forum Properties Inc., Managing Agent
-------------------------------------------------------
8705 SW Nimbus Avenue Suite 230
-------------------------------------------------------
Attn: Beaverton OR 97008 Attn: Property Manager
-------------------------------------------------------
With a Copy to:
_______________________________________________________
_______________________________________________________
_______________________________________________________
d. PREMISES AREA: Approximately 2,620 Rentable Square Feet
-------
e. PROJECT AREA: Approximately 75,218 Rentable Square Feet
--------
f. AGREED UPON TENANT'S PERCENTAGE: 3.48 %
---------
g. TERM OF LEASE: The term of this Lease shall be for 60 full calendar months
----
commencing upon April 1, 1997 (the "Scheduled Commencement Date") and
---------------
ending on March 31, 2002 (the "Scheduled Expiration Date").
----------------
h. BASE MONTHLY RENT: $4,258.00
--------------
i. RENT ADJUSTMENT (Initial One):
<TABLE>
<S> <C> <C>
/s/ JNU
------------------------- --------------------------
Landlord Tenant
</TABLE>
(2) Step Increase. If this provision is
initialed, the step adjustment /s/ MTS
provisions of Section 5c apply as _________________________ ___________
follows: Landlord Tenant
1 - OFFICE BUILDING LEASE
<PAGE>
<TABLE>
<CAPTION>
Effective Date of New Base
Rent Increases Monthly Rent
----------------- ------------
<S> <C>
April 1 , 1999 $4,470.00
----------------- ------------
April 1 ,**2001 $4,693.00
----------------- ------------
_________________, 19___ $___________
_________________, 19___ $___________
_________________, 19___ $___________
</TABLE>
j. BASE YEAR: Calendar Year 1997
----------------------------------------------------
k. PREPAID RENT: $4,258
----------
l. TOTAL SECURITY DEPOSIT: $26,842.00 , including a $0
------------- ---------------------------
non-refundable cleaning fee. See attached Addendum One.
m. TENANT IMPROVEMENT ALLOWANCES: $ 0 per rentable square foot. See attached
----
Addendum One.
n. TENANT'S USE OF PREMISES: General office.
----------------------------------------------------
_____________________________________________________________________________
o. PARKING: 4/1,000 unreserved spaces
-------
p. BROKER(S): Cliff Finnall, Grubb & Ellis
-------------------------------------------------------------------
q. BROKERAGE COMMISSION PAYABLE BY: Landlord
---------------------------------------------
r. GUARANTOR(S): n/a
----------------------------------------------------------------
s. ADDITIONAL SECTIONS: Additional sections of this lease, if any, attached
hereto are a part hereof.
t. EXHIBITS: All Exhibits attached hereto are a part hereof.
Section 1 represents a summary of certain terms of this Lease. In the event of
any inconsistency between the terms contained in Section 1 and other specific
clause of this Lease, the terms of the other clause shall prevail.
2. PREMISES AND COMMON AREAS LEASED.
a. Lease. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the premises described in Section 1 and depicted on Exhibit A hereto
(the "Premises") within the building at the address designated in Section 1 (the
"Building") located in the Project described on Exhibit B hereto (the
"Project"). The rentable square footage of the Premises (and also Tenant's
Percentage set forth in Section 1) may be adjusted by Landlord's architect upon
completion of the Tenant improvements pursuant to the Work Letter Agreement
which is attached hereto. The calculation shall be made in accordance with the
most current "BOMA Standard" in effect and shall be binding upon Landlord and
Tenant.
b. License. Tenant shall have the nonexclusive right to use, in common with
other tenants in the Building and the Project and subject to the Rules and
Regulations referred to in Section 29b below and acts of government, the
following areas: the common entrances, lobbies, restrooms, elevators, stairways,
and loading areas of the Building, and the parking areas, sidewalks, driveways
and landscaped areas and similar areas and facilities appurtenant to the
Building (herein "Common Areas").
c. Reservations. Landlord reserves the right from time to time without
unreasonable interference with Tenant's use:
(1) To install, use, maintain, repair and replace pipes, wires and other
equipment above the ceiling surfaces, below the floor surfaces, within the
walls and/or in the central core areas of the Premises;
(2) To add to, make changes to, or to delete from the Common Areas;
(3) To do work in the Common Areas, and/or to close temporarily any of
the Common Areas (so long as reasonable access to the Premises remains
available); and
(4) To do and perform such other acts and make such other changes in, to
or with respect to the Common Areas, the Building or the Project as Landlord
may deem appropriate.
2 - OFFICE BUILDING LEASE
<PAGE>
3. TERM.
The term of this lease shall be for the period designated in Section
1, commencing on the Scheduled Commencement Date, and ending on the Scheduled
Expiration Date, unless sooner terminated as herein provided. The actual
Commencement Date, Expiration Date, rentable square footage of the Premises, and
Tenant's Percentage shall be determined in accordance with the provisions of
this Lease and will be specified by Landlord, in a written notice given after
completion of the Tenant Improvements. Such notice shall be binding upon Tenant
unless Tenant objects, in writing, within five (5) days of Tenant's receipt of
Landlord's notice.
4. POSSESSION AND COMMENCEMENT.
a. Delays. If Landlord, for any reason cannot deliver possession of
the Premises to Tenant upon the Scheduled Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting from such delay. In that event, however, Landlord shall deliver
possession of the Premises as soon as practicable and the Commencement Date
shall be the date of such delivery with the length of the term of the Lease
being the number of full calendar months set forth in Section 1, and all other
terms and conditions of the Lease remaining in full force and effect. However,
if Landlord is delayed in delivering possession to Tenant for any reason
attributable to Tenant, this Lease (including the obligation to pay all rents)
shall commence on the date Landlord could have delivered possession absent such
delay.
b. Outside Date. Notwithstanding the foregoing, if Landlord, for any
reason not attributable to Tenant, is unable to deliver possession of the
Premises within ninety (90) days following the Scheduled Commencement Date,
either party may terminate this Lease by written notice given within ten (10)
days following expiration of such period.
5. RENT.
a. Generally. Tenant shall pay to Landlord, monthly in advance on the
first day of each calendar month, Base Monthly Rent in the amounts described in
Section 1 ("Base Monthly Rent"); provided, however, the Base Monthly Rent for
the first month of the term (or the first month following any rental abatement
period, if applicable) is due upon execution of this Lease by Tenant. If the
term on this Lease contains any rental abatement period, and if this Lease or
Tenant's right of possession is terminated because of Tenant's default, then the
rental abatement period shall be void and Tenant shall pay, in addition to all
other damages due Landlord, rent for the entire rental abatement period at a
rental rate equivalent to the highest Base Monthly Rent described herein. All
charges and sums due from Tenant to Landlord hereunder shall be deemed rent. For
purposes of Section 467 of the Internal Revenue code, the parties agree to
allocate the stated rents to the periods which correspond to the actual rent
payments as provided herein.
b. Index. If Section 1.i.(1) is initialed, the Base Monthly Rent
shall be subject to increase (but shall not be decreased) on each annual
anniversary of the commencement of the term of this Lease. The base for
computing the increase is the Consumer Price Index all Urban Consumers U.S. City
Average (1982-84 = 100), published by the United States Department of Labor,
Bureau of Labor Statistics ("Index"). The Index which is in effect on the
ninetieth (90th) day preceding the date of the commencement of the term is the
"Beginning Index". The Index published and in effect on the ninetieth (90th) day
preceding each anniversary of the commencement of the term of this Lease is the
"Extension Index". On and after each anniversary of the Commencement Date, the
Base Monthly Rent shall be increased to equal the product achieved by
multiplying the Base Monthly Rent due with respect to the month immediately
preceding such anniversary date by a fraction. On the first anniversary of the
Commencement Date, the numerator of the fraction will be the Extension Index and
the Denominator will be the Beginning Index. On the second and any subsequent
anniversaries of the Commencement Date, the numerator of the fraction will be
the current Extension Index and the denominator will be the Extension Index used
to calculate the previous year's rental increase. If the Index is changed so
that the base year differs from that in effect when the term commences, the
Index shall be converted in accordance with the conversion factor published by
the United States Department of Labor, Bureau of Labor Statistics. If the Index
is discontinued or revised during the term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index had not been
discontinued or revised.
c. Step Increase. If Section 1.i.(2) is initialed, Base Monthly Rent
shall be increased periodically to the amounts and at the times set forth in
Section 1.i.(2).
d. Payment. All rent shall be paid by Tenant to Landlord (i) monthly
in advance on the first day of every calendar month, at the address shown in
Section 1, or such other place as Landlord may designate in writing from time
to time, (ii) without prior demand or notice and without any deduction or
offset whatsoever, and (iii) in lawful currency of the United States of
America. All rent due for any partial month shall be prorated.
e. Late Charge and Default Rate. Tenant acknowledges that late
payment by Tenant to Landlord of any rent or other sums due under this Lease
will cause Landlord to incur additional costs, the exact amount of such costs
being extremely difficult and impracticable to ascertain. Such costs include,
without limitation, processing and accounting charges and late charges that may
be imposed on Landlord by the terms of any note secured by the Premises.
Therefore, if any rent or other sum due from Tenant is not received within five
(5) days of when due, Tenant shall pay to landlord an additional sum equal to 5%
of such overdue payment. Landlord and Tenant hereby agree that such late charge
represents a fair and reasonable estimate of the costs that Landlord will incur
by reason of any such late payment and that the assessment and/or collection of
the late charge shall not be
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deemed a waiver of any default or of any other right or remedy of Landlord.
Additionally, all such delinquent rent or other sums, plus this late charge,
shall bear interest at the prime rate of the U.S. National Bank of Oregon, plus
two percentage points, on a fully floating basis (herein the "Default Rate")
from the date first due until the date paid in full. If any payment is returned
for insufficient funds, thereafter Landlord may require Tenant to pay all
future payments by cashier's check.
f. Prepaid Rent. Upon the execution of this Lease, Tenant shall pay
to Landlord the prepaid rent set forth in Section 1, and if Tenant is not in
default of any provisions of this Lease, such prepaid rent shall be applied
toward the Base Monthly Rent due for the first month of the term (or the first
month following any Base Monthly Rent abatement period, if applicable). Upon a
default by Tenant prior to such application, Landlord shall have the right,
without waiver of the default or prejudice to other remedies, to use the prepaid
rent or any of it to cure the default or to compensate Landlord for all or any
damages resulting from the default. Landlord is not a trustee for the prepaid
rent and the same may be commingled with Landlord's general funds. The prepaid
rent shall not bear interest.
6. RENTAL ADJUSTMENT.
a. Definitions. For the purpose of this Section 6, the following
terms are defined as follows:
(1) "Operating Expense Allowance" shall mean that portion of
Tenant's Percentage of the Operating Expenses that is equal to Operating
Expenses incurred by Landlord with respect to the Premises for the Base
Year as identified in Section 1.
(2) "Operating Expenses" shall consist of all direct costs of
operation, maintenance, repair and replacement of the Project and the
Common Areas of the entire Project ("Operating Expenses"), as determined by
standard accounting practices (including establishment of reasonable
reserves), including the following costs by way of illustration, but not
limitation:
(a) Real Property Taxes;
(b) water, sewer, HVAC, garbage and other utility charges;
(c) legal, accounting, and other consulting fees;
(d) the cost of insurance which Landlord or its lenders deem
appropriate for the Project;
(e) the cost of janitorial, maintenance, security and/or
other services and supplies;
(f) the cost (amortized over a reasonable period set by
Landlord, together with interest at the rate described in Section 5c)
of any capital improvements made to the Project or the Common Areas by
Landlord or replacement of any equipment needed to operate the
Building or the Common Areas at the same quality levels as prior to
the replacement;
(g) cost incurred in the management of the Project
(including Project management office rental, a management fee, and, in
the event Landlord is directly participating in the administration of
the Project, an administrative fee);
(h) the cost of repairs and maintenance of the Project,
including the plumbing, heating, ventilating, air conditioning and
electrical systems installed or furnished by Landlord;
(i) personal property taxes attributable to personal
property used in connection with the Project; and
(j) costs and expenses of repairs, resurfacing, repairing,
maintenance, painting, lighting, cleaning, refuse removal, security
and similar items, including appropriate reserves.
Operating expenses shall not include depreciation on buildings or
equipment therein, real estate brokers' commissions, nor costs charged to
specific lessees under their respective leases.
(3) "Real Property Taxes" shall include any form of tax,
assessment, fee, levy, charge, or other imposition imposed by any authority
having the direct power to tax, including any city, county, state or
federal government, or any school, improvement or special assessment
district, against the Project or any portion thereof or interest therein,
including, but not limited to the following:
(a) any tax against Landlord's business of leasing the Premises;
(b) any tax or other imposition in substitution, partially or
totally, of any assessment, tax, fee, levy or charge previously
included within the definition of Real Property Tax, including but not
limited to, any assessment that may be imposed for services such as
fire protection, street, sidewalk and road maintenance, refuse removal
or other services formerly provided without charge or with less charge
to property owners or occupants;
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(c) any assessment, tax, fee, levy or charge allocable to or
measured by the area of the Project or Premises, the rent payable
hereunder, the number of parking spaces at the Project or similar
criteria, including, without limitation, any gross income tax or
excise tax;
(d) any assessment, tax, fee, levy or charge upon this
transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises; and
(e) any local improvement district assessments and any
assessments under recorded covenants.
"Real Property Taxes" shall not include Landlord's federal or state
net income, franchise, inheritance or estate taxes.
b. Payments. For each calendar year during this Lease, or portion
thereof, Tenant shall pay its Percentage (see Sections 1 and 2 above) of the
amount by which Operating Expenses for that year exceed the Operating Expense
for the Base Year. Landlord shall estimate, from time to time, Tenant's payment
amount. This estimated amount shall be divided into equal monthly installments,
one payable with each installment of Base Monthly Rent. As soon as practical
following each calendar year, Landlord shall prepare an accounting of actual
Operating Expenses incurred during the prior calendar year and such accounting
shall reflect Tenant's Percentage. If the additional rent paid by Tenant under
this Section 6b during the preceding calendar year was less than the actual
amount of Tenant's Percentage of Operating Expenses, Landlord shall so notify
Tenant and Tenant shall pay such amount to Landlord within thirty (30) days of
receipt of such notice. Tenant shall have thirty (30) days from receipt of such
notice to contest the amount due; failure to so notify Landlord shall represent
final determination of Tenant's share of Operating Expenses. If Tenant's
payments were greater than the actual amount due, then such overpayment shall be
credited by Landlord to all present rent next due under this Section 6b.
c. Survival. Even though this Lease has expired or been terminated,
when final determination is made of Tenant's Percentage of Operating Expenses
for the year in which this Lease expires or terminates, Tenant shall
immediately pay any shortfall due. Conversely, any overpayment made shall be
rebated by Landlord to Tenant, unless Tenant at that time is indebted to
Landlord.
7. SECURITY DEPOSIT. See attached Addendum One
8. USE.
a. Permitted Use. Tenant shall use the Premises for the uses set
forth in Section 1 above, and for no other purpose without the prior written
consent of Landlord. Nothing contained herein shall be deemed to give Tenant any
exclusive right to such use in the Project. Tenant acknowledges that neither
Landlord nor any agent of Landlord has made any representation of the
suitability of the Premises for the conduct of Tenant's business.
b. Restrictions. Tenant shall not use or occupy the Premises in
violation of any applicable statute, order, regulation, ordinance, approval, or
Certificate of Occupancy ("Laws") and shall upon written notice from Landlord,
discontinue any use declared by any governmental authority or determined by
Landlord to be such a violation. Tenant shall comply with any direction of any
governmental authority which shall, by reason of the nature of Tenant's use or
occupancy of the Premises, impose any duty upon Tenant or Landlord with respect
to the Premises or with respect to the use or occupancy thereof. Tenant shall
not do or permit anything to be done in or about the Premises that would
increase the Project insurance premiums or violate any insurance underwriting
standards; in addition to any other remedy and without waiver of default,
Landlord shall have the right to collect from Tenant the amount of any premium
increase cause =d by Tenant's violation of the foregoing. Tenant shall not (i)
do or permit anything to be done in or about the Premises which will interfere
with the rights of other occupants of the Project, or injure or annoy them, (ii)
use or allow the Premises to be used for any improper, immoral, unlawful or
objectionable purpose, nor (iii) cause, maintain or permit any nuisance in, on
or about the Premises nor cause or suffer any waste. Tenant shall comply with
all master plans, restrictive covenants, and obligations created by private
contracts which affect the use and operation of the Premises. Landlord reserves
the right to prescribe the weight and position of all heavy objects which Tenant
desires to place in the Premises. Tenant shall be responsible for all structural
engineering required to determine structural load. Tenant shall not create nor
allow to be emitted from the Premises any odor, noise, heat, light or vibration;
any insulation or other remedial measures
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required shall be accomplished by or under the supervision of Landlord, but
Tenant shall immediately pay all costs incurred in connection therewith.
9. NOTICES.
Any notice required or permitted to be given hereunder must be in
writing and shall be given by personal delivery or by registered or certified
mail (regular mail to any P.O. Box) addressed to Landlord or Tenant, as the case
may be, at the address(es) designated in Section 1. A notice shall be deemed
given upon such personal delivery or upon such mailing. Either party may specify
a different address for notice purposes by written notice to the other, except
that Landlord may, in any event, use the Premises as Tenant's address for notice
purposes.
10. BROKERS.
Tenant warrants that it has had no dealings with any broker or agent
regarding this Lease except for those brokers, if any, named in Section 1.
Tenant shall defend, indemnify, and hold Landlord harmless against any liability
based upon a breach of this warranty, including attorneys fees.
11. HOLDING OVER.
If Tenant holds over after the expiration of the term hereof without
the express written consent of Landlord, Tenant shall become a Tenant at
sufferance only, which tenancy may be terminated by Landlord upon ten (10) days
written notice. Such tenancy shall be on the terms hereof, except at a Base
Monthly Rent rate equal to the greater of Landlord's scheduled rent for the
Premises or one hundred twenty-five percent (125%) of the Base Monthly Rent in
effect upon the date of such expiration (subject to adjustment as provided in
Section 6 hereof), prorated on a daily basis. Acceptance by Landlord of rent
after such expiration shall not result in a renewal of this Lease. The
provisions of this Section are in addition to and do not affect Landlord's right
of re-entry or any rights of Landlord hereunder or as otherwise provided by law.
If Tenant fails to surrender the Premises upon the expiration of this Lease or
upon other termination of this Lease or of Tenant's right of possession, Tenant
shall defend, indemnify and hold Landlord harmless from all resulting loss or
liability, including without limitation, any claim made by any succeeding tenant
founded on or resulting from such failure to surrender and any attorneys fees
and costs.
12. TAXES ON TENANT'S PROPERTY.
Tenant shall pay before delinquency all taxes levied against any
personal property or trade fixtures of Tenant in the Premises. If any such taxes
are levied against Landlord or Landlord's property or if the assessed value of
the Premises is increased by the inclusion therein of a value placed upon such
personal property or trade fixtures of Tenant and if Landlord, after written
notice to Tenant, pays the taxes based upon such increased assessment (which
Landlord shall have the right to do regardless of the validity thereof, but only
under proper protest if requested by Tenant), Tenant shall, upon demand, repay
to Landlord the taxes so levied against Landlord. The foregoing shall also
apply, if Landlord so elects, with respect to any fixtures in the Premises which
are assessed at a valuation higher than the valuation of "Building Standard"
improvements. If the records of the County Assessor are not available or
sufficiently detailed to serve as a basis for making said determination, the
actual cost of construction shall be used.
13. CONDITION OF PREMISES.
Tenant acknowledges that neither Landlord nor any agent of Landlord
has made any representation or warranty with respect to the Premises, the
Building or the Project, nor the suitability of the same for the conduct of
Tenant's business. The taking of possession of the Premises by Tenant shall
conclusively establish that the Premises, the Building and the Project were in
satisfactory condition at such time and that Landlord has fully complied with
the requirements of the Work Letter Agreement. Without limiting the foregoing,
Tenant specifically acknowledges and accepts the various inconveniences that may
be associated with the use of the Premises and the rest of the Project, such as
certain construction obstacles, delays in use of freight elevator service,
certain elevators not being available to Tenant, the presence of work crews,
uneven air conditioning services, and other typical conditions incident to
recently constructed or improved office space.
14. ALTERATIONS.
a. Consent Requirement. Tenant shall not make any alterations to the
Premises, the Building or to the Project, including any changes to the existing
landscaping, without Landlord's prior written consent in each instance. Any
alterations made shall remain on and be surrendered with the Premises upon
expiration or termination of this Lease, except that Landlord may elect in its
consent (or at any time, if consent was not obtained), to require Tenant to
remove any alterations which Tenant may have made to the Premises. If Landlord
so elects, at its cost Tenant shall accomplish such removal and restore the
Premises to the condition designated by Landlord in its election.
b. Request. Any request for Landlord's consent to alterations shall
be made at least thirty (30) days before any work may be commenced and shall be
accompanied by (i) detailed and costed plans and specifications for all
alterations, and (ii) Tenant's written agreement to provide, upon completion of
work, a complete set of as-built plans and specifications. All alterations
shall be constructed only after obtaining Landlord's prior written
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consent and only in conformity with all Laws. The issuance of Landlord's consent
shall not be a waiver of nor an opinion regarding Tenant's obligation to comply
with all Laws.
c. Construction. Should Landlord consent in writing to Tenant's
alteration of the Premises, Tenant shall contract with a contractor approved by
Landlord for the construction of such alterations, shall secure all appropriate
governmental approvals and permits, and shall complete such alterations with due
diligence in compliance with the plans and specifications approved by Landlord.
All such construction shall be performed in a manner which will not interfere
with the quiet enjoyment of other tenants in the Project. Landlord may post
notices of nonresponsibility. Tenant shall pay all costs for construction of
alterations and shall keep the Premises and the Project free and clear of all
liens which may result from work by third parties authorized by Tenant. If any
such lien is filed, the same shall be an event of default hereunder. It shall be
a further event of default for Tenant to fail to remove such lien within ten
(10) days of the filing thereof. Landlord may, at Landlord's option, require
Tenant to obtain a payment and performance bond in an amount equal to 100% of
the estimated cost of the alteration. If such bond is required by Landlord,
Tenant shall deliver satisfactory evidence of same to Landlord prior to the
commencement of the work.
d. Removal of Personal Property. If Tenant shall fail to remove all
of its personal property from the Premises upon expiration or termination of
this Lease, Landlord may, at its option, remove, store and sell the same in any
manner that Landlord shall choose, without liability to Tenant. Tenant agrees to
pay Landlord any and all expenses incurred by Landlord in so doing.
15. REPAIRS.
a. Tenant Obligations. By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair. Tenant
shall, at its expense, keep, maintain and preserve the Premises in first class
condition and repair, and shall make all repairs to the Premises and every part
thereof. Tenant shall,, upon the expiration or sooner termination of the term
hereof, surrender the Premises to Landlord in the same condition as when
received, usual and ordinary wear and tear excepted. Except as provided in the
Work Letter Agreement, Landlord shall have no obligation to alter, remodel,
improve, repair, decorate or paint the Premises or any part thereof.
b. Landlord Obligations. Notwithstanding Section 15a, Landlord shall
repair and maintain the structural portions of the Building and the plumbing,
heating, ventilating, air conditioning, elevator and electrical systems
furnished by Landlord; the cost of the foregoing shall be Operating Expenses,
unless such maintenance and repairs are caused by the act, neglect or omission
of Tenant, its agents, servants, employees or invitees, in which case Tenant
shall pay to Landlord, as additional rent, the cost of such maintenance and
repairs. Landlord shall not be liable for any failure to make any such repairs
or to perform any maintenance unless such failure shall persist for an
unreasonable time after written notice of the need of such repairs or
maintenance is given to Landlord by Tenant. There shall be no abatement of rent
and no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or in or to
fixtures, appurtenances and equipment therein. Tenant waives the right, if any,
to make repairs at Landlord's expense under any law, statute or ordinance now or
hereafter in effect.
16. LIENS.
Tenant shall not permit any statutory, consensual or other lien to be
filed against the Premises, the Building or the Project, nor against Tenant's
leasehold interest in the Premises. Landlord shall have the right at all times
to post notices of nonresponsibility. If any such lien is filed and not removed
within ten (10) days of filing, Landlord may, without waiving its rights and
remedies based on such breach and without releasing Tenant from any of its
obligations, cause such lien to be released by any means, including payment.
Tenant shall pay to Landlord at once, upon notice by Landlord, any sum expended
by Landlord in connection with any such lien, together with interest at the
Default Rate.
17. ENTRY ON PREMISES.
Landlord and its authorized representatives shall have the right,
after reasonable notice under the circumstances (but without notice in case of
emergency) to enter the Premises at all reasonable times for any of the
following purposes: (a) To determine whether Tenant is complying with its
obligations under this Lease; (b) To do any maintenance, restoration,
improvement and/or janitorial work that Landlord has the right or obligation to
perform; (c) To post "for sale" or "for lease" signs; (d) To show the Premises
to brokers, agents, buyers, lenders, tenants or other persons interested in the
Premises; and/or (e) to do any other act or thing necessary for the safety or
preservation of the Premises or the Project. Landlord may erect temporary
scaffolding or barricades in and around the Premises, but not so as to prevent
access to the Premises. Landlord shall conduct its activities on the Premises as
provided herein in a manner that will cause the least inconvenience, annoyance
or disturbance to Tenant. Landlord shall at all times have and retain a key with
which to unlock all the doors in, upon and about the Premises, excluding
Tenant's vaults and safes. Tenant shall not alter any lock or install a new or
additional lock or bolt on any door of the Premises.
Landlord shall not be liable in any manner, and Tenant shall not be
entitled to any rent reduction, for any inconvenience, disturbance, loss or
other damage arising out of Landlord's activities referenced in this Section 17.
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Any entry to the Premises by Landlord shall not be construed or deemed to be an
eviction of Tenant from the Premises or any portion thereof.
18. UTILITIES AND SERVICES.
It is Landlord's policy that utilities and services be furnished as
set forth in Exhibit "C" hereto. Landlord's failure to furnish any of such items
shall not result in any liability to Landlord, Tenant shall not be entitled to
any abatement or reduction of rent by reason of such failure, and no eviction of
Tenant shall result from such failure. If Tenant uses more water or electrical
power than is considered reasonable or normal by Landlord, Landlord may at its
option require Tenant to pay, as additional rent, the cost, as fairly determined
by Landlord, incurred by such extraordinary usage. In addition, Landlord may
install separate meter(s) for the Premises, at Tenant's sole expense, and Tenant
thereafter shall pay all charges so metered.
19. BANKRUPTCY.
If Tenant shall file a petition in bankruptcy or be the subject of
involuntary proceedings in bankruptcy not vacated within thirty (30) days, or if
a receiver or trustee shall be appointed of Tenant's property, or if Tenant
shall make an assignment for the benefit of creditors, or if this Lease shall,
by operation of law or otherwise, pass to any person or persons other than
Tenant, then in any such event this Lease shall automatically terminate, unless
Landlord shall elect otherwise within a reasonable period of time. In such case,
notwithstanding any other provisions of this Lease, Landlord, in addition to any
and all rights and remedies allowed by law or equity, shall, upon such
termination, be entitled to recover damages in the amount provided in Section 25
below. For purposes of the Section 19 (and therefore also of Section 25a(4)),
"Tenant" shall mean and include the Tenant named herein, any assignee or
subtenant, and any partner, co-tenant, or guarantor in or of such Tenant or any
assignee or subtenant.
20. INDEMNIFICATION AND RELEASE.
a. Indemnification. Tenant shall indemnify, defend and hold Landlord,
its property manager, and also all partners, shareholders, officers, directors,
employees and agents of each (collectively the "Protected Parties") harmless,
from all claims, losses, causes of action, damages, costs and expenses
(including attorneys fees incurred by or demanded from the Protected Parties)
arising from (i) the use of the Premises or the Project by Tenant or its agents
or visitors, (ii) any activity, work or thing done, permitted or suffered by
Tenant in or about the Premises, the Building, or the Project, (iii) any breach
or default by Tenant hereunder, and/or (iv) any act, neglect, fault or omission
of Tenant or of its agents or employees. In any litigation against Landlord by
reason of any of the foregoing, Tenant, upon notice from Landlord, shall defend
the same at Tenant's expense by counsel approved in writing by Landlord.
b. Release. Neither Landlord nor any Protected Party shall be liable
to Tenant for any loss, injury or damage to Tenant or to any other person, or to
its or their property, irrespective of the cause of such injury, damage or loss,
unless solely caused by the negligence of Landlord.
21. EXCLUSIONS.
The provisions of this Section 21 shall be operative notwithstanding
Section 20b above. Neither Landlord nor any other Protected Party shall be
liable in any circumstances for (i) any loss, injury or damage caused by other
leases or persons in or about the Building or Project, or (ii) consequential
damages of any kind or type, or (iii) loss or damage to any personal property by
theft or otherwise. Landlord or its agents shall not be liable for interference
with light or other incorporeal hereditaments. Landlord has no liability for or
with respect to an incident or condition not immediately reported by Tenant to
Landlord in writing.
22. TENANT'S INSURANCE. Please refer to Exhibit I.
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23. DAMAGE OR DESTRUCTION.
a. Restoration. If during the term, the Premises, Building or
Project is more than 25% destroyed (based upon replacement cost) from any
cause, or rendered permanently unusable from any cause, Landlord may, in its
sole discretion, terminate this Lease by delivery of notice to Tenant within
thirty (30) days of such event without compensation to Tenant. If Landlord does
not elect to terminate this Lease, and if, in Landlord's estimation, the
Premises cannot be restored and/or made usable within one hundred eighty (180)
days following such destruction, the Landlord shall notify Tenant and Tenant
may terminate this Lease by delivery of notice to Landlord within thirty (30)
days of receipt of Landlord's notice. If neither Tenant nor Landlord terminates
this Lease as provided herein, then Landlord shall commence to restore the
Premises in compliance with then existing laws and shall complete such
restoration with due diligence. In such event, this Lease shall remain in full
force and effect, without abatement of rent. Tenant shall not be entitled to
any compensation or damages for loss of use of all or any part of the Premises
and/or any inconvenience or annoyance occasioned by such damage, repair,
reconstruction or restoration. Tenant hereby waives the provisions of any
statutes or court decisions which relate to the abatement of rent or
termination of leases when leased property is damaged or destroyed and agree
that such event shall be exclusively governed by the terms of this Lease.
b. Limitations. If damage is due to any cause other those fully
covered by Landlord's insurance, or occurs during the final twelve (12) months
of the term of this Lease, Landlord may elect to terminate this Lease. If
Landlord repairs or restores as herein provided, Landlord shall repair or
restore only those portions of the Building and the Premises which were
originally provided at Landlord's expense, and the repair and restoration of
items not provided at Landlord's expense shall be the obligation of Tenant.
24. EMINENT DOMAIN.
a. Definitions. The following definitions shall apply.
"Condemnation" means (a) the exercise of any governmental power of eminent
domain, whether by legal proceedings or otherwise by a Condemnor, and (b) the
voluntary sale or transfer by Landlord to any Condemnor either under threat of
condemnation or while legal proceedings for condemnation are proceeding. "Date
of Taking" means the earlier of the date that title or the right of possession
passes to the Condemnor. "Award" means all compensation, sums or anything of
value awarded, paid or received by reason of a Condemnation. "Condemnor" means
any public or quasi-public authority, or private corporation or individual,
having a power of condemnation.
b. Lease Governs. If during the term of the Lease there is any
taking of all or any part of the Premises or the Project, the rights and
obligations of the parties shall be determined pursuant to this Lease.
c. Termination or Continuation. If the Premises are totally taken
by condemnation, this Lease shall terminate on the Date of Taking. If only a
portion of the Premises is taken by Condemnation, this Lease shall terminate as
to the part so taken as of the Date of Taking, but shall in all other respects
remain in effect, except that Tenant shall have the right to elect to terminate
this Lease if the remaining portion of the Premises is rendered unsuitable for
Tenant's continued use of the Premises. If Tenant elects to terminate this
Lease, Tenant must exercise its right to terminate by giving notice to Landlord
within 30 days after the nature and extent of the Condemnation have been
finally determined. If Tenant elects to terminate this Lease, Tenant shall also
notify Landlord of the date of termination, which date shall not be earlier
than 30 days nor later than 90 days after Tenant
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has notified Landlord of its election to terminate; except that this Lease shall
terminate on the Date of Taking if the Date of Taking falls on a date before the
date of termination as designated by Tenant. If any portion of the Premises is
taken by Condemnation and this Lease remains in effect, on the Date of Taking
the Base Monthly Rent shall be reduced by an amount in the same ratio as the
total number of square feet in the Premises taken bears to the total number of
square feet in the Premises immediately before the Date of Taking.
d. Landlord Right. Notwithstanding anything herein to the contrary,
if the Premises or the Project or any portion of either is taken by
Condemnation and the portion taken does not, in Landlord's sole judgment,
feasibly permit the continuation of the operation of the Premises or Project by
Landlord, then Landlord shall have the right to terminate this Lease by written
notice given within thirty (30) days after the nature or event of the
Condemnation have been finally determined.
e. Award. Tenant shall have no right or claim to all or any portion
of the Award; provided this shall not limit Tenant's right to seek and to
receive compensation for relocation expenses or the value of its personal
property taken, so long as receipt of such compensation does not decrease the
Award otherwise payable to Landlord.
25. DEFAULTS AND REMEDIES.
a. Defaults. The occurrence of any one or more of the following
events shall constitute a default hereunder by Tenant:
(1) The vacation or abandonment of the Premises by Tenant.
Abandonment is herein defined to include, but is not limited to, any
absence by Tenant from the Premises for ten (10) business days or longer.
(2) The failure by Tenant to make any payment of rent or
additional rent or any other payment required to be made by Tenant
hereunder, as and when due.
(3) The failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Subparagraph 25a(1) or (2)
above, where such failure shall not be cured within the time period
specified in a written notice of such failure from Landlord to Tenant.
(4) The occurrence of any of the events set forth in Section 19
above.
b. Remedies. Landlord shall have the following remedies if Tenant
is in default. Landlord may terminate this Lease and/or Tenant's right to
possession of the Premises at any time. No act by Landlord other than giving
notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to
relet the Premises, or the appointment of a receiver on Landlord's initiative
to protect Landlord's interest under this Lease shall not constitute a
termination of this Lease. Upon termination of this Lease or of Tenant's right
to possession, Landlord has the right to recover from Tenant: (1) The worth of
the unpaid rent that had been earned at the time of such termination; (2) The
worth of this amount of the unpaid rent that would have been earned after the
date of such termination; and (3) Any other amount, including court, attorney
and collection costs, necessary to compensate Landlord. "The Worth," as used
in Section (1) is to be computed by allowing interest at the Default Rate.
"The worth" as used for Section (2) is to be computed by discounting the amount
at the discount rate of the Federal Reserve Bank of San Francisco at the time
of termination.
c. Additional Rights. All rights, options and remedies of Landlord
contained in this Lease shall be construed and held to be cumulative, and no
one of them shall be exclusive of the other or of any other right now or
hereafter allowed by law. Landlord shall have the right to pursue any one or
all of such remedies. No waiver of any default of Tenant hereunder shall be
implied from any acceptance by Landlord of any rent or other payments due
hereunder or any omission by Landlord to take any action on account of such
default if such default persists or is repeated, and no express waiver shall
affect defaults other than as specified in said waiver.
26. ASSIGNMENT AND SUBLETTING.
a. General Restriction. Tenant shall not voluntarily assign or
encumber its interest in this Lease or in the Premises or sublease all or any
part of the Premises, or allow any other person or entity to occupy or use all
or any part of the Premises, without first obtaining Landlord's prior written
consent in each instance. Any assignment, encumbrance or sublease without
Landlord's prior written consent shall be voidable at Landlord's election and
shall constitute a default. For purposes hereof, in the event Tenant is a
partnership or consists of one or more persons or entities, a withdrawal or
change (whether voluntary, involuntary, or by operation of law) of a partner or
of one of such persons or entities, or if Tenant is a corporation, any transfer
of fifty percent (50%) of its stock in one or more transfers, shall constitute
a voluntary assignment and shall be subject to these provisions. No consent to
an assignment, encumbrances or sublease shall constitute a waiver of the
provisions of this Section.
b. Request. Tenant shall request in writing, consent to any
assignment or sublease. The request shall include the name of the proposed
assignee or subleases, the nature of the proposed assignee's or sublessee's
business, information concerning the financial responsibility of the proposed
assignee or subleases, and the terms of the proposed assignment or subletting.
Landlord shall, within thirty (30) days of receipt of such request and
information and of any additional information requested by Landlord, elect one
of the following: (1) consent to such proposed assignment or sublease (Landlord
shall have the right to impose reasonable conditions, including but not limited
to those discussed below); or (2) refuse such consent, which refusal shall be
on reasonable grounds.
10 - OFFICE BUILDING LEASE
<PAGE>
c. Conditions. As a condition for granting its consent to any
assignment or sublease, Landlord may require that the rent payable by the
assignee or sublessee is at the then current published rental rates for the
Premises or comparable premises in the Building, but not less than the then
current Base Monthly Rent under this Lease and may require that the assignee or
sublessee remit directly to Landlord on a monthly basis all monies due to
Tenant by said assignee or sublessee. In addition, a condition to Landlord's
consent to any assignment, transfer or hypothecation of this Lease shall be the
delivery to Landlord of a true copy of the fully executed instrument of
assignment, transfer or hypothecation, and the delivery to Landlord of an
agreement executed by the assignee in form and substance satisfactory to
Landlord and expressly enforceable by Landlord, whereby the assignee assumes
and agrees to be bound by all the terms and provisions of this Lease and to
perform all of the obligations of Tenant hereunder. As a condition to
Landlord's consent to any sublease, such sublease shall provide that it is
subject and subordinate to this Lease and to all mortgages; that Landlord may
enforce the provisions of the sublease, including collection of rent; that in
the event of termination of this Lease for any reason, including without
limitation a voluntary surrender by Tenant, or in the event of any reentry or
repossession of the Premises by Landlord, Landlord may, at its option, either
(1) terminate the sublease or (2) take over all of the right, title and
interest of Tenant, as sublessor, under such sublease, in which case such
subleases shall attorn to Landlord, but that nevertheless Landlord shall not be
liable for any previous act or omission of Tenant under such sublease, be
subject to any defense or offset previously accrued in favor of the subleases
against Tenant, or be bound by any previous modification of the sublease made
without Landlord's written consent, or by any previous prepayment by subleases
of more than one month's rent.
d. Costs. In the event that Landlord shall consent to an assignment
or sublease under the provisions of this Paragraph 26, Tenant shall pay
Landlord's processing costs and attorneys' fees incurred in giving such
consent.
e. No Release. Landlord's consent to any assignment or subletting
shall not relieve Tenant or any assignee or subleases from any obligation under
this Lease whether or not accrued.
27. SUBORDINATION.
a. Lease Status. Without the necessity of any additional document
being executed by Tenant, this Lease shall be subject and subordinate at all
times to: (1) all ground leases or underlying leases which may now exist or
hereafter be executed affecting the Building or the land upon which the
Building is situated or both; and (2) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which the
Building, or any such land, ground leases or underlying leases, or Landlord's
interest or estate in any of said items, is specified as security.
b. Attornment and Documentation. In the event that any ground lease
or underlying lease terminates or any mortgage or deed of trust is foreclosed
or a conveyance in lieu of foreclosure is made, Tenant shall, notwithstanding
any subordination, attorn to and become the Tenant of the successor in interest
to Landlord, at the option of such successor in interest. Tenant covenants and
agrees to execute and deliver, within ten (10) days of request, any additional
documents evidencing the subordination and/or attornment provided herein.
28. ESTOPPEL CERTIFICATE.
Within ten (10) days following any written request, Tenant shall
execute and deliver to Landlord an estoppel certificate regarding the status of
this Lease and any particular matters requested therein. Landlord and Tenant
intend that any materials delivered pursuant to this Section may be relied upon
by any then current or prospective lender or purchaser.
29. MISCELLANEOUS PROVISIONS.
The following are material provisions of this Lease.
a. Building Planning. In the event Landlord requires the Premises
for use in conjunction with another suite or for other reasons, upon notifying
Tenant in writing, Landlord shall have the right to move Tenant to other space
in the Building, at Landlord's sole cost and expense, and the terms and
conditions of this Lease shall remain in full force and effect, except that a
revised Exhibit A shall become part of this Lease and shall reflect the
location of the new space and Section 1 of this Lease shall be amended to
include and state all correct data as to the new space. However, if the
proposed new space does not meet with Tenant's approval, Tenant shall have the
right to terminate this Lease upon giving Landlord thirty (30) days' notice
within ten (10) days of receipt of Landlord's notification. If Tenant
terminates this Lease pursuant to this Section 29, Tenant shall vacate the
Building and the Premises within thirty (30) days of its delivery to Landlord
of the notice of termination.
b. Rules and Regulations. Tenant shall comply with the "Rules and
Regulations" attached hereto as Exhibit D, the "Parking Rules and Regulations"
attached hereto as Exhibit E, and all reasonable and nondiscriminatory
modifications and additions to either adopted from time to time by Landlord.
Tenant shall be responsible for compliance with the foregoing by all employees,
agents and visitors of Tenant. Landlord shall not be responsible to Tenant for
the violation or non-performance by any other tenant or occupant of the
Building or Project of any of said Rules and Regulations.
c. Applicable Law. This Lease shall be governed by the laws of the
state in which the Premises are located.
11 - OFFICE BUILDING LEASE
<PAGE>
d. Successors and Assigns. Without diminishing the provisions of
Section 26 above, it is agreed that all of the covenants, conditions and
provisions of this Lease shall bind and benefit the parties hereto and their
respective successors and assigns.
e. Professional Fees. In the event of any other litigation between
Tenant and Landlord and/or any of the Protected Parties with respect to this
Lease, all cost and attorneys fees incurred by the prevailing party shall be
paid by the other party, including fees incurred at and in preparation for
trial and any appeal or review. If Landlord employs a collection agency to
recover delinquent charges, Tenant agrees to pay all collection agency fees
charged to Landlord.
f. Performance By Tenant. All covenants to be performed by Tenant
under this Lease shall be performed by Tenant at Tenant's sole cost and expense
and without any abatement of rent. If Tenant shall fail to pay any sum of
money owed to any party other than Landlord for which it is liable hereunder,
or if Tenant shall fail to perform any other act on its part to be performed
hereunder, and such failure shall continue after the time for cure specified in
notice of such failure given by Landlord, Landlord may, without waiving such
default or any other right or remedy, but shall not be obligated to, make any
such payment or perform any such other act to be made or performed by Tenant.
All sums so paid by Landlord and all necessary incidental costs, together with
interest thereon at the Default Rate from the date of expenditure by Landlord,
shall be payable to Landlord on demand.
g. Mortgage Protection. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgage covering the Premises whose address
shall have been furnished to Tenant, and shall allow such beneficiary or
mortgagee a reasonable opportunity to cure the default prior to exercise of any
remedy.
h. Definition of Landlord. In the event of any transfer, assignment
or other conveyance of title to the Building or the lessee's interest in a
ground or master lease, the Landlord herein named (and in the case of any
subsequent transfers or conveyances, the then grantor) shall be automatically
freed and relieved from all liability thereafter arising hereunder, and the
transferee shall be deemed to have assumed such liability arising during its
ownership of the Premises.
i. Waiver. A waiver shall be accomplished only by a written
instrument which expressly states such waiver and is signed by the party
charged with the waiver. The waiver by Landlord of any breach of any term of
this Lease shall not be deemed to be a waiver of any subsequent breach of the
same or any other term, nor shall any custom or practice between the parties
affect the right of Landlord to insist upon performance by Tenant in strict
accordance with the terms hereof. The subsequent acceptance of rent by
Landlord shall not be deemed a waiver of any preceding breach by Tenant,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such rent.
j. Identification of Tenant. If more than one person or entity
constitutes Tenant, each shall be jointly and severally liable hereunder, and
the term "Tenant" shall mean and include each of them jointly and severally.
The act of or notice from, or the signature of, any one or more of them, shall
be binding upon each and all of the persons and entities constituting Tenant.
k. Force Majeure. Landlord shall have no liability whatsoever to
Tenant on account of the inability of Landlord to fulfill, or delay in
fulfilling, any of Landlord's obligations under this Lease by reason of strike
or other labor trouble, acts of omissions of government, acts of God, or any
other cause, whether similar or dissimilar to the above, beyond Landlord's
reasonable control. The time period for performance of any obligation of
Landlord shall be extended by the period of any delay caused by any such
events.
l. Interpretation. The Section headings of this Lease are for
convenience only and shall have no effect whatsoever upon the interpretation of
any part hereof. This Lease has been completely reviewed by Tenant and by such
attorneys and others as Tenant desires and shall not be construed against
Landlord by reason of having been initially prepared by Landlord. Any
handwritten or typed modifications to this Lease shall be given only as much,
and not more, weight as the preprinted provisions hereof.
m. Time. Time is of the essence of every provision of this Lease.
n. Prior Agreement; Amendments. This Lease, including the Work
Letter Agreement and the Exhibits hereto, contains all of the agreements of the
parties with respect to the leasing of the Premises and supercedes any prior
agreement or understanding. This Lease may be amended only by a subsequent
writing signed by the parties hereto.
o. Separability. If any provision of this Lease is held to be
invalid, void or unenforceable as written, the parties intend and desire that
such provision be enforced to the fullest extent allowed by law and that such
holding is no way affect, impair or invalidate any other provision hereof.
p. Recording. Tenant shall not record this Lease or a memorandum
thereof without the prior written consent of Landlord.
q. Financial Statements. Tenant shall upon ten (10) days prior
written notice from Landlord provide Landlord with a current financial statement
and financial statements of the two (2) years prior to the current financial
12 - OFFICE BUILDING LEASE
<PAGE>
statement year. Such statements shall be prepared in accordance with generally
accepted accounting principles and, if such is the normal practice of Tenant,
shall be audited by an independent certified public accountant.
r. Consent. Any consent required by Landlord under this Lease must
be granted in writing. No such consent shall be unreasonably withheld, but any
consent may be issued subject to reasonable conditions. As a condition to any
consent, Landlord may require that any other party or parties with a right of
consent issue such consent on terms acceptable to Landlord. The consent or
approval of Landlord to or of any act by Tenant requiring Landlord's consent or
approval shall not be deemed to waive or render unnecessary Landlord's consent
to or approval of any subsequent similar acts by Tenant.
s. Third Parties. The Protected Parties and the lenders of Landlord
shall have the right to enforce the provisions of this Lease which reference
them. Except for the foregoing, there are no third parties benefitted hereby,
this Lease being intended solely for the benefit of Landlord and Tenant.
t. Survival. The release and indemnity covenants of Tenant, the
right of Landlord to enforce its remedies hereunder, the attorneys fees
provisions hereof, the provisions of Section 30 hereof, as well as all
provisions of this Lease which contemplate performance after the expiration or
termination hereof or the termination of Tenant'' right to possession
hereunder, shall survive any such expiration or termination.
30. LIMITATION ON LIABILITY.
In consideration of the benefits accruing hereunder, Tenant agrees
that, regarding any claim against Landlord and/or any other Protected Party,
including in the event of any actual or alleged failure, breach or default by
Landlord:
(a) The sole and exclusive remedy of Tenant shall be against the
interest of Landlord in the Project, and neither Landlord nor any other
Protected Party shall have any other liability whatsoever.
(b) If Landlord is a partnership, the following provisions of this
item b. shall also apply: (i) No partner of Landlord shall be sued or named as
a party in any suit or action; (ii) No service of process shall be made against
any partner of Landlord (except as may be necessary to secure jurisdiction of
the partnership); (iii) No partner of Landlord shall be required to answer or
otherwise plead to any service or process; (iv) No judgment may be taken
against any partner of Landlord; (v) Any judgment taken against any partner of
Landlord may be vacated and set aside at any time without hearing; and (vi) No
writ of execution will ever be levied against the assets of any partner of
Landlord.
(c) These covenants and agreements contained in this Section 30 are
enforceable both by Landlord and also by any other Protected Party.
(d) Tenant agrees that each of the foregoing provisions shall be
applicable to any and all liabilities, claims and causes of action whatsoever,
including those based on any provisions of this Lease, any implied covenant,
and/or any statue or common law principle.
31. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE.
a. Emissions. Tenant shall not (i) discharge, emit or permit to be
discharged or emitted, any liquid, solid or gaseous matter, or any combination
thereof, into the atmosphere, the ground or any body of water, which does or
may pollute or contaminate the same, or does or may adversely affect the health
or safety of persons, or the use or enjoyment of the Premises; nor (ii)
transmit, receive or permit to be transmitted or received, any electromagnetic,
microwave or other radiation in, on or about the Premises.
b. Storage. If, with or without violation of this Lease, Tenant
possesses at the Premises any matter described in Section 31a(i) above or any
Hazardous Substances (as defined below), Tenant shall store the same in
appropriate leak proof containers and/or areas which comply with all laws and
all prudent practices.
c. Disposal of Waste. Tenant shall not keep any trash, garbage,
waste or other refuse on the Premises except in sanitary containers and shall
regularly and frequently remove same from the Premises. Tenant shall keep all
such containers in a clean and sanitary condition. Tenant shall properly
dispose of all sanitary sewage and shall not use the sewage system for the
disposal of anything except sanitary sewage, nor in excess of capacity. Tenant
shall not cause any obstruction in the sewage disposal system.
d. Compliance with Law. Notwithstanding any other provision in the
Lease to the contrary, Tenant shall comply with all Laws in complying with its
obligations under this Lease, and in particular, Laws relating to the storage,
use and disposal of Hazardous Substances (as defined below).
e. Indemnification for Breach. Tenant shall defend, indemnify and
hold Landlord, the other Protected Parties, the Project and the holder of a
trust deed or mortgage on the Project harmless from any loss, claim, liability
or expense, including, without limitation, attorneys fees and costs, at trial
and/or on appeal and review, arising out of or in connection with its failure
to observe or comply with the provisions of this Section 31. This indemnity
shall survive the expiration or earlier termination of the term of the Lease or
the termination of Tenant's right of possession and be fully enforceable
thereafter.
13 - OFFICE BUILDING LEASE
<PAGE>
f. Indemnification Regarding Hazardous Substances. In addition to
the indemnity obligations contained elsewhere herein, Tenant shall indemnify,
defend and hold harmless Landlord, the other Protected Parties, the Premises,
the Project, and the holder of a trust deed or mortgage on the Project, from
and against all claims, losses, damages, monitoring costs, response costs,
liabilities, and other costs and expenses caused by, arising out of, or in
connection with, the generation, release, handling, storage, discharge,
transportation, deposit or disposal in, on, under or about the Premises by
Tenant or any of Tenant's agents of the following (collectively referred to as
"Hazardous Substances"): hazardous materials, hazardous substances, toxic
wastes, toxic substances, pollutants, petroleum products, underground tanks,
oils, pollution, asbestos, PCB's, radioactive materials, or contaminants, as
those terms are commonly used or as defined by federal, state, and/or local law
or regulation related to protection of health or the environment, including but
not limited to, the Resource Conservation and Recovery Act (RCRA) (42 U.S.C.
(S) 6901, et seq.); the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) (42 U.S.C. (S) 9601, et seq.); the Toxic Substances
Control Act (15 U.S.C. (S) 2601, et seq.); the Clean Water Act (33 U.S.C. (S)
1251, et seq.); the Clean Air Act (42 U.S.C. (S) 7401 et seq.); and ORS
Chapters 453, 465 and 466 as any of same may be amended from time to time,
and/or by any rules and regulations promulgated thereunder. Such damages,
costs, liabilities, and expenses shall include such as are claimed by any
regulating and/or administering agency, any ground lessor or master lessor of
the Project, the holder of any Mortgage or Deed of Trust on the Project, and/or
any successor of the Landlord named herein. This indemnity shall include (i)
claims of third parties, including governmental agencies, for damages, fines,
penalties, response costs, monitoring costs, injunctive or other relief; (ii)
the costs, expenses or losses resulting from any injunctive relief, including
preliminary or temporary injunctive relief; (iii) the expenses, including fees
of attorneys and experts, of reporting the existence of Hazardous Substances to
an agency of the State of Oregon or of the United States as required by
applicable laws and regulations; and (iv) any and all expenses or obligations,
including attorney's fees, incurred at, before and after any administrational
proceeding, trial, appeal and review. This indemnity shall survive the
expiration or earlier termination of the term of the Lease or the termination
of Tenant's right of possession and shall remain fully enforceable thereafter.
g. Information. Tenant shall give prior written notice to Landlord
of any use, whether incidental or otherwise, of Hazardous Substances on the
Premises, and shall immediately deliver to Landlord a copy of any notice of any
violation of any Law with respect to such use. Tenant shall also provide
Landlord, upon request, with any and all information regarding Hazardous
Substances in the Premises, including contemporaneous copies of all filings and
reports to governmental entities, and any other information requested by
Landlord. In the event of any accident, spill or other incident involving
Hazardous Substances, Tenant shall immediately report the same to Landlord and
supply Landlord with all information and reports with respect to the same. All
information described herein shall be provided to Landlord regardless of any
claim by Tenant that it is confidential or privileged.
IN WITNESS WHEREOF, the parties have executed this Lease as of the
date first above written.
Tenant: Tut Systems, Inc.
----------------------------------
/s/ Michael T. Sullivan
----------------------------------
By: /s/ Michael T. Sullivan
------------------------------
Its: V P
------------------------------
Landlord: See Attached
14 - OFFICE BUILDING LEASE
<PAGE>
PETULA ASSOCIATES, LTD., an Iowa Corporation and PRINCIPAL MUTUAL
LIFE INSURANCE COMPANY, an Iowa Corporation dba CREEKSIDE VI
PETULA ASSOCIATES, LTD., an Iowa Corporation
By: /s/ JOHN N. URBAN
---------------------------------
Its: JOHN N. URBAN
VICE PRESIDENT
---------------------------------
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa Corporation
By: /s/ Kurt D. Schaeffer
---------------------------------
Its: Kurt D. Schaeffer
Assistant Director
Commercial Real Estate
--------------------------------
<PAGE>
ADDENDUM ONE
1. Basic Lease Terms, No Tenant Improvement Allowance
Tenant has agreed to take the Premises in "as-is" condition, with minor cosmetic
touch-up painting, and carpet cleaning of the entire suite to be completed by
Landlord prior to commencement. Landlord will provide one standard building
suite sign and one directory listing.
7. Letter of Credit As Security Deposit
Upon execution of this Lease, Tenant shall provide Landlord with a Letter of
Credit as the security deposit set forth in Section 1 as security for the
performance by Tenant of the provisions of this Lease. Upon a default by Tenant,
Landlord shall have the right, without waiver of the default or prejudiced other
remedies, to use the security deposit or any portion of it to cure the default
or to compensate Landlord for any damages resulting from Tenant's default. Upon
demand, Tenant shall immediately pay to Landlord a sum equal to the portion of
the security deposit expended or applied by Landlord to maintain the security
deposit in the amount required by the following schedule. In no event will
Tenant have the right to apply any part of the security deposit to any rent or
to other sums due under this Lease. If Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return the entire
scheduled amount remaining as security. Landlord is not a trustee of the
security deposit and Landlord can commingle the security deposit with Landlord's
general funds. Landlord shall not be required to pay Tenant interest on the
deposit. If Landlord sells its interest in the Premises during the term hereof
and deposits with or credits to the purchase the unapplied portion of the
security deposit, Landlord shall be discharged from liability with respect to
the security deposit.
If Tenant is not in default of the Lease, increments of the Letter of Credit
security deposit shall be released at Tenant's request in accordance with the
following schedule.
Letter of Credit Security Deposit Schedule
------------------------------------------
<TABLE>
<S> <C>
. Due upon lease execution: $ 26,842
. Deposit level required from April 1, 1997 through February 28, 1998: $ 26,842
. Deposit level required from March, 1998 through February 28, 1999: $ 22,584
. Deposit level required from March 1999 through February 29, 2000: $ 18,326
. Deposit level required from March 2000 through February 28, 2001: $ 13,856
. Deposit level required from March 2001 through February 28, 2002: $ 9,386
. Remaining final security deposit: $ 4,693
</TABLE>
<PAGE>
EXHIBIT A
[MAP OF CREEKSIDE SIX APPEARS HERE]
THE PREMISES
(Cross-hatched area)
<PAGE>
EXHIBIT B
[MAP OF CREEKSIDE CORPORATE PARK APPEARS HERE]
THE PROJECT
(CROSS-HATCHED AREA)
<PAGE>
EXHIBIT C
STANDARDS FOR UTILITIES AND SERVICES
The following Standards for Utilities and Services are in effect. Landlord
reserves the right to adopt nondiscriminatory modifications and additions
hereto.
1. Non-attended automatic elevator facilities Monday through Friday,
except holidays, from 8 A.M. to 6 P.M., and have one elevator available at all
other times.
2. Monday through Friday, except holidays, from 8 A.M. to 6 P.M., and on
Saturday mornings from 8 A.M. to 12 Noon (and other times for the sum of $10.00
per hour), ventilate the Premises and furnish air conditioning or heating on
such days and hours, when in the reasonable judgment of Landlord it may be
required for the comfortable occupancy of the Premises. Tenant agrees to
cooperate fully at all times with Landlord, and to abide by all reasonable
regulations and requirements which Landlord may prescribe for the proper
function and protection of said air conditioning system. Tenant agrees not to
connect any apparatus, device, conduit or pipe to the Building chilled and hot
water air conditioning supply lines. Tenant further agrees that neither Tenant
nor its employees, agents, visitors, licensees or contractors shall at any time
enter mechanical installations or facilities of the Building or adjust, tamper
with, touch or otherwise in any manner affect said installations or facilities.
The cost of maintenance and service calls to adjust and regulate the air
conditioning system shall be charged to Tenant if the need for maintenance work
results from either Tenant's adjustment of room thermostats or Tenant's failure
to comply with its obligations under this section. Such work shall be charged at
hourly rates equal to then-current journeymen's wages to air conditioning
mechanics.
3. During the usual business hours on business days, electric current as
required by the building standard office lighting and fractional horsepower
office business machines in an amount not to exceed 5 watts per square foot.
Tenant agrees, should its electrical installation or electrical consumption be
in excess of the aforesaid quantity or extend beyond normal business hours, to
reimburse Landlord monthly for the measured consumption at the average cost per
kilowatt hour charged to the building during the period. If a separate meter is
not installed at Tenant's cost, such excess cost will be established by an
estimate agreed upon by Landlord and Tenant, and if the parties fail to agree,
as established by an independent licensed engineer. Tenant agrees not to use
any apparatus or device in, or upon, or about the Premises which may in any way
increase the amount of such services usually furnished or supplied to said
Premises, and Tenant further agrees not to connect any apparatus or devise with
wires, conduits or pipes, or other means by which such services are supplied,
for the purpose of using additional or unusual amounts of such services without
written consent of Landlord. Should Tenant use the same to excess, the refusal
on the part of Tenant to pay upon demand of Landlord the amount established by
Landlord for such excess charge shall constitute a breach of the obligation to
pay rent under this Lease and shall entitle Landlord to the rights therein
granted for such breach. At all times Tenant's use of electric current shall
never exceed the capacity of the feeders to the building or the risers or wiring
installation and Tenants shall not install or use or permit the installation or
use of any computer or electronic data processing equipment in the Premises
without the prior written consent of Landlord.
4. Provide janitor service to the Premises, provided the same are used
exclusively as offices, and are kept reasonably in order by Tenant, and if to be
kept clean by Tenant, no one other than persons approved by Landlord shall be
permitted to enter the Premises for such purposes. If the Premises are not used
exclusively as offices, they shall be kept clean and in order by Tenant, at
Tenant's expense, and to the satisfaction of Landlord, and by persons approved
by Landlord. Tenant shall pay to Landlord the cost of removal of any of
Tenant's refuse and rubbish to the extent that the same exceeds the refuse and
rubbish usually attendant upon the use of the Premises as offices.
Landlord reserves the right to stop service of the elevator, plumbing,
ventilation, air conditioning and electric systems, when necessary, by reason of
accident or emergency or for repairs, alterations or improvements, in the
judgment of Landlord desirable or necessary to be made, until said repairs,
alterations or improvements, shall have been completed, and shall further have
no responsibility or liability for failure to supply elevator facilities,
plumbing, ventilating, air conditioning or electric service. It is expressly
understood and agreed that any covenants, express or implied, for Landlord to
furnish any service for the benefit of Tenant shall not be deemed breached if
Landlord is unable to furnish or perform the same by virtue of a strike or labor
trouble or any other cause whatsoever beyond Landlord's reasonable control.
5. Tenant shall not use or install in the Premises any heat generating
equipment, except as specifically authorized herein, or installed pursuant to
the Work Letter Agreement, without Landlord's prior written consent. The
inclusion of this restriction is to ensure that the HVAC system is adequate to
service the Building and the various uses of tenants that occupy the Building.
EXHIBIT C
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
1. Except as specifically provided in the Lease to which these Rules and
Regulations are attached, no sign, placard, picture, advertisement, name or
notice shall be installed or displayed on any part of the outside or inside of
the Building or Project without the prior written consent of Landlord. Landlord
shall have the right to remove, at Tenant's expense and without notice, any sign
installed or displayed in violation of this rule. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or inscribed at
the expense of Tenant by a person approved by Landlord.
2. If Landlord objects in writing to any curtains, blinds, shadow, screens
or hanging plants or other similar objects attached to or used in connection
with any window or door of the Premises, or placed on any windowsill, which is
visible from the exterior of the Premises, Tenant shall immediately discontinue
such use. Tenant shall not place anything against or near glass partitions or
doors or windows which may appear unsightly from outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits,
entrances, elevators or stairways of the Project. The halls, passages, exits,
entrances, elevators and stairways are not open to the general public, but are
open, subject to reasonable regulations, to Tenant's business invitees.
Landlord shall in all cases retain the right to control and prevent access
thereto of all persons whose presence in the judgment of Landlord would be
prejudicial to the safety, character, reputation and interest of the Project and
its tenants; provided that nothing herein contained shall be construed to
prevent such access to personnel with whom any tenant normally deals in the
ordinary course of its business, unless such persons are engaged in illegal or
unlawful activities. No tenant and no employee or invitee of any tenant shall
go upon the roof(s) of the Project.
4. Landlord will furnish Tenant, free of charge, with two keys to each
door lock in the Premises. Landlord may make a reasonable charge for any
additional keys. Tenant shall not make or have made additional keys, and Tenant
shall not alter any lock or install a new additional lock or bolt on any door of
its Premises. Tenant, upon the termination of its tenancy, shall deliver to
Landlord the keys of all doors which have been furnished to Tenant, and in the
event of loss of any keys so furnished, shall pay Landlord therefor.
5. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's instructions in
their installation.
6. No equipment, materials, furniture, packages, supplies, merchandise or
other property will be received in the Building or carried in the elevators
except between such hours and in such elevators as may be designated by
Landlord. Tenant's initial move in and subsequent deliveries of bulky items,
such as furniture, sofas and similar items shall, unless otherwise agreed in
writing by Landlord, be made during the hours of 6:00 p.m. to 6:00 a.m., or on
Saturday or Sunday. Deliveries during normal office hours shall be limited to
normal office supplies and other small items. No deliveries shall be made which
impede or interfere with other tenants or the operation of the Building.
7. Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by Law. Landlord shall have the right to prescribe the weight,
size and position of all equipment, materials, furniture or other property
brought into the Building. Heavy objects shall, if considered necessary by
Landlord, stand on such platforms as determined by Landlord to be necessary to
properly distribute the weight, which platforms shall be provided at Tenant's
expense. Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein shall be placed and maintained by Tenant, at
Tenant's expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration. The persons employed to move such equipment in or
out of the Building must be acceptable to Landlord. Landlord will not be
responsible for loss of, or damage to, any such equipment or other property from
any cause, and all damage done to the building by maintaining or moving such
equipment or other property shall be repaired at the expense of Tenant.
8. Tenant shall not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited quantities
necessary for the operation or maintenance of office equipment. Tenant shall
not use or permit to be used in the Premises any foul or noxious gas or
substance, or permit or allow the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the building by
reason of noise, odors, or vibrations, nor shall Tenant bring into or keep in or
about the Premises any birds or animals.
9. Tenant shall not use any method of heating or air conditioning other
than that supplied by Landlord.
10. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to assure the most effective operation
of the Building's heating and air conditioning and to comply with any
governmental energy-saving rules, laws or regulations of which Tenant has actual
notice, and shall refrain from attempting to adjust controls. Tenant shall keep
corridor doors closed, and shall close window coverings at the end of each
business day.
D-1
<PAGE>
11. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building.
12. Landlord reserves the right to exclude from the Building between the
hours of 6:00 p.m. and 7:00 a.m. the following day, or such other hours as may
be established from time to time by Landlord, and on Sundays and legal holidays,
any person unless that person is known to the person or employee in charge of
the Building and has a pass or is properly identified. Tenant shall be
responsible for all persons for whom it requests passes and shall be liable to
Landlord for all acts of such persons. Landlord shall not be liable for damages
for any error with regard to the admission to or exclusion from the Building of
any person. Landlord reserves the right to prevent access to the Building in
case of invasion, mob, riot, public excitement or other commotion by closing the
doors or by other appropriate action.
13. Tenant shall entirely shut off all water faucets or other water
apparatus, and electricity, gas or air outlets before tenant and its employees
leave the Premises. Tenant shall be responsible for any damage or injuries
sustained by other tenants or occupants of the Building or by Landlord for
noncompliance with this rule.
14. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.
15. Tenant shall not sell, or permit the sale at retail of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to the
general public in or on the Premises. Tenant shall not make any room-to-room
solicitation of business from other tenants in the Project. Tenant shall not
use the Premises for any business or activity other than that specifically
provided for in Tenant's Lease. Canvassing, soliciting and distribution of
handbills or any other written material, and peddling in the Project are
prohibited, and Tenant shall cooperate to prevent such activities.
16. Tenant shall not install any radio or television antenna, loudspeaker
or other devices on the roof(s) or exterior walls of the Building or Project.
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Project or elsewhere.
17. Tenant shall not mark, drive nails, screw or drill into the
partitions, woodwork or plaster or in any way deface the Premises or any part
thereof, except in accordance with the provisions of the Lease pertaining to
alterations. Landlord reserves the right to direct electricians as to where and
how telephone and telegraph wires are to be introduced to the Premises. Tenant
shall not cut or bore holes for wires. Tenant shall not affix any floor
covering to the floor of the Premises in any manner except as approved by
Landlord. Tenant shall repair any damage resulting from noncompliance with this
rule.
18. Tenant shall not install, maintain or operate upon the Premises any
vending machines without the written consent of Landlord.
19. Landlord reserves the right to exclude or expel from the Project any
person who, in Landlord's judgment, is intoxicated or under the influence of
liquor or drugs or who is in violation of any of the Rules and Regulations of
the Building.
20. Tenant shall store all its trash and garbage within its Premises or in
other facilities provided by Landlord. Tenant shall not place in any trash box
or receptacle any materials which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse disposal
shall be made in accordance with directions issued from time to time by
Landlord.
21. The Premises shall not be used for the storage of merchandise held for
sale to the general public, or for lodging or for manufacturing of any kind, nor
shall the Premises be used for any improper, immoral or objectional purpose. No
cooking shall be done or permitted on the Premises without Landlord's consent,
except that use by Tenant of Underwriters' Laboratory approved equipment for
brewing coffee, tea, hot chocolate and similar beverages or use of microwave
ovens for employee use shall be permitted, provided that such equipment and use
is in accordance with all applicable Laws.
22. Tenant shall not use in any space or in the public halls of the
Project any hand truck except those equipped with rubber ties and side guards or
such other material-handling equipment as Landlord may approve. Tenant shall
not bring any other vehicles of any kind into the Building or Project.
23. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
24. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
25. Tenant's requirements will be attended to only upon appropriate
application to the Project management office by an authorized individual.
Employees of Landlord shall not perform any work or do anything outside of their
regular duties unless under special instructions from Landlord.
D-2
<PAGE>
EXHIBIT E
PARKING RULES AND REGULATIONS
The following rules and regulations shall govern use of the parking
facilities which are appurtenant to the Project.
1. Tenant shall not park or permit the parking of any vehicle in any
parking areas designated by Landlord as areas for parking by visitors to the
Project. Tenant shall not leave vehicles in the parking areas overnight.
Tenant shall not park any vehicles in the parking areas other than automobiles
and motorcycles.
2. No overnight or extended term storage of vehicles shall be permitted.
3. Vehicles must be parked entirely within painted stall lines of a
single parking stall.
4. All directional signs and arrows must be observed.
5. The speed limit within all parking areas shall be 5 miles per hour.
6. Parking is prohibited:
(a) in areas not striped for parking;
(b) in aisles;
(c) where "no parking" signs are posted;
(d) on ramps;
(e) in cross-hatched areas; and
(f) in such other areas as may be designated by Landlord.
7. All responsibility for damage to vehicles is assumed by the parker.
8. Washing, waxing, cleaning or servicing of any vehicle in any area is
prohibited.
9. Landlord reserves the right to establish and change parking fees and to
modify and/or adopt such other reasonable and non-discriminatory rules and
regulations for the parking facilities as it deems necessary for the operation
of the parking facilities. Landlord may refuse to permit any person who violates
these rules to park in the parking facilities, and any violation of the rules
shall subject the car to removal at the owner's expense and without any
liability to Landlord whatsoever.
10. Landlord may waive any one or more of these Rules and Regulations for
the benefit of Tenant or any other tenant, but no such waiver by Landlord shall
be construed as a waiver of such Rules and Regulations in favor of Tenant or any
other tenant, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against any or all of the tenants of the Project.
11. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease.
12. Landlord reserves the right to make such other and reasonable Rules and
Regulations as, in its judgment, may from time to time be needed for safety and
security, for care and cleanliness of the Project and for the preservation of
good order therein. Tenant agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are adopted.
13. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and guests.
1 - OFFICE BUILDING LEASE
<PAGE>
[LOGO OF FORUM PROPERTIES APPEARS HERE]
EXHIBIT E-1
Intentionally omitted.
<PAGE>
[LOGO OF FORUM PROPERTIES APPEARS HERE]
EXHIBIT F
Intentionally omitted.
<PAGE>
[LOGO OF FORUM PROPERTIES APPEARS HERE]
EXHIBIT G
Intentionally omitted.
<PAGE>
[LOGO OF FORUM PROPERTIES APPEARS HERE]
EXHIBIT H
ENVIRONMENTAL DISCLOSURE AND CERTIFICATION STATEMENT
Creekside II Phase VI
---------------------
(Project Name)
<TABLE>
DATE:____________________________Petula Assoc., Ltd., an Iowa corporation.,
And Principal Mutual Life Ins., Co.,
TO: Tut Systems Inc., and an Iowa corporation., dba KC Creekside and Forum Properties, Inc,
----------------------- ------------------------------------- -------------------------
Phase VI
<S> <C> <C>
(Lender) (Owner) (Manager, if applicable)
FROM: Name Michael T. Sullivan
--------------------------------------------------------------------
Position VP
--------------------------------------------------------------------
Company Tut Systems Inc.
--------------------------------------------------------------------
Address 2446 Estand Way, Pleasant Hill, CA 94523
--------------------------------------------------------------------
Phone
--------------------------------------------------------------------
</TABLE>
RE: LEASE AGREEMENT DATED ________________, 19__________, BY AND BETWEEN
Petula Assoc., Ltd., an Iowa corporation., and Principal Mutual Life Ins.,
Co., An Iowa corporation., d.b.a. KC Creekside-Phase VI
AS LANDLORD (THE "LANDLORD"), AND Tut Systems Inc., AS TENANT,
FOR THE LEASING OF THESE CERTAIN PREMISES DESCRIBED IN THE ATTACHMENT
EXHIBIT A (THE "LEASED PREMISES").
___________________________________________________________________________
Notwithstanding anything to the contrary contained in the Lease Agreement, I
Michael T. Sullivan acting with full authority, knowledge and on behalf of
Tut Systems, Inc., (hereinafter called "Company"), represent and warrant that
the following disclosure accurately reflects Company's operations as they
pertain to the use or proposed use of hazardous materials, petroleum, chemical
and waste products in, on or about the Leased Premises. I further certify that
after careful review of all anticipated Company operations and activities in
Leased Premises and thorough inquiry into any and all potentially applicable
governmental rules and regulations pertaining to health, safety and
environmental control, Company will operate in the Leased Premises in complete
and full compliance with all required standards.
Furthermore, the company will obtain and renew, as required by Landlord, all
applicable environmental, health and safety permits, registrations and
applications needed for Company operations on or about the Leased Premises.
Company will continue to review and inspect operations, chemical use and waste
streams activities for the purpose of identifying and eliminating any potential
environmental, health and safety concerns that could contaminate the property
and environment or represent safety and health concerns or increase
environmental risk and liability.
Company assures Landlord and its Lender, representatives, affiliated entities,
successors and assignees that any and all potential problems will be
communicated to Landlord promptly, fixed and the risk eliminated. All potential
problems will be communicated to Landlord by Company and remedied within forty-
eight (48) hours of identification or at another time acceptable to Landlord;
such remediation to be approved in writing by Landlord first and to be in
conformance with paragraph 31.g. of the Lease Agreement.
Company understands that it will be fully accountable to Landlord and any and
all applicable governmental agencies for any non-compliance items and
environmental contamination to the Leased Premises or adjacent property.
Company also understands that this Environmental Disclosure and Certification
Statement is incorporated by reference into the Lease Agreement. Company agrees
to abide by the terms and conditions contained herein and in the Lease Agreement
at all times or at the sole discretion of Landlord, any such noncompliance will
be considered a default under the Lease Agreement. Landlord can then exercise
to the fullest extent any and all of its remedies in accordance with the Lease
Agreement and any other legal remedies available.
<PAGE>
Company also understands that this Environmental Disclosure and Certification
Statement be reissued by Company to Landlord annually within thirty (30) days of
the anniversary of the original lease date or at any other time during the term
of the Lease Agreement.
"Company will not use, generate, store, treat or dispose of any hazardous
materials or waste as defined by any and all federal, state or local
environmental, health and safety rules, regulation decrees and laws
(collectively the "Environmental Laws"), that may apply to Company's operations
or the Leased Premises unless otherwise described below.
Company also assures Landlord that all Company's operations in or about the
leased premises will be conducted in full compliance with all the Environmental
Laws as required by any and all agencies with jurisdiction over the company's
operation or the Leased Premises."
Description of Company's operations.
- -----------------------------------
Sales office for northern California; high speed data transfer equipment
company.
List all petroleum products, chemicals, and waste to be used or generated by
- ----------------------------------------------------------------------------
Company.
- --------
N/A
List container sizes, maximum amounts at any given time and estimated annual
- ----------------------------------------------------------------------------
throughput during term of Lease Agreement.
- ------------------------------------------
N/A
Describe storage location and method for petroleum, chemical, and wastes used
- -----------------------------------------------------------------------------
and generated at the facility.
- ------------------------------
N/A
List all potential operation discharges from pipes, vents, flues and to building
- --------------------------------------------------------------------------------
drain.
- ------
N/A
List all required environmental permits and registrations, their assigned number
- --------------------------------------------------------------------------------
and expiration dates.
- ---------------------
N/A
________________________________________________________________________________
COMPANY:
Tut Systems Inc.,
------------------------------
By: /s/ Michael Sullivan
---------------------------
Its: VP
--------------------------
PRO MANUAL: Leasing -- Environmental Disclosure and Certification Statement
June 7, 1994
<PAGE>
EXHIBIT I
LEASE INSURANCE LANGUAGE
Insurance By Tenant
Tenant shall, during the Lease Term, procure at its expense and keep in force
the following insurance:
(1) Commercial general liability insurance naming the Landlord, Landlord's
Agents and other protected parties shall be named as additional insured
against any and all claims for bodily injury and property damage occurring
in or about the Premises arising out of Tenant's use and occupancy of the
Premises. Such insurance shall have a combined single limit of not less
than One Million Dollars ($1,000,000) per occurrence with a Two Million
Dollar ($2,000,000) aggregate limit and excess umbrella liability insurance
in the amount of Two Million Dollars ($2,000,000). If the Tenant has other
locations that it owns or leases, the policy shall include an aggregate
limit per location endorsement. Such liability insurance shall be primary
and not contributing to any insurance available to Landlord and Landlord's
insurance shall be in excess thereto. In no event shall the limits of such
insurance be considered as limiting the liability of Tenant under this
lease.
(2) Personal property insurance insuring all equipment, trade fixtures,
inventory, fixtures and personal property located on or in the Premises for
perils covered by the causes of loss special form (all risk) and in
addition, coverage for flood, earthquake and boiler and machinery (if
applicable). Such insurance shall be written on a replacement cost basis in
an amount equal to one hundred percent (100%) of the full replacement value
of the aggregate of the foregoing.
(3) Workers' compensation insurance in accordance with statutory law and
employers' liability insurance with a limit of not less than $100,000 per
accident, $500,000 disease, policy limit and $100,000 disease, each
employee.
(4) Such other insurance as Landlord deems necessary and prudent or required by
Landlord's beneficiaries or mortgagees of any deed of trust or mortgage
encumbering the Premises.
The policies required to be maintained by Tenant shall be with companies rated
AX or better in the most current issue of Best's Insurance Reports. Insurers
shall be licenses to do business in the state in which the Premises are located
and domiciled in the U.S.A. Any deductible amounts under any insurance policies
required hereunder shall not exceed $1,000. Certificates of insurance (certified
copies of the policies may be required) shall be delivered to Landlord prior to
the commencement date and annually thereafter at lease thirty (30) days prior to
the expiration date of the old policy. Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms hereof
in a blanket policy, provided such blanket policy expressly affords coverage to
the Premises and to Landlord as required by this Lease. Each policy of insurance
shall provide notification to Landlord at least thirty (30) days prior to any
cancellation or modification to reduce the insurance coverage.
In the event Tenant does not purchase the insurance required by this lease or
keep the same in full force and effect, Landlord may, but shall not be obligated
to purchase the necessary insurance and pay the premium. The Tenant shall repay
to Landlord, as additional rent, the amount so paid promptly upon demand. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
additional rent, any and all reasonable expenses (including attorneys' fees) and
damages which Landlord may sustain by reason of the failure to Tenant to obtain
and maintain such insurance.
Subrogation
Landlord and Tenant hereby mutually waive their respective rights of recover
against each other for any loss of, or damage to, either parties' property, to
the extent that such loss or damage is insured by an insurance policy required
to be in effect at the time of such loss or damage. Each party shall obtain any
special endorsements, if required by its insurer whereby the insurer waives its
rights of subrogation against the other party. The provisions of this clause
shall not apply in those instances in which waiver of subrogation would cause
either party's insurance coverage to be voided or otherwise made uncollectible.
[LOGO OF FORUM PROPERTIES APPEARS HERE]
CREEKSIDE CORPORATE PARK
<PAGE>
EXHIBIT 10.8
LICENSING AND COOPERATIVE MARKETING AGREEMENT
BETWEEN
MICROSOFT CORPORATION AND TUT SYSTEMS, INC.
THIS LICENSING AND COOPERATIVE MARKETING AGREEMENT (the "Licensing and
Cooperative Marketing Agreement") is made and entered into this 27th day of
August, 1997 (the "Effective Date"), by and between MICROSOFT CORPORATION, a
Washington corporation ("Microsoft"), and TUT SYSTEMS, INC., a California
corporation ("Tut"). The agreement has been modified and restated as of July 30,
1998.
RECITALS
--------
WHEREAS, Tut has developed technology that enables low cost, high speed,
local area networks to run on "plain old telephone service" ("POTS") wiring,
which technology is referred to by Tut as its "HomeRun" technology;
WHEREAS, Microsoft and Tut desire to cooperate to enable Tut to productize
Tut's HomeRun technology, including the creation of integrated circuits and end
user products containing integrated circuits, the development of software
drivers to support HomeRun-based products when running in Microsoft's Windows
and Windows NT operating environments, the creation of a testing and
certification program to enable third parties to achieve compatibility with the
HomeRun technology, and the definition of additional enhancements and upgrades
for the HomeRun products to be developed by Tut during the term of this
Licensing and Cooperative Marketing Agreement;
WHEREAS, upon the completion of products based on the HomeRun technology
and the parties acceptance of the same, the parties further desire to cooperate
with respect to the marketing and promotion of such HomeRun products and
technology; and
WHEREAS, to further the foregoing objectives, and to induce Microsoft to
enter into the Licensing and Cooperative Marketing Agreement, Tut is issuing to
Microsoft the Series G Preferred Stock Purchase Warrant (the "Warrant") pursuant
to the terms and conditions of the Warrant Purchase and Equity Rights Agreement
dated as of the Effective Date by and between Microsoft and Tut in the form
attached hereto as Exhibit I (the "Warrant Purchase and Equity Rights Agreement"
and collectively with the Warrant and this Agreement, the "Transaction
Documents").
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Microsoft and Tut agree as
follows:
AGREEMENT
---------
1. DEFINITIONS. When used in this Licensing and Cooperative Marketing Agreement
-----------
and its various Exhibits, the following terms shall have the following meanings
whenever initially capitalized:
(a) "HOMERUN END USER PRODUCTS" shall mean electronic devices (e.g. network
cards) based on or containing HomeRun Integrated Circuits.
(b) "HOMERUN INTEGRATED CIRCUITS" or "HICS" shall mean integrated circuits
based on or containing the HomeRun Technology.
(c) "HOMERUN INTELLECTUAL PROPERTY LICENSES" or "HIPS" shall mean non-
exclusive licenses to the HomeRun Technology, which licenses are granted to
third parties to enable them to create, market and distribute products based on
the HomeRun Technology, including but not limited to HomeRun End User Products
and HomeRun Integrated Circuits.
Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as [*]. A complete version of this exhibit
has been filed separately with the Securities and Exchange Commission.
Page 1 of 40
<PAGE>
(d) "HOMERUN PRODUCTS" shall collectively refer to the HomeRun End User
Products and the HomeRun Integrated Circuits.
(e) "HOMERUN TECHNOLOGY" shall mean Tut's proprietary technology that
enables low cost, high speed, local area networks to run on POTS wiring, which
technology is more fully described in the attached Exhibit A.
(f) "HOMERUN WINDOWS DRIVERS" shall mean software drivers to enable the
Windows Products to communicate with and operate in conjunction with the HomeRun
Products. The "Initial HomeRun Windows Drivers" are those software drivers that
work with the Initial HomeRun Products and the "Subsequent HomeRun Windows
Drivers" are those software drivers that work with the Subsequent HomeRun
Products.
(g) "HR1300HEC TECHNOLOGY" shall mean the technology and maskwork contained
in Tut's HR1300HEC HomeRun Integrated Circuit, or a derivative or successor
thereto as may be mutually agreed upon by the parties, which technology and
maskwork are described in the attached Exhibit B.
(h) "INITIAL HOMERUN PRODUCTS" shall mean the initial versions of the
HomeRun Products to be created by Tut pursuant to this Licensing and Cooperative
Marketing Agreement, which versions are more fully described and specified in
the Initial HomeRun Product Specifications.
(i) "INITIAL HOMERUN PRODUCT SPECIFICATIONS" shall mean the specifications
for the Initial HomeRun Products which specifications are attached hereto as
Exhibit C.
(j) "JOINT CREATIONS" shall mean any and all ideas, concepts, software
code, specifications and other intellectual creations regarding the HomeRun
Technology, the HomeRun Products and the HomeRun Windows Drivers creations
jointly (according to standard principals of inventorship and authorship) by
employees or contractors of Microsoft and Tut pursuant to this Agreement.
(k) "MARKETING AGREEMENT" shall refer to the Marketing Agreement attached
hereto as Exhibit E.
(m) "MICROSOFT CREATIONS" shall mean any and all ideas, concepts, software
code, specifications and other intellectual creations regarding the HomeRun
Technology, HomeRun Products and HomeRun Windows Drivers created solely by
Microsoft employees or contractors and submitted to Tut by Microsoft to this
Agreement for use in the development of the HomeRun Products and HomeRun
Technology.
(n) "SUBSEQUENT HOMERUN PRODUCTS" shall mean future, enhanced versions of
the HomeRun Products, which future versions are created during the term of this
Licensing and Cooperative Agreement but subsequent to the creation of the
Initial HomeRun Products, as more particularly described in the attached Exhibit
D.
(o) "TIMETABLE" shall mean the timetable for the development of the Initial
and Subsequent HomeRun Products, which timetable is attached hereto as Exhibit
F.
(p) "TUT CREATIONS" shall mean any and all ideas, concepts, software code,
specifications and other intellectual creations regarding the HomeRun
Technology, HomeRun Products and HomeRun Windows Drivers created solely by Tut
employees or contractors.
(q) "WINDOWS PRODUCTS" shall mean Microsoft's systems software products,
whether now known or hereafter developed, including but not limited to Microsoft
Windows 95, Windows CE, Windows NT Server, Windows NT Workstation, and any
derivative, successor or replacement products thereto.
2. HOMERUN PRODUCT AND HOMERUN WINDOWS DRIVER DEVELOPMENT.
------------------------------------------------------
Page 2 of 40
<PAGE>
(a) HOMERUN PRODUCT DESIGN AND FEATURES. Tut agrees that it shall develop
the Initial HomeRun Products according to the Initial HomeRun Product
Specifications. During the term of this Licensing and Cooperative Marketing
Agreement, the parties agree to consult with each other with respect to features
and enhancements to be contained in Subsequent HomeRun Products, and with
respect to the target shipment dates for any such Subsequent HomeRun Products.
During the term of this Licensing and Cooperative Marketing Agreement, Microsoft
agrees m assist Tut in the development and testing of the HomeRun Products by
testing versions of the Initial HomeRun Products and any Subsequent HomeRun
Products in Microsoft's public network trials, as mutually agreed upon.
(b) INITIAL HOMERUN PRODUCTS AND INITIAL HOMERUN WINDOWS DRIVERS
DEVELOPMENT/MICROSOFT'S TESTING AND ACCEPTANCE OF THE SAME. Tut agrees to create
the Initial HomeRun Products and the Initial HomeRun Windows Drivers according
to the Timetable. Microsoft hereby agrees to provide Tut, free of char e, with
reasonable amounts of technical support with respect to the creation and support
of the Initial HomeRun Windows Drivers. Upon completion of the final versions of
the Initial HomeRun Products and the Initial HomeRun Windows Drivers, Tut agrees
to deliver two (2) copies of each such Initial HomeRun Product and HomeRun
Windows Driver to Microsoft for Microsoft's testing and acceptance. Microsoft
shall have thirty (30) days from receipt of the final versions of the Initial
HomeRun Products and the Initial HomeRun Windows Drivers to accept or reject the
same. Microsoft's acceptance of the Initial HomeRun Products and the Initial
HomeRun Windows Drivers shall be based on the conformance of the Initial HomeRun
Products and the Initial HomeRun Windows Drivers to the Initial Home HomeRun
Product Specifications, and Microsoft's quality standards for third party
products it endorsed Microsoft agrees not to unreasonably withhold its
acceptance of any Initial HomeRun Product or any Initial HomeRun Windows Driver.
If. Microsoft rejects an initial HomeRun Product or Initial HomeRun Windows
Driver, then Microsoft shall inform Tut in writing of Microsoft's rejection and
the reason(s) therefore. Tut shall have thirty (30) days to revise and submit
corrected versions of the rejected Initial HomeRun Product(s) and/or Initial
HomeRun Windows Driver(s) to Microsoft for re-testing and acceptance as set
forth above. In the event Microsoft rejects any re-submitted Initial HomeRun
Product(s) and/or Initial HomeRun Windows Driver(s), then Microsoft in its sole
discretion, may elect to either extend the correction period or to terminate
this Licensing and Cooperative Marketing Agreement as set forth in Section
12(b). In the event Microsoft fails to accept or reject within the specified
time flame a particular Initial HomeRun Product(s) and/or Initial HomeRun
Windows Driver(s), such Initial HomeRun Product(s) and/or Initial HomeRun
Windows Driver(s) shall be deemed accepted.
(C) SUBSEQUENT HOMERUN PRODUCTS AND SUBSEQUENT HOMERUN WINDOWS DRIVERS
DEVELOPMENT/MICROSOFT'S TESTING AND ACCEPTANCE OF THE SAME. During the term of
this Licensing and Cooperative Marketing Agreement, Tut agrees to create all
Subsequent HomeRun Products and Subsequent HomeRun Windows Drivers according to
the Timetable. Microsoft hereby agrees to provide Tut, free of charge, with
reasonable amounts of technical support with respect to the creation and port of
any Subsequent HomeRun Windows Drivers. Upon completion of the final versions of
any Subsequent HomeRun Products and Subsequent HomeRun Windows Drivers, Tut
agrees to deliver two (2) copies of each such Product and Driver to Microsoft
for Microsoft's testing and acceptance. Microsoft shall have thirty (30) days
from delivery of the final versions of any Subsequent HomeRun Products and
Subsequent HomeRun Windows Drivers to accept or reject the same. Microsoft's
acceptance of any Subsequent HomeRun Products and Subsequent HomeRun Windows
Drivers shall be based on the Subsequent HomeRun Products and the Subsequent
HomeRun Windows Drivers passing the HomeRun certification program referenced in
Section 4(b) of this Licensing and Cooperative Marketing Agreement, and
Microsoft's quality standards for third party products it endorse. Microsoft
agrees not to unreasonably withhold its acceptance of any Subsequent HomeRun
Products and Subsequent HomeRun Windows Driver(s), If Microsoft rejects a
Subsequent HomeRun Product or a Subsequent HomeRun Windows Driver, then
Microsoft shall inform Tut in writing of Microsoft's rejection and the reason(s)
therefore. Tut shall have thirty (30) days to revise and submit corrected
versions of such Subsequent HomeRun Product(s) and/or Subsequent HomeRun Windows
Driver(s) to Microsoft for re-testing and acceptance as set forth above. In the
event Microsoft rejects any re-submitted Subsequent HomeRun Product(s) and/or
Subsequent HomeRun Windows Driver(s), then Microsoft in its sole discretion, may
elect to either extend the correction period or to terminate this Licensing and
Cooperative Marketing Agreement as set forth in Section 12(b). In the event
Microsoft fails to accept or reject within the specified time frame a particular
Subsequent HomeRun Product(s) and/or Subsequent HomeRun Windows
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Driver(s), such Subsequent HomeRun Product(s) and/or Subsequent HomeRun Windows
Driver(s), shall be deemed accepted.
3. OWNERSHIP OF AND LICENSES TO THE MICROSOFT CREATIONS, TUT CREATIONS AND THE
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JOINT CREATIONS.
- ---------------
(A) MICROSOFT CREATIONS. Any and all Microsoft Creations shall at all times
remain the sole and exclusive property of Microsoft. Effective upon the delivery
of any Microsoft Creations to Tut, Microsoft shall be deemed to have granted to
Tut a perpetual, irrevocable, non-exclusive, worldwide, royalty free license
under Microsoft's proprietary rights in the Microsoft Creations (a) to make,
use, modify, create derivative works based upon, reproduce, import, distribute,
license, offer to sell, and sell, rent or lease copies of the HomeRun Products,
the HomeRun Windows Drivers and the HomeRun Technology, in source and object
code form, and derivative works thereof based on or containing such Microsoft
Creations, and (b) to license third parties to exercise the foregoing rights,
including the right to license such rights to further third parties. To the
extent that Microsoft believes that any technology existing, being created, or
to be created will qualify as Microsoft Creations, Microsoft will promptly
notify Tut in writing of their belief that such technology will be Microsoft
Creations; in the absence of such a notification, no technology shall be deemed
licensed under this Section 3(a) as Microsoft Creations.
(B) TUT CREATIONS. Any and all Tut Creations shall at all times remain the
sole and exclusive property of Tut, subject only to the license rights therein
granted to Microsoft in Sections 6 and 8 of this Licensing and Cooperative
Marketing Agreement. To the extent that Tut believes that any technology
existing, being created, or to be created will qualify as Tut Creations, Tut
will promptly notify Microsoft in writing of their belief that such technology
will be Tut Creations; in the absence of such a notification, no technology
shall be deemed licensed under this Section 3(b) as Tut Creations.
(C) JOINT CREATIONS. Microsoft and Tut each shall have an undivided, joint
ownership interest in the Joint Creations. Neither party shall be obligated to
pay the other any royalties or other consideration, nor account to the other for
any royalties or other consideration it may receive, for any license,
assignment, sale, lease or other distribution of the Joint Creations, or any
derivative technology thereof. Any derivative technology of the Joint Creations
made independently by the parties shall be owned exclusively by the creator of
such derivative technology. To enable each party to have the joint ownership
rights set forth in this Section 3(c), each party hereby assigns to the other
party an undivided, one-half interest in all right, title and interest in and to
the Joint Creations, including, without limitation, the following:
(i) Any United States copyrights that each such party may possess or
acquire in the Joint Creations and all world-wide copyrights and equivalent
rights in the Joint Creations including all renewals and extensions of such
rights may be secured under the laws now or hereafter in force and effect
in the United States of America or in any other country or countries;
(ii) All worldwide rights in and to any inventions, ideas, designs,
concepts techniques, discoveries or improvements, whether or not
patentable, embodied in Joint Creations, including but not limited to all
trade secrets utility and design patent rights and equivalent rights in and
to such inventions and designs, regardless of whether or not legal
protection for the Joint Creations is sought;
(iii) The right to develop derivative technology from the Joint
Creations with full rights to sublicense others to do the same without
further approval of the other party; and
(iv) The right to sue for intellectual property infringements of the
Joint Creations and the right to collect and retain damages from any such
infringements.
Each party hereby irrevocably and forever waives and agrees never to assert
against the other party or its licensees any or all "moral rights" it may have
in the Joint Creations. Each party shall execute and deliver such instruments
and take such other actions as may be requested by the other party to perfect or
protect their joint ownership of the rights in the Joint Creations, to carry out
the assignments and other activities contemplated in this Section 3(c), and to
assist the other and its nominees in every proper way to secure, maintain,
protect and defend for
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each party's benefit all such rights in the Joint Creations in the United States
and any and all foreign countries. The parties will cooperate with each other in
the filing and prosecution of any copyright or patent applications that the
parties jointly elect to file on the Joint Creations. To the extent either party
believes that any technology being created or to be created will qualify as
Joint Creations, they agree to promptly notify the other party in writing of
their belief that such technology will be Joint Creations.
4. COOPERATIVE MARKETING AND PROMOTION OBLIGATIONS OF THE PARTIES.
--------------------------------------------------------------
(A) MARKETING EFFORTS. Beginning on the Effective Date, both Microsoft and
Tut agree to undertake the responsibilities and activities set forth in the
Marketing Agreement. In addition, Microsoft and Tut agree to cooperate during
the term of this Licensing and Cooperative Marketing Agreement in defining,
sharing and supporting the creation of white papers, presentations and other
customer-related marketing materials that outline the current or future
implementations of the HomeRun Technology on conventional household electrical
wiring and wireless alternatives. Microsoft and Tut further agree to cooperate
in promoting the HomeRun Technologies and HomeRun Products through mutually
acceptable use of each company's Web site.
(B) HOMERUN TESTING AND CERTIFICATION PROGRAM. Microsoft and Tut agree to
jointly create, within sixty (60) days of Microsoft's acceptance pursuant to
Section 2(b) of the Initial HomeRun Products and the Initial HomeRun Windows
Drivers, a testing and certification program(s) to validate that third parties
achieve compliance with the initial HomeRun Product Specifications (as well as
subsequent specifications developed by the parties for the Subsequent HomeRun
Products) in the implementation of the HomeRun Technology. The final testing and
certification program(s) will be designed by mutual agreement and administered
by Tut with Microsoft's reasonable cooperation. Tut agrees to conform the
Initial HomeRun Products and any Subsequent HomeRun Products with all elements
of the testing and certification programs designed by the parties pursuant to
this Licensing and Cooperative Marketing Agreement.
(C) TUT'S ADDITIONAL MARKETING EFFORTS AND OBLIGATIONS. Tut intends to
distribute the HomeRun Products and Technology in three forms: (i) HomeRun End
User Products, (ii) HIP sales, and (iii) HIP licenses. Tut shall set pricing for
the HomeRun End User Products, including pricing to its original equipment
manufacturers ("OEMs"), at a level to accomplish broad adoption of the HomeRun
End User Products. Tut shall manage and price HICS sales in accordance with
standard industry margins for integrated circuits, and HIP licenses in a
commercially reasonable manner. Tut shall leverage an OEM channel arrangement as
the primary channel for HIP sales and as a channel of distribution for the
HomeRun End User Products. Tut will allocate adequate financial, sales, and
marketing resources to the OEM channel in order to accomplish the foregoing. Tut
further agrees to make commercially reasonable efforts to support the dedicated
pilot projects as outlined in the Marketing Agreement that Microsoft will
initiate in order to showcase the HomeRun Technology and the HomeRun Products.
(D) MICROSOFT'S ADDITIONAL MARKETING EFFORTS AND OBLIGATIONS. Microsoft
agrees to use its OEM relationships to assist Tut in evangelizing the HomeRun
Technology and the HomeRun Products. Microsoft further agrees to assist Tut in
participating in appropriate Trade shows and conferences that Microsoft either
sponsors and/or participates in, provided that Tut shall remain solely
responsible for all fees and costs associated therewith. Additionally, Microsoft
will explore extending discounts to Tut for appropriate space on The Microsoft
Network ("MSN") for HomeRun Technology and HomeRun Product related business,
including but not limited to product literature and technical support Microsoft
agrees that the HomeRun Technology will be the technology that Microsoft
initially promotes for providing home networking Ethernet services over POTS
wiring.
5. TUT'S TECHNICAL SUPPORT OBLIGATIONS WITH RESPECT TO THE HOMERUN PRODUCTS AND
----------------------------------------------------------------------------
THE HOMERUN TECHNOLOGY. Tut will at all times remain solely responsible for
- ----------------------
providing all technical support to HICS customers, HIP licensees, OEMs and to
end users of the HomeRun Products. In connection with its technical support, Tut
agrees to assist HICS customers and HIP licensees in the completion of Federal
Communication Commission ("FCC") testing and approval, including but not limited
to documentation (which shall include but is not limited to schematics and
layouts) and consulting as required to assist in the approval of various HomeRun
Technology based product offerings. Tut also agrees to provide technical support
to HICS customers and HIP licensees to aid them in
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obtaining international governmental approvals (i.e., the approval of foreign
country equivalents of the FCC), including but not limited to, documentation
(which shall include but is not limited to schematics and layouts), and
consulting as required to assist in the approval of various HomeRun Technology
based product offerings in key international markets, including but not limited
to the following and any others as mutually agreed upon between Microsoft and
Tut: Asia (the primary markets being Japan, China (including Hong Kong),
Malaysia and Singapore); and Europe (the primary markets being:. England,
France, Germany and Switzerland). Tut further agrees to make commercially
reasonable efforts to provide, free of charge, technical support for dedicated
pilot projects that Microsoft elects to initiate in order to showcase the
HomeRun Technology and the HomeRun Products.
6. TUT'S SPECIFIC OBLIGATIONS AND MICROSOFT'S SPECIFIC RIGHTS WITH RESPECT TO
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THE HR1300HEC TECHNOLOGY.
- ------------------------
(A) TUT'S EFFORTS TO LICENSE THE HR1300HEC TECHNOLOGY. Tut hereby agrees to
use its best efforts to license the right to use the HR1300HEC Technology to the
companies listed on the attached Exhibit G for incorporation into products those
companies will market and sell to end users, specifically including the right to
manufacture their own integrated circuits for inclusion in their own products.
The foregoing licenses shall not, however, be required to include any right on
behalf of such companies to further grant to other third parties sub-licenses or
the right to sell standalone integrated circuits. The per unit royalties for the
HR1300HEC Technology or derivatives or successors to be charged by Tut will be
set by market conditions. Notwithstanding the foregoing, if:
[*]
(iii) at any time during the term of this Licensing and Cooperative
Marketing Agreement, Tut breaches its obligations under Section 9.
then Microsoft shall receive from Tut, a perpetual, irrevocable, non-exclusive,
real, worldwide license under Tut's copyrights, trade secrets, patents and other
intellectual property and proprietary rights (a) to make, use, modify, create
derivative works based upon, reproduce, import, distribute, license, offer to
sell, and sell, rent or lease products based on the HR1300HEC Technology and the
HomeRun Technology, and (b) to grant third parties (excluding, however, those
companies listed in Exhibit H) the right to exercise any of the rights set forth
in (a) above. [*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
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<PAGE>
[*]
In the event Microsoft is alleging that condition (iii) has occurred, then
Tut shall have thirty (30) days to cure such violation, and, in the absence of a
timely cure, the license grant described in this Section 6(a) shall thereupon
automatically be deemed to have been granted upon Microsoft's giving written
notice to Tut that Microsoft is accepting the license.
The HR1300HEC Technology and the HomeRun Technology that is covered by the
foregoing license shall include, by way of example, the HomeRun reference
designs and all related technical information necessary for producing,
enhancing, modifying, maintaining and supporting the HomeRun Technology,
including source code, mask works and technical specifications, and any updates
thereto created by or for Tut during the term of this Licensing and Cooperative
Marketing Agreement. All technical materials needed by Microsoft to exercise the
foregoing license, including source code, mask works and technical
specifications, shall be delivered to Microsoft within thirty (30) days of the
license coming into effect.
(b) ROYALTY PAYMENTS. In the event the license described in Section 6(a) is
granted to Microsoft, Microsoft agrees to pay Tut a non-recoupable license fee
of [*] within thirty (30) days of the license becoming effective and a royalty
of [*] for each unit of product sold by Microsoft or any of its sublicenses or
used by Microsoft or its sublicensees for business operations not related to the
testing and production of products based upon this license, or any lower per
unit royalty that is then being paid by any other Tut licensee. All payments due
pursuant to the license granted Microsoft in Section 6(a) subsequent to the One
Million Dollar non-recoupable license fee shall be made within forty five (45)
days after the end of each calendar quarter with respect to which Microsoft owes
Tut any royalties. Microsoft shall furnish Tut a statement together with payment
for any amount shown thereby to be due to Tut. The royalty statement shall
contain information sufficient to discern how the royalty payment was computed.
In no event shall the license described in Section 6(a) come into effect before
Microsoft affirmatively states in writing that it accepts the license and
believes that either of both conditions (i) or (ii) described in Section 6(a)
has occurred.
(c) AUDIT RIGHTS. During the time period Microsoft is exercising the
license rights granted in Section 6(a) and for three (3) years thereafter,
Microsoft agrees to keep all usual and proper records and books of account and
all usual and proper entries relating to HR1300HEC Technology efficient to
substantiate the number of copies of products based on the HR1300HEC Technology
distributed or otherwise disposed of by or for Microsoft. Microsoft shall
maintain such records for itself and for each Microsoft licensee which exercises
rights under this Licensing and Cooperative Marketing Agreement. In order to
verify statements issued by Microsoft and Microsoft's compliance with the terms
of this Licensing and Cooperative Marketing Agreement, upon thirty (30) days
prior written notice to Microsoft, Tut may cause an audit to be made of
Microsoft books and records. Any audit and/or inspection shall be conducted
during regular business hours at Microsoft's facilities. Any audit shall be
conducted by a nationally recognized independent certified public accountant
selected by Tut (other than on a contingent fee basis). Microsoft agrees to
provide Tut's designated audit or inspection team access to the relevant
Microsoft records. Prompt
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
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<PAGE>
adjustment shall be made to compensate for any errors or omissions disclosed by
such audit. Any such audit shall be paid for by Tut unless material
discrepancies are disclosed. "Material" shall mean more than five percent (5%)
of the amount that was reported. If material discrepancies are disclosed,
Microsoft agrees to pay Tut for the reasonable costs associated with the audit.
In no event shall audits be made more frequently than annually, and in no event
shall more than three (3) previous years be auditable.
7. MICROSOFT'S LICENSE GRANT TO TUT WITH RESPECT TO THE WINDOWS PRODUCTS.
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Microsoft hereby grants to Tut during the term of this Licensing and Cooperative
Marketing Agreement, a personal, non-transferable, worldwide, limited license to
reproduce and internally use in object code form, copies of the Windows Products
solely as reasonably required for Tut to undertake the HomeRun Product and
HomeRun Windows Driver development and testing described herein. Tut's use of
copies of the Windows Products shall at all time be in accordance with the terms
and conditions of the End User License Agreement which normally accompanies such
products. Upon termination of this Licensing and Cooperative Marketing Agreement
for any reason, Tut shall return to Microsoft or destroy all copies of the
Windows Products made pursuant to this Section 7.
8. TUT'S LICENSE GRANT TO MICROSOFT WITH RESPECT TO THE HOMERUN WINDOWS DRIVERS.
----------------------------------------------------------------------------
Upon Microsoft's acceptance of a particular HomeRun Windows Driver pursuant to
Section 2(b) or (c), Tut shall be deemed to have granted to Microsoft, a
perpetual, irrevocable, non-exclusive, worldwide, royalty-free license under
Tut's copyrights, trade secrets, patents and other intellectual property and
proprietary rights (a) to make, use, modify, create derivative works based upon,
reproduce, import, distribute, license, offer to sell, and sell, rent or lease
copies of the HomeRun Windows Driver, in source and object code form, and
derivative works thereof; and (b) to license third parties to exercise the
foregoing rights, including the right to license such rights to further third
parties. Tut agrees to immediately deliver to Microsoft upon request, the source
code for any HomeRun Windows Driver. In the event Microsoft has accepted a given
HomeRun Windows Driver and its associated HomeRun Product, then Microsoft agrees
to use commercially reasonable efforts to incorporate that HomeRun Windows
Driver in the next major release of the applicable Windows Products.
9. COVENANTS. In partial consideration for the assistance Microsoft will be
---------
providing to the development of the HomeRun Technology, Tut agrees for a
period of three (3) years from the Effective Date that Microsoft shall be the
preferred operating system developer or operating system vendor with
authorized access to information regarding the behavior of the algorithms and
the software code underlying the HomeRun Technology and the HomeRun Products.
[*] In the event that either the IEEE or ANSI elect at any time during the
three year period to standardize the HomeRun Technology, then upon such
standard becoming effective, the restrictions set forth above will
automatically terminate; provided, however, that any material provided to Tut
by Microsoft pursuant to Section 3 of this Licensing and Cooperative Marketing
Agreement, shall remain at all times Microsoft proprietary and confidential
information and no Microsoft confidential information shall be disclosed to
IEEE or ANSI without Tut having received Microsoft's prior written permission
for such disclosure. Without limiting Microsoft's remedies hereunder, the
parties expressly agree that Microsoft may enforce the provisions of this
Section 9 by specific performance in an action for injunctive or other
equitable relief.
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
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<PAGE>
10. PROMOTION AND PUBLIC ANNOUNCEMENT. Except as expressly set forth in the
---------------------------------
Marketing Agreement, the parties agree that the contents of all press releases
or other public announcements or disclosure concerning the Transaction Documents
and the relationship between the parties shall be made only with the consent of
Tut and Microsoft prior to the release thereof. The foregoing notwithstanding,
each party reserves the right to make such disclosures, whether in public
filings or otherwise, as may be necessary in the judgment of such party's legal
counsel and independent auditors after prior consultation with the other party
with respect thereto, provided such party and its legal counsel and independent
auditors comply at all times with the provisions of Section 1l of this Licensing
and Cooperative Marketing Agreement.
11. CONFIDENTIALITY. All confidential information disclosed by either party
---------------
pursuant to this Transaction Documents, along with the terms and conditions of
the Transaction Documents, shall be subject to the Non Disclosure Agreement
dated August 29, 1996 between the parties, as modified by Section l0 of this
Licensing and Cooperative Marketing Agreement.
12. TERM AND TERMINATION.
--------------------
(A) TERM. This Licensing and Cooperative Marketing Agreement shall take
effect on the Effective Date and shall continue in effect for a period of two
(2) years unless such term is renewed by mutual agreement of the parties or is
terminated in accordance with this Licensing and Cooperative Marketing
Agreement.
(B) TERMINATION BY MICROSOFT PURSUANT TO SECTIONS 2(b) AND (c). In the
event Microsoft rejects a resubmitted HomeRun Product and/or HomeRun Windows
Driver pursuant to either Section 2(b) or 2(c) and elects in its discretion to
terminate this Licensing and Cooperative Marketing Agreement rather than grant
an extension to the correction period, then any such decision by Microsoft to
terminate this Licensing and Cooperative Marketing Agreement shall be effective
immediately upon Microsoft's giving written notice of its election to terminate.
(C) TERMINATION BY EITHER PARTY FOR CAUSE. Either party may terminate this
Licensing and Cooperative Marketing Agreement immediately upon written notice at
any time if the other party is in material breach of Licensing and Cooperative
Marketing Agreement and fails to cure such breach within thirty (30) days after
written notice thereof.
(D) SURVIVAL/OBLIGATIONS UPON EXPIRATION OR TERMINATION. sections 1, 3, 5,
8, 11, 14, 15 and 16 shall survive any expiration of this Licensing and
Cooperative Marketing Agreement or the termination of this Licensing and
Cooperative Marketing Agreement pursuant to either Section 12(b) or (c). If the
license referenced in Section 6 has been granted to Microsoft prior to either
the natural expiration of this Agreement or a termination of this Agreement by
either party, then Section 6 shall also survive such expiration or termination.
If the license referenced in Section 6 has not been granted at the expiration or
termination of this Agreement, then Section 6 will only survive if the cause of
termination is a termination by Microsoft pursuant to either Section 12(b) or
(c). Furthermore, Section 9 shall only survive in the event of either the
natural expiration of this Agreement or a termination of this Agreement by
Microsoft pursuant to either Section 12(b) or (c).
13. REPRESENTATIONS WARRANTIES AND COVENANTS.
----------------------------------------
(A) BY TUT. Tut represents, warrants and covenants that:
(i) This Licensing and Cooperative Marketing Agreement, the Warrant
Purchase and Equity Rights Agreement and all related agreements are legal,
valid and binding agreements of Tut, each enforceable against Tut in
accordance with its terms.
(ii) No work or materials Tut develops, acquires or uses in connection
with its performance under Licensing and Cooperative Marketing Agreement,
including without limitation the HomeRun
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Technology, the HomeRun Products, the HomeRun Windows Drivers, and the
HomeRun logo (if any), shall (i) infringe any copyright, patent, trade
secret, trademark, moral right, or other proprietary or personal right held
by any third party, (ii) contain any defamatory or unlawful statements, or
(iii) contain any instructions that may cause harm or injury.
(iii) All obligations owed to third parties with respect to the
HomeRun Technology, the HomeRun Products, the HomeRun Windows Drivers, and
the HomeRun logo (if any) and Microsoft's exercise of any rights therein as
may be authorized in this Licensing and Cooperative Marketing Agreement,
including, but not limited to, any payment of fees owed to third parties
for the exercise of such rights, have been or will be satisfied and/or
paid, and that Microsoft and its licensees shall in no event have any
obligations with respect to any such third party fees.
(iv) Tut will carry out its obligations hereunder in a professional
manner and its work will be of a high grade, nature, and quality.
(v) There is no pending or threatened claim or other dispute or
investigation of any nature whatsoever concerning, affecting or relating to
Tut or any of its property, which could result in a liability of Tut for
$100,000 or more.
(vi) Tut has not made any agreement or taken any action that may have
caused any person or entity to become entitled to a commission or finder's
fee as a result of or in connection with the Transaction Documents.
(B) BY MICROSOFT. Microsoft represents, warrants and covenants that:
(i) This Licensing and Cooperative Marketing Agreement, the Warrant
Purchase and Equity Rights Agreement and all related agreements are legal,
valid and binding agreements of Microsoft, each enforceable against
Microsoft in accordance with its terms.
(C) RELIANCE. The representations, warranties and covenants contained in
this Licensing and Cooperative Marketing Agreement shall be deemed to have been
relied upon by Microsoft and Tut respectively, regardless of any investigation
made by Microsoft or Tut, and shall survive any expiration or termination of
this Licensing and Cooperative Marketing Agreement, the Warrant Purchase and
Equity Rights Agreement or any related agreement. THE REPRESENTATIONS AND
WARRANTIES MADE IN THIS SECTION 13 ARE THE ONLY REPRESENTATIONS AND WARRANTIES
MADE BY THE PARTIES AND ALL OTHER WARRANTIES, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY
DISCLAIMED.
14. INDEMNITY. Tut shall indemnify, pay the defense costs of, and hold Microsoft
---------
and its successors, officers, directors, employees and licensees harmless from
any and all actions, causes of action, claims, demands, costs, losses,
liabilities, expenses and damages (including reasonable attorneys' fees) arising
out of or in connection with any claim which, if true, would represent a breach
by Tut of any of its representations, warranties, covenants or obligations under
this Licensing and Cooperative Marketing Agreement or any related agreement.
Microsoft agrees to consult with Tut with respect to the defense of any such
actions, causes of action, claims or demands, provided that Microsoft shall at
all times remain in the control of the defense of such actions, causes of
action, claims, demands. Tut shall reimburse Microsoft on demand for any payment
made by Microsoft in respect of any liability or claim to which the foregoing
indemnity relates, and which has resulted in an adverse judgment against
Microsoft or has been settled with the written consent of Tut. Prompt notice
shall be given to Tut of any claim to which the foregoing indemnity relates.
Nothing in this section is intended to limit or shall limit any obligation of
Tut to Microsoft.
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15. NOTICES. All notices, requests, demands, consents and other communications
-------
required or permitted hereunder will be in writing and will be deemed to have
been duly given when personally delivered m an officer of each party, or when
such notice is received, certified mail return receipt requested, first-class
postage prepaid, or when such notice is received by overnight commercial
courier, by the intended recipient at the address specified below:
TO TUT: TO MICROSOFT:
- ------ ------------
Tut Systems, Inc. Microsoft Corporation
2495 Estrand Way One Microsoft Way
Pleasant Hill, CA 94523-3911 Redmond, Washington, 98052-6399
Attn.: Nelson Caldwell Attn.: Group Vice President, Platforms
Telephone: 510 682-6510 Telephone: (206) 882-8080
Fax: 510 682-4125 Fax: (206) 936-7409
In all cases copies shall be sent to:
- ------------------------------------
Wilson, Sonsini, Goodrich & Rosati Microsoft Corporation
650 Page Mill Road One Microsoft Way
Palo Alto, California 94304 Redmond, Washington, 98052-6399
Attn.: Jeff Herbst Attn: Law & Corporate Affairs
Telephone: 650 493-9300 Telephone: (206) 882-8080
Fax: 650 493-6811 Fax: (206) 936-7409
or to such other address as a party may from time to time designate in writing
by written notice to the other
party.
16. MISCELLANEOUS.
-------------
(a) NO PARTNERSHIP. Nothing in this Licensing and Cooperative Marketing
Agreement or the Warrant Purchase and Equity Rights Agreement shall be construed
as creating an employer-employee relationship, a partnership, a franchise, or a
joint venture between the parties.
(b) GOVERNING LAW AND VENUE/ATTORNEYS' FEES. This Licensing and Cooperative
Marketing Agreement shall be governed by the laws of the State of Washington and
Tut consents to jurisdiction and venue in the state or federal courts sitting in
King County, Washington. In any action or suit to enforce any right or remedy
under this Licensing and Cooperative Marketing Agreement or to interpret any
provision of this Licensing and Cooperative Marketing Agreement, the prevailing
party shall be entitled to recover its costs, including reasonable attorneys'
fees.
(c) SEVERABILITY. In the event that any provision of this Licensing and
Cooperative Marketing Agreement is found invalid or unenforceable pursuant to
judicial decree or decision, the remainder of this Licensing and Cooperative
Marketing Agreement shall remain valid and enforceable according to its terms.
The parties intend that the provisions of this Licensing and Cooperative
Marketing Agreement be enforced to the fullest extent permitted by applicable
law.
(d) PROHIBITION ON ASSIGNMENT. This Licensing and Cooperative Marketing
Agreement shall not be assigned in whole or in any part by Tut except to a
purchaser or assignee of the HomeRun Technology or to a successor in interest.
This Licensing and Cooperative Marketing Agreement shall not be assigned in
whole or in any part by Microsoft except to a subsidiary or affiliate under the
direct control of Microsoft.
(e) NO OFFER. This Licensing and Cooperative Marketing Agreement does not
constitute an offer by either party and it shall not be effective until signed
by both parties. This Licensing and Cooperative Marketing Agreement and the
Warrant Purchase and Equity Rights Agreement constitutes the entire agreement
between the parties with respect to all subject matter hereof and merges all
prior and contemporaneous communications. It shall
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not be modified except by a written agreement dated subsequent to the date of
this Licensing and Cooperative Marketing Agreement and signed on behalf of Tut
and Microsoft by their respective duly authorized representatives.
(F) MODIFICATION; WAIVERS. This Licensing and Cooperative Marketing
Agreement may be modified or amended only with the written consent of Microsoft
and Tut. Except as otherwise specifically provided herein, no delay on the part
of either party hereto in exercising any right, power or privilege hereunder
will operate as a waiver thereof; nor will any waiver on file part of either
party hereto of any right, power or privilege hereunder operate as a waiver of
any other fight, power or privilege hereunder, nor will any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder.
IN WITNESS WHEREOF, the parties have executed this Licensing and Cooperative
Marketing Agreement as of the dates shown below.
MICROSOFT CORPORATION TUT SYSTEMS, INC.
By (Sign) /s/ Paul Maritz By (Sign) /s/ Matthew Taylor
------------------- ---------------------
Name (Print) Paul Maritz Name (Print) Matthew Taylor
---------------- ------------------
Title Group VP Title Chairman
----------------------- -------------------------
Date 8/27/97 Date 8/27/97
------------------------ --------------------------
Page 12 of 40
<PAGE>
EXHIBIT A
---------
DESCRIPTION OF THE HOMERUN TECHNOLOGY
-------------------------------------
HomeRun enables a home-based 1.3 Mbps Ethernet LAN using existing single-pair
residential wiring. External or internal PC card HomeRun network adapters
connect between the computer and any standard RJ-11 telephone jack. HomeRun uses
frequency division multiplexing, allowing networking signals and standard
telephone service to co-exist transparently on the same wires. HomeRun supports
most wiring topologies with less than 500 feet between any two devices. HomeRun
does not require any special terminations, filters or splitters. The core
HomeRun technologies consist of Time Modulation line code (TM32), noise
suppression circuits, and collision sensors.
HOME SCENARIO HIGHLIGHTING THE HR1300T EXTERNAL ADAPTER
[FLOORPLAN OF HR1300T APPEARS HERE]
HOME SCENARIO SHOWING HR1300ISA NETWORK INTERFACE CARDS
[FLOORPLAN OF HR1300ISA NETWORK INTERFACE CARDS APPEARS HERE]
Page 13 of 40
<PAGE>
EXHIBIT B
---------
DESCRIPTION OF THE HR1300HEC TECHNOLOGY
---------------------------------------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT C
---------
INITIAL HOMERUN PRODUCT SPECIFICATIONS
--------------------------------------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT D
---------
SUBSEQUENT HOMERUN PRODUCTS TO BE DEVELOPED BY TUT UNDER THIS AGREEMENT
-----------------------------------------------------------------------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT E
---------
MARKETING AGREEMENT
OVERVIEW
- --------
HomeRun's ability to use the existing residential wiring as a home LAN will
assist. Microsoft in its goal of information-sharing solutions in home networks.
Microsoft's Consumer Windows Group ("CWG") will work with Tut to incorporate
their joint message into the marketing programs for products that can take
advantage of Tut technology
ELEMENTS OF THE MARKETING AGREEMENT
- -----------------------------------
Microsoft and Tut agree that the following list constitutes the four general
areas in which the companies will focus on working together:
1. MEDIA RELATIONS - publicize the product offerings and the companies'
relationship (Tut's position as a Microsoft key consideration for in-home
networking over residential wiring).
2. WEBSITE LINKAGE - create references to Tut's products and embed links to
Tut's web site at appropriate location(s) on Microsoft's website to inform
customers about Tut's HomeRun Product
3. GENERAL MARKETING - introduce Tut to key channels and field contacts within
Microsoft
4. SPECIFIC PRODUCT MARKETING ACTIVITIES - execute marketing activities around
Tut's HomeRun
MUTUAL MARKETING OBLIGATIONS
- ----------------------------
The following are activities that both parties will commit to on behalf of the
marketing agreement:
MEDIA RELATIONS
. Both parties will provide their respective public relations agency product
information on Tut and related Microsoft systems products, as the case may
be, to satisfy requests for information.
. Both parties will participate in joint calls regarding the companies'
relationship and the products to a mutually agreed upon set of press
representatives, industry analysts, and product reviewers.
. Both parties will provide a general quote to be used in their respective
general media relations' activities.
. Both parties will include each other's products in PR talking points, as
appropriate.
. Both parties will incorporate their respective product information (one-
page fact sheet) in appropriate press briefing materials
GENERAL MARKETING
. CWG will attempt to include Tut in one or more Microsoft Partner Pavilions
at appropriate trade shows, e.g. N+I, with expenses paid by Tut.
. CWG will send email introducing Tut to key Microsoft sales/channel
contacts.
. Both parties will include an announcement of their cooperation in
appropriate activities announcements
WEB SITE
. Both parties' websites will publish content provided by each other such as
products, case studies, and white papers, subject to mutual approval, or
will provide link to such content on their respective site.
. Both parties website will provide reference to their respective products
or related efforts on an appropriate page
SPECIFIC PRODUCT MARKETING ACTIVITIES
. In order to facilitate progress in home networking, CWG agrees to provide
introduction and appropriate assistance in approaching the following OEM
and potential cooperative parties in the specified time frame, whereas Tut
will make any commercially reasonable effort to engage these companies for
their respective products/technology.
Page 18 of 40
<PAGE>
. Compaq
. International Business Machines
. Intel
--------------------
. Philips
. Sony
. AT&T Wireless Services
. HP
. Mitsubishi
--------
. AT&T Worldnet
. Cisco
. Dell
. Gateway
. GTE
. Hughes Direct TV
. Hybrid Networks
. NEC
. Nynex
. 3 Com
. Toshiba
. US West
. Worldcom
. Bell Atlantic
. TCI
. Comcast
. Pilot HomeRun Product Installations
. Microsoft will cooperate with Tut Systems on a showcase installation of
Initial HomeRun Products, and in addition Microsoft will cooperate with
Tut Systems on a minimum of two additional demonstration implementations
of Initial HomeRun Products.
Page 19 of 40
<PAGE>
Sales Tools
- -----------
. Microsoft and/or Tut, as case may be, will use commercially reasonable
efforts to provide or deliver the following Sales Tools, as described below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SALES TOOL DESCRIPTION AUDIENCE OWNER DATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Web Site Section of tutsys.com and microsoft.com OEMs, SPs, ISPs Tut, MS Within 90 days of
featuring product information and Effective Date
cross-references
- ------------------------------------------------------------------------------------------------------------------------------------
Demonstration Web Site demonstration, script to highlight OEMs, SPs Tut October 1997
key features of HomeRun product, related
technology
- ------------------------------------------------------------------------------------------------------------------------------------
Evaluation Demonstration versions of HomeRun OEMs
versions of products(HR 1300 ISA and HR 1300 T) for Tut September 1997
HomeRun Product evaluation and demonstration purposes
- ------------------------------------------------------------------------------------------------------------------------------------
Datasheet Product positioning and information. OEMs, VARs Tut October 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy White MS and TUT will jointly draft a Home OEMs SPs Tut & MS October 1997
Paper Networking, Connectivity Strategy White Paper
- ------------------------------------------------------------------------------------------------------------------------------------
Reviewers Guide Complete description of HomeRun product OEMs SPs Tut November 1997
features in the context of CWG activities January 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Deployment Guide Deployment Guide for residential customers: SPs, ISPs Tut/MS January 1998
how to plan, and implement this technology
- ------------------------------------------------------------------------------------------------------------------------------------
Training materials In-depth technical training materials that SPs Tut/MS November 1997
will outline installation, troubleshooting,
upgrades, etc. for Solution Providers or any
other entities that will install and/or
service this technology
- ------------------------------------------------------------------------------------------------------------------------------------
Case Studies Case study to be based on initial HomeRun SPs, ISPs Tut/MS February 1998
product installations, such as those noted
above
- ------------------------------------------------------------------------------------------------------------------------------------
Business High level guide for this category of SPs, ISPs Tut/MS November 1997
Managers Guide technology and/or installations,
for services
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 20 of 40
<PAGE>
EXHIBIT F
---------
TIMETABLE
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT G
---------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT H
---------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EXHIBIT I
---------
WARRANT PURCHASE AND EQUITY RIGHTS AGREEMENT
THIS WARRANT PURCHASE AND EQUITY RIGHTS AGREEMENT dated August 28/th/, 1997
(the "Warrant Purchase and Equity Rights Agreement"), is made by and between TUT
SYSTEMS, INC., a California corporation (the "Corporation"), and MICROSOFT
CORPORATION, a Washington corporation ("Microsoft").
WHEREAS, the Corporation wishes to sell to Microsoft, and Microsoft wishes
to acquire from the Corporation, a Series G Preferred Stock Purchase Warrant, in
the form of Attachment 1 (the "Warrant"), to purchase an aggregate of 2,667,343
shares of Series G Preferred Stock, of the Corporation, upon the terms and
conditions hereinafter set forth.
WHEREAS, the Warrant is being issued to Microsoft in connection with the
Licensing and Cooperative Marketing Agreement dated the date hereof, between the
Corporation and Microsoft (the "Licensing and Cooperative Marketing Agreement").
NOW THEREFORE, in consideration of the mutual benefits to be derived from
this Warrant Purchase and Equity Rights Agreement and of the representations,
warranties, conditions and promises hereinafter contained, the parties hereby
agree as follows:
ARTICLE I
ISSUANCE OF WARRANT
Simultaneously herewith, the Corporation is issuing and delivering the
Warrant to Microsoft as an inducement to and in consideration of Microsoft
entering into the Licensing and Cooperative Marketing Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation represents and warrants to Microsoft and agrees that:
2.1 Organization; Good Standing The Corporation is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California and is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which the nature of its business or the
ownership of its property makes such qualification necessary, except where the
failure to be so qualified will not have a material adverse effect on the
Corporation, and has the corporate power and authority to own and lease its
properties, to carry on its business as presently conducted, and to execute,
deliver and perform its obligations under this Warrant Purchase and Equity
Rights Agreement and the Warrant.
2.2. Due Authorization The execution, delivery and performance of this
-----------------
Warrant Purchase and Equity Rights Agreement and the Warrant have been duly
authorized by all requisite corporate action by the Corporation and will not
violate or result in a breach of any provision of any law, statute, rule or
regulation, any order of any court or other agency, the Certificate of
Incorporation (the "Charter") or Bylaws of the Corporation (the "Bylaws") or any
other agreement or understanding, or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon the properties or
assets of the Corporation.
2.3. Binding Obligation; No Consents This Warrant Purchase and Equity
-------------------------------
Rights Agreement and the Warrant have been duly executed and delivered by the
Corporation and constitute valid and legally binding obligations of the
Corporation, enforceable in accordance with their respective terms. No
registration or filing with, or consent or approval of, or other action by, any
Federal, state or other governmental department, commission, board, bureau,
agency or instrumentality or any third party is necessary for the execution,
delivery and performance of this Warrant Purchase and Equity Rights Agreement or
the Warrant or for the issuance of the shares of Common
Page 25 of 40
<PAGE>
Stock issued upon exercise of the Warrant (the "Warrant Shares") other than
those required under applicable federal and state securities laws (the
"Securities Consents and Filings"). The Corporation covenants and agrees to make
and obtain all required Securities Consents and Filings within the applicable
statutory periods prescribed for such consents and filings.
2.4. Capitalization The authorized capital stock of the Corporation
--------------
consists of 30,000,000 shares of Preferred stock, of which 24,810,612 million
shares are issued and outstanding on the date hereof; and 45,000,000 shares of
Common Stock, of which 678,676 shares (excluding nominal shares issued in
exercise of employee options since July 25, 1997) are issued and outstanding on
the date hereof. All of the issued and outstanding shares of capital stock have
been duly authorized and validly issued and are fully-paid and non-assessable,
and there are no preemptive rights or cumulative voting rights with respect
thereto. On the date hereof, 1,248,691 shares of Common Stock were reserved for
future issuance under the Corporation's employee stock option plan (the "Plan").
On the date hereof there were no outstanding options, warrants, or other
securities convertible into or exchangeable for shares of the Corporation's
equity securities other than options outstanding under the Plan.
2.5. Litigation, Etc There are no material (i) actions, suits, claims,
---------------
investigations or legal or administrative proceedings pending against the
Corporation or any of its subsidiaries relating to or affecting the Corporation,
whether at law or in equity, or before or by any governmental authority or
arbitrator, which if determined adversely against the Corporation or any of its
subsidiaries could reasonably be expected to materially adversely affect the
business, results of operations, financial condition, assets, liabilities or
prospects of the Corporation and its subsidiaries, taken as a whole, or
(ii) judgments, decrees, injunctions or orders of any governmental authority or
arbitrator against the Corporation or any of its subsidiaries that could
reasonably be expected to materially adversely affect the business, results of
operations, financial condition, assets, liabilities or prospects of the
Corporation and its subsidiaries, taken as a whole.
2.6. Financial Information. The Corporation has delivered to Microsoft
---------------------
copies of the Company's audited financial statements at and for the years ended
December 31, 1994, 1995 and 1996 and unaudited financial statements for each of
the first two full quarters of 1997 (collectively, the "Financial Statements").
The Financial Statements arc complete and correct, in accordance with the books
and records of the Corporation and present fairly the financial condition and
results of operations of the Company, as at the dates and for the periods
indicated, and have been prepared in accordance with generally accepted
accounting principles ("GAAP") consistently applied, with the exception that the
unaudited interim financial statements omit footnotes and typical year end
adjustments necessary for compliance with GAAP.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MICROSOFT
Microsoft represents and warrants to the Corporation that:
3.1. Organization Microsoft is a corporation duly organized validly
------------
existing and in good standing under the laws of the State of Washington and has
the corporate power and authority to execute, deliver and perform its
obligations under this Warrant Purchase and Equity Rights Agreement
3.2. Due Authorization The execution, delivery and performance of this
-----------------
Warrant Purchase and Equity Rights Agreement have been duly authorized by all
requisite action by Microsoft.
3.3. Binding Obligation; No Consents This Warrant Purchase and Equity
-------------------------------
Rights Agreement constitutes a valid and legally binding obligation of
Microsoft, enforceable in accordance with its terms. No registration or filing
with, or consent or approval of, or other action by, any Federal, state or other
governmental department, commission, board, bureau, agency or instrumentality or
any third party is necessary for the execution, delivery and performance of this
Warrant Purchase and Equity Rights Agreement by Microsoft.
3.4. Investment Representations
--------------------------
Page 26 of 40
<PAGE>
(a) Microsoft is acquiring the Warrant hereunder and will acquire
Warrant Shares upon the exercise of the Warrant for its own account, for
investment and not with a view to the distribution thereof.
(b) Microsoft understands that the Warrant and Warrant Shares will not
be registered under the Securities Act of 1933, as amended (the "Securities
Act"), by reason of their issuance in a transaction exempt from the registration
requirements of the Securities Act and that they must be held indefinitely
unless a subsequent disposition thereof is registered under the Securities Act
or is exempt from registration.
(c) Microsoft understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to Microsoft)
promulgated under the Securities Act depends upon the satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for sales
under certain circumstances and only in limited amounts.
(d) Microsoft is an "accredited investor" (as such term is defined in
Rule 501(a) promulgated under the Securities Act).
ARTICLE IV
COVENANTS OF THE CORPORATION
The Corporation hereby covenants and agrees with Microsoft as follows:
4.1 Shareholder Rights Agreement. Upon the execution of the Warrant,
----------------------------
Microsoft shall become a party to the Third Amended and Restated Shareholders'
Rights Agreement dated as of July 1, 1996, by and among the Company and the
persons or entities who are signatories thereto (the "Rights Agreement"), or any
substitute or successor agreement thereto which is substantially similar to the
Rights Agreement, with full rights as a "Shareholder" thereunder.
4.2 Right of First Refusal on Sale of Corporation. During the period
---------------------------------------------
commencing on the date hereof and ending on the earlier to occur of (1) the
closing of an underwritten initial public offering of the Company's common stock
and (2) the later to occur of (i) the natural termination of the Licensing and
Cooperative Marketing Agreement and (ii) the termination of the survival of
Section 9 of the Licensing and Cooperative Marketing Agreement (the "Refusal
Period"), in the event that the Corporation or any shareholder, officer,
director, agent, representative or affiliate which individually or together with
any other Person (as defined below) or group controls the Corporation (each a
"Control Person" and collectively, the "Control Persons") receives an offer from
any Person set forth on Exhibit I to the Licensing and Cooperative Marketing
Agreement (each a "Specified Person" and collectively, the "Specified Persons")
to engage in an Acquisition Transaction (as defined below), the Corporation
shall promptly notify Microsoft in writing of such offer along with all of the
material terms and conditions thereof; including, but not limited to, the
identity of the offeror, nature of the transaction, price, nature of the
consideration and timing for closing. During the term of this Warrant Purchase
and Equity Rights Agreement, the Corporation shall use all commercially
reasonable efforts to ensure that none of the Control Persons takes or causes or
permits any Person to take, directly or indirectly, any of the following actions
with any Specified Person unless such actions concurrently are undertaken with
Microsoft: solicit, encourage, initiate or participate in any negotiations,
inquiries or discussions with respect to any offer or proposal to acquire all or
any significant part of the Corporation's business, assets (including its
HomeRun Technology (as defined in the Licensing and Cooperative Marketing
Agreement)), stock or other equity interest, whether by merger, consolidation,
other business combination, purchase of assets, tender or exchange offer or
otherwise (each of the foregoing, an "Acquisition Transaction"). If at any time
during the Refusal Period the Corporation (or to the extent the Corporation is
able to influence them, the Control Persons) should desire to enter into or
execute any agreement with any Specified Person relating to an Acquisition
Transaction, the Corporation (or to the extent the Corporation is able to
influence them, the Control Persons) shall first offer Microsoft the same
opportunity proposed with respect to the Specified Person, and if Microsoft
agrees to substantially the same economic terms and conditions proposed with
respect to such Specified Person within thirty (30) days after Microsoft's
receipt of written notice of such opportunity, then the Corporation (and/or each
Page 27 of 40
<PAGE>
applicable Control Person) will enter into or execute such proposed agreement
with Microsoft rather than the respective Specified Person. For purposes of this
Warrant Purchase and Equity Rights Agreement, the term "Person" shall mean any
general partnership, limited partnership, corporation, limited liability
company, joint venture, trust, business trust, governmental agency, co-
operative, association, individual or other entity, and the heirs, executors,
administrators, legal representatives, successors and assigns of such a Person
as the context may require.
4.3 Information and Board Observer. Immediately upon exercise of the
------------------------------
Warrant and for so long as Microsoft owns Warrant Shares (as defined in the
Warrant), or securities issued upon conversion or exchange thereof, representing
at least 50% of the total Warrant Shares for which rights to re vest under
Section 1.1 of the Warrant: (a) the Corporation will provide to Microsoft copies
of all correspondence, documents and other information and materials provided to
members of the Corporation's board of directors in connection with their service
as directors; (b) the Corporation will make available to Microsoft copies of all
correspondence, documents and other information and materials made available to
members of the Corporation's board of directors in connection with their service
as directors; and (c) the Corporation will notify Microsoft of all meetings
(official and unofficial) of the Corporation's board of directors (and all
meetings, official and unofficial, of any committee of such board), in the same
manner and at the same time as the Corporation notifies the members of said
board (or committee, if applicable), and the Corporation will permit a
representative of Microsoft, designated by Microsoft, to attend all such
meetings as an observer. Prior to disclosure of any confidential and proprietary
information disclosed to Microsoft's designated board meeting representative
pursuant to this Section 4.3, such representative will enter into a
confidentiality and non-disclosure agreement reasonably acceptable to the
Corporation and Microsoft.
ARTICLE V
MISCELLANEOUS
5.1. Amendment, Modification or Waiver This Warrant Purchase and Equity
---------------------------------
Rights Agreement shall not be altered or otherwise emended except pursuant to an
instrument in writing signed by each of the parties hereto.
5.2. Entire Agreement; Content of Exhibits This Warrant Purchase and
-------------------------------------
Equity Rights Agreement, the Exhibits attached hereto and the Licensing and
Cooperative Marketing Agreement contain the entire agreement of the parties with
respect to the transactions contemplated hereby and thereby and supersede all
prior agreements or understandings among the parties with respect thereto.
5.3. Descriptive Headings Descriptive headings are for convenience only
--------------------
and shall not control or affect the meaning or construction of any provision of
this Warrant Purchase and Equity Rights Agreement.
5.4. Counterparts This Warrant Purchase and Equity Rights Agreement may be
------------
executed in two counterparts, and each such counterpart hereof shall be deemed
to be an original instrument, but all such counterparts together shall
constitute but one agreement.
5.5. Governing Law This Warrant Purchase and Equity Rights Agreement shall
-------------
be governed by and construed in accordance with the laws of the State of
California, without regard to its conflicts of laws principles.
5.6. Benefits of Agreement All the terms and provisions of this Warrant
---------------------
Purchase and Equity Rights Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
Page 28 of 40
<PAGE>
assigns. Anything contained herein to the contrary notwithstanding, this Warrant
Purchase and Equity Rights Agreement shall not be assignable by any party hereto
without the consent of the other party hereto.
IN WITNESS WHEREOF, each of the parties has caused this Warrant Purchase
and Equity Rights Agreement to be executed on its behalf as of the date first
above written.
TUT SYSTEMS, INC.
By /s/ Matthew Taylor
------------------------------
Name: Matthew Taylor
Title: Chairman
MICROSOFT CORPORATION
By /s/ Paul Maritz
------------------------------
Name: Paul Maritz
Title: Group V.P.
Page 29 of 40
<PAGE>
ATTACHMENT 1
------------
WARRANT
-------
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THIS WARRANT OR
OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID OR EFFECTIVE
UNLESS (A)SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES'
LAW, OR (B)THE HOLDER SHALL DELIVER TO THE COMPANY AN OPINION OF COUNSEL IN FORM
AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE
STATE SECURITIES LAW.
WARRANT NO. M-1 AUGUST 27, 1997
TUT SYSTEMS, INC.
SERIES G PREFERRED STOCK PURCHASE WARRANT
Tut Systems, Inc., a California corporation (the "Company"), hereby grants
to Microsoft Corporation, a Washington corporation ("Microsoft"), or its
registered assigns or transferees (Microsoft and each such assign or transferee
being referred to herein as a "holder" and collectively as the "holders") the
right to purchase, at any time and from time to time on and after the date
hereof until the earliest to occur of (i) five years from Original Issue Date,
(ii) the closing of any consolidation or merger of the Company with another
entity in which the Company is not the surviving entity or the sale of all or
substantially all of the Company's assets to another person or entity (a "Sale
Transaction") or (iii) the closing of an underwritten initial public offering of
the Company's Common Stock (the "IPO") (the "Expiration Date"), up to 2,667,343
fully paid and non-assessable shares of Series G Preferred Stock of the Company
(the "Preferred Stock"), on the terms and subject to the conditions set forth
below. The Company shall be obligated to provide holder with written notice of
any Sale Transaction or IPO at least 30 days prior to closing or consummation
thereof. References herein to "Common Stock" shall refer to the Company's common
stock, of no par value per share, and any other class of equity security of the
Company (whether designated as preferred or common stock) for or into which the
Series G Stock is or becomes convertible or exchangeable. References herein to
the term "Stock" shall mean and include the Company's authorized preferred and
common stock of any class or classes and any securities convertible into or
exchangeable for such stock.
This Series G Preferred Stock Purchase Warrant (hereinafter, this
"Warrant") was originally issued by the Company in connection with the Licensing
and Cooperative Marketing Agreement (the "Licensing and Cooperative Marketing
Agreement") on August , 1997 (the "Original Issue Date"). Microsoft
acknowledges that the Company intends to conduct an offering of Series G
Preferred Stock which is expected to close on or prior to December 31, 1997 (the
"Series G Offering"). In the event the Company does not raise a minimum of
$1,000,000 in the Series G Offering prior to the earlier to occur of (i) one
year from the Original Issue Date or (ii) thirty days prior to the Expiration
Date (the "Designation Date"), the Company covenants and agrees to effect a
designation of Series G Preferred Stock (or Series H Preferred Stock in the
event the Company has already created a Series G, in which case all references
herein to Series G Preferred Stock shall be deemed to be Series H Preferred
Stock) with rights and preferences equal to and substantially similar to the
Company's Series F Preferred Stock in all respects. At no time shall one Series
G Preferred Share be convertible into less than one Common Share.
Page 30 of 40
<PAGE>
1. Exercise and Vesting of Warrant.
-------------------------------
1.1 Exercise and Vesting. Subject to adjustment as hereinafter
--------------------
provided, the rights represented by this Warrant are exercisable at a price per
share (thc "Exercise Price") of Preferred Stock issuable hereunder (hereinafter,
"Warrant Shares") equal to the lower of (i) $2.50 and (ii) the per share sales
price of Series G Preferred Stock sold by the Company in the Series G Offering
if the Company raises a minimum of $1,000,000 in the Series G Offering on or
prior to the Designation Date. In the event the Company does not raise a minimum
of $1,000,000 in the Series G Offering on or prior to the Designation Date, the
Exercise Price shall be $2.50, The Exercise Price shall be payable in cash or by
certified or official bank check as hereinafter provided or in accordance with
Section 1.2 below. Rights to purchase the Warrant Shares hereunder shall vest
and become exercisable on the following dates (each a "Vesting Date"): (i)
rights to acquire 30% of the Warrant Shares shall vest and become exercisable on
the date of the public announcement by the Company and Microsoft of the
Licensing and Cooperative Marketing Agreement and the relationship created
thereby if such announcement is made on or prior to October 31, 1997, (ii)
rights to acquire 40% of the Warrant Shares shall vest and become exercisable
upon the signing of a letter of intent or a definitive agreement with any of the
companies listed on Exhibit G to the Licensing and Cooperative Marketing
Agreement if such signing occurs on or prior to December 31, 1997, and (iii)
rights to acquire 30% of the Warrant Shares shall vest and become exercisable
upon initiation of the Home Run showcase detailed in the Marketing Agreement (as
defined in the Licensing and Cooperative Marketing Agreement) if begun by
December 31, 1997. Upon the request of the holder, the Company agrees to furnish
following each Vesting Date a certificate signed by the Chief Financial Officer
of the Company which certifies the number of vested Warrant Shares and Exercise
Price hereunder. Notwithstanding the foregoing, no Warrant Shares shall vest
following such time as the Licensing and Cooperative Marketing Agreement is
terminated by the Company in accordance with Section 12(c) thereof.
Upon surrender of this Warrant with a duly executed Notice of Exercise in
the form of Annex A hereto, together with payment, if applicable, of the.
-------
Exercise Price for the Warrant Shares purchased, at the address specified in
Section 9 below or at such other address as the Company shall have advised the
holder in writing (the "Designated Office"), the holder shall be entitled to
receive a certificate or certificates for the Warrant Shares so purchased. The
Company agrees that the Warrant Shares shall be deemed to have been issued to
the holder as of the close of business on the date on which this Warrant shall
have been surrender together with the Notice of Exercise and payment, if
applicable, for such Warrant Shares. In lieu of issuance of fractional shares
hereunder, the Company shall upon exercise hereof promptly pay in cash or by
Company check to the holder the difference between the proportional fraction of
the Exercise Price and the proportional fraction of the Current Market Price (as
defined in Section l.2(c) hereof) of a share of Preferred Stock.
1.2 Right to Convert. In the event, and only in the event, the
----------------
Company raises a minimum of $1,000,000 in the Series G Offering at a valuation
of $2.50 or more per share prior to the Designation Date, holder shall have the
following rights set forth in this Section 1.2 (a) Subject to the vesting
schedule set forth in Section 1.1, at any time or from time to time on or prior
to the Expiration Date when the Exercise Price shall be less than the Current
Market Price (as defined in Section 1.2(c)) of a share of Preferred Stock, the
holder of this Warrant shall also have the right to convert this Warrant or any
portion thereof (the "Conversion Right"), without payment by the holder of this
Warrant of the Exercise Price or any other consideration, into shares of
Preferred Stock as provided in this Section 1.2. Upon exercise of the Conversion
Right with respect to a particular number of Warrant Shares (the "Converted
Warrant Shares"), the Company shall deliver to the holder of this Warrant
(without payment by the holder of this Warrant of the Exercise Price or any
other consideration) that number of shares of Preferred Stock equal to the
quotient obtained by dividing (x) the difference between (1) the product of (A)
the Current Market Price of a share of Preferred Stock by (B) the number of
Converted Warrant Shares and (2) the product of (A) the Exercise Price
multiplied by (B) the number of the Converted Warrant Shares, in each case as of
the Conversion Date (as defined by Section 1.2(b)), by (y) the Current Market
Price of a share of Prefer Stock on the Conversion Date. No fractional Warrant
Shares shall be issuable upon exercise of the Conversion Right, and if the
number of Warrant Shares to be issued determined in accordance with the
following formula is other than a whole number, the Company shall pay to the
holder of this Warrant an amount in cash equal to the Current Market Price of
the resulting fractional Warrant Share on the Conversion Date.
Page 31 0f 40
<PAGE>
(b) The Conversion Right may be exercised by the holder of this
Warrant by the surrender of this Warrant as provided in Section 1.1, together
with a written statement specifying that the holder of this Warrant thereby
intends to exercise the Conversion Right and indicating the number of Converted
Warrant Shares which are covered by the exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Corporation of this Warrant,
together with the aforesaid written statement, or on such later date as is
specified therein (the "conversion Date"). The Corporation shall issue to the
holder of this Warrant as of the Conversion Date a certificate for the Warrant
Shares issuable upon exercise of the Conversion Right and, if applicable, a new
warrant of like tenor evidencing the balance of the Warrant Shares remaining
subject to this Warrant.
(c) The term "Current Market Price" for the Preferred Stock as of a
specified date shall mean: (i) if the Preferred Stock is Publicly Traded on such
date, the average current market price over the preceding 20 trading days (as
reported on the principal stock exchange or quotation system on which the
Preferred Stock is listed or quoted); (ii) if the Common Stock is Publicly
Traded on such date, the average current market price over the preceding 20
trading days (as reported on the principal stock exchange or quotation system on
Which the Common Stock is listed or quoted) divided by the then current exchange
ratio for conversion of each share of Preferred Stock into Common Stock (for
purposes of clarity, if the average current market price of the Common Stock is
$10 and each share of Preferred Stock is convertible into two shares of Common
Stock, the Current Market Price of the Preferred Stock would be $20 ($10 divided
by 0.5)); or (iii) if the Preferred Stock or Common Stock is not publicly traded
on such date, the greater of the book value (determined in accordance with GAAP)
and the value per share of Preferred Stock as of such date mutually determined
between the Company and the holder, provided that in the event the Company and
the holder are unable to agree on the Current Market Price, the determination
shall be submitted to and determined by an investment banking firm of recognized
standing selected and paid for by the Company and the holder. In reference to
any equity security of the Company, the term "Publicly Traded" shall mean the
security is listed on a national securities exchange, the Nasdaq Stock Market or
traded in the over-the-counter market.
2. Transfer, Issuance of Stock Certificates; Restrictive Legends.
-------------------------------------------------------------
2.1. Transfer. This Warrant and the rights conferred hereby shall be
--------
transferable by the holder only with the prior written consent Of the Company,
which consent shall not be unreasonably withheld (provided the Company may
withhold consent to transfer to any person or entity who or which is not an
affiliate of the holder). Any transfer in violation of the provisions of this
Section 2 shall be void and of no force or effect. Subject to compliance with
the restrictions on transfer set forth in this Section 2, each transfer of this
Warrant and all rights hereunder, in whole or in part, shall be registered on
the books of the repay to be maintained for such person, upon surrender of this
Warrant at the Designated Office, together with a written assignment of this
Warrant in the form of Annex B hereto duly executed by the holder or its agent
-------
or attorney. Upon such surrender and delivery, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denominations specified in such instrument of assignment, and shall issue
to the assigner a new Warrant evidencing the portion of this Warrant not so
assigned, if any. A Warrant, if properly assigned in compliance with the
Provisions hereof, may be exercised by the new holder for the purchase of
Warrant Shares without having a new Warrant issued. All Warrants issued upon any
assignment of Warrants in compliance with this Section 2 shall be the valid
obligations of the Company, evidencing the same rights, and entitled to the same
benefits as the Warrants surrendered upon such registration of transfer or
exchange.
2.2 Stock Certificates. Certificates for the Warrant Shares shall be
------------------
delivered to the holder within a reasonable time after the rights represented by
this Warrant shall have been exercised pursuant to Section 1, and a new Warrant
representing the share, shares or fraction of a share of Preferred Stock, if
any, with respect to which this Warrant shall not then have been exercised shall
also be issued to the holder within such time. The issuance of certificates for
Warrant Shares upon the exercise of this Warrant shall be made without charge to
the holder hereof including, without limitation, any tax that may be payable in
respect thereof; provided, however, that the Company shall not be required to
-------- -------
pay any income tax to which the holder hereof may be subject in connection with
the issuance of this Warrant or the Warrant Shares.
Page 32 of 40
<PAGE>
2.3. Restrictive Legends. (a) Except as otherwise provided in this
-------------------
Section 2, each certificate for Warrant Shares initially issued upon the
exercise of this Warrant, and each certificate for Warrant Shares issued to any
subsequent transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAW. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE
SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE
WITH ANY APPLICABLE STATE SECURITIES LAWS, OR (B)THE HOLDER SHALL DELIVER
TO THE COMPANY AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY
ACCEPTABLE TO THE COMPANY THAT SUCH PROPOSED TRANSFER, IS EXEMPT FROM THE
REGISTRA-TION REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE
STATE SECURITIES LAWS.
(b) Except as otherwise provided in this Section 2, each Warrant shall
be stamped or otherwise imprinted with a legend in substantially the following
form:
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THIS
WARRANT OR OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID
OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECCTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY
APPLICABLE STATE SECURITIES LAW, OR (B) THE HOLDER SHALL DELIVER TO THE
COMPANY AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE
TO THE COMPANY THAT SUCH TRANSFER IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE STATE SECURITIES
LAW.
Notwithstanding the foregoing, the legend requirements of this Section 2.3 shall
terminate as to any particular Warrant or Warrant Share when the Company shall
have received from the holder thereof an opinion of counsel in form and
substance reasonably acceptable to the Company that such legend is not required
in order to ensure compliance with the Securities Act. Whenever the restrictions
imposed by this Section 23 shall terminate, the holder hereof or of Warrant
Shares, as the case may be, shall be entitled to receive from the Company
without cost to such holder a new Warrant or certificate for Warrant-Shares of
like tenor, as the case may be, without such restrictive legend.
3. Adjustment of Number of Shares; Exercise Price, Nature of Securities
--------------------------------------------------------------------
Issuable Upon Exercise of Warrants.
----------------------------------
3.1 Exercise Price, Adjustment of Number of Shares. The Exercise
----------------------------------------------
Price set forth in Section 1 hereof and the number of shares purchasable
hereunder shall be subject to adjustment from time to time as hereinafter
provided.
3.2 Reorganization or Reclassification. If any capital reorganization
----------------------------------
or reclassification of the capital stock of the Company (collectively referred
to as a "Reorganization Transaction") shall be effected in such a way that
holders of Preferred Stock shall be entitled to receive stock, securities, cash
or assets with respect to or in exchange for Preferred Stock, then, as a
condition of such Reorganization Transaction, lawful and adequate provisions
shall be made whereby the holder of this Warrant shall the after have the right
to purchase and receive upon the basis and upon the terms and conditions
specified in this Warrant, upon exercise of this Warrant and in lieu of the
Warrant Shares immediately theretofore purchasable and receivable upon the
exercise of the rights
Page 33 of 40
<PAGE>
represented hereby, such number, amount and like kind of shares of stock,
securities, cash or assets as may be issued or payable pursuant to the terms of
the Reorganization Transaction with respect to or in exchange for the number of
shares of Preferred Stock immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby as if such shares were
outstanding immediately prior to the Reorganization Transaction, and in any such
case appropriate provision shall be made with respect to the rights and interest
of the holders to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and of the number
of Warrant Shares purchasable and receivable upon the exercise of this Warrant)
shall the thereafter be applicable, as nearly as may be, in relation to any
shares of stock or securities thereafter deliverable upon the exercise hereof.
3.3 Stock Splits, Stock Dividends and Reverse Stock Splits. In case
------------------------------------------------------
at any time the Company shall subdivide its outstanding shares of Preferred
Stock into a greater number of shares, or shall declare and pay any stock
dividend with respect to its outstanding stock that has the effect of increasing
the number of outstanding shares of Preferred Stock, the Exercise Price in
effect immediately prior to such subdivision or stock dividend shall be
proportionately reduced and the number of Warrant Shares purchasable pursuant to
this Warrant immediately prior to such subdivision or stock dividend shall be
proportionately increased, and conversely, in case at any time the Company shall
combine its outstanding shares of Preferred Stock into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased and the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced.
3.4 Company to Prevent Dilution. In case at any time or from time to
---------------------------
time conditions arise by reason of action taken by the Company which are not
adequately covered by this Section 3 and which would cause or trigger
antidilution rights under the Rights Agreement (as defined in Section S hereof),
the Company shall make an appropriate and corresponding adjustment to the rights
hereunder so as to preserve, without dilution, the exercise rights of the holder
hereof. In the event that the holder disputes such adjustment, the holder shall
be entitled to select an additional fm of independent certified public
accountants of national standing and paid for by the holder to calculate such
adjustment and the Company and the holder shall use their good faith best
efforts to agree on such adjustment based on the reports of the two accounting
firms. In the event that the Company and the holder are still unable to reach
agreement as to such adjustment, the Company and the holder agree to submit such
determination to binding arbitration. Upon determination of such adjustment, the
Board of Directors shall forthwith make the adjustments described therein.
3.5 Accountant's Certificate. In each case of an adjustment in the
------------------------
Exercise Price, number of Warrant Shares or other stock, securities or property
receivable upon the exercise of this Warrant, the Company shall compute, and
upon the holders request and pen shall cause independent public accountants of
recognized standing selected by the Company and reasonably acceptable to the
holder to certify such computation, such adjustment in accordance with the terms
of this Warrant and prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based, including a
statement of (a) the number of shares of Preferred Stock of each class
outstanding or deemed to be outstanding, (b) the adjusted Exercise Price and (c)
the number of Warrant Shares issuable upon exercise of this Warrant. The Company
will forthwith mail a copy of each such certificate to the holder hereof. In the
event that the holder dispute such adjustment, the holder shall be entitled to
select an additional firm of independent certified public accountants of
national standing and paid for by the holder to certify such adjustment and the
Company and the holder shall use their good faith best efforts to agree on such
adjustment based on the reports of the two accounting firms. In the event that
the Company and the holder are still unable to reach agreement as to such
adjustment, the Company and the holder agree to submit such determination to
binding arbitration. Upon determination of such adjustment, the Board of
Directors shall forthwith make the adjustments described therein.
4. Registration; Exchange and Replacement of Warrant; Reservation of
-----------------------------------------------------------------
Shares.
- ------
The Company shall keep at the Designated Office a register in which
the Company shall provide for the registration, transfer and exchange of this
Warrant. The Company shall not at any time, except upon the
Page 34 of 40
<PAGE>
dissolution, liquidation or winding-up of the Company, close such register so as
to result in preventing or delaying the exercise or transfer of this Warrant.
The Company may deem and treat the person in whose name this Warrant
is registered as the holder and owner hereof for all purposes and shall not be
affected by any notice to the contrary, until presentation of this Warrant for
registration or transfer as provided in this Section 4.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant without
requiting the posting of any bond or the giving of any security.
On and after the Designation Date (or as soon thereafter as reasonably
practicable), the Company shall at all times reserve and keep available out of
its authorized shares of Preferred Stock, solely for the purpose of issuance
upon the exercise of this Warrant, such number of shares of Preferred Stock as
shall be issuable upon the exercise hereof. The Company covenants and agrees
that, upon exercise of this Warrant and payment of the Exercise Price therefor,
if applicable, all Warrant Shares issuable upon such exercise shall be duly and
validly issued, fully paid and non-assessable.
5. Registration of Preferred Stock. The Warrant Shares issued and issuable
-------------------------------
hereunder shall be deemed "Registrable Securities" under the Third Amended and
Restated Shareholders' Rights Agreement dated as of July 1, 1996 by and among
the Company and the persons or entities who are signatories thereto (the "Rights
Agreement"), or any substitute or successor agreement thereto which is
substantially similar to the Rights Agreement, and the holder shall become a
party to such Rights Agreement as soon as reasonably practicable after the
Designation Date. The Company represents and warrants to the holder that the
Company is not a party to any agreement that conflicts in any manner with the
holder's rights to cause the Company to register the Registrable Securities
pursuant to the Rights Agreement and this Section 6.1. The Company covenants and
agrees that it shall not, without the prior written consent of the Shareholders
holding a majority of the outstanding Registrable Securities, amend, modify or
restate the Rights Agreement or grant to any third party rights of a similar
nature as those set forth in the Rights Agreement if the rights of the
Shareholders would be subordinated, diminished or otherwise adversely affected
in a different manner other than "Holders" of Registrable Securities.
Capitalized terms used in this Section 5 but not otherwised defined in this
Warrant have the meanins set forth in the Rights Agreement.
6. Company Information.
-------------------
Until the termination of the registration rights referred to in
Section 5, the Company shall deliver to each holder hereof or of Warrant Shares
one copy of each of the following items:
(i) as soon as available, and in any event within forty-five (45) days
after the end of each fiscal quarter of the Company, its Form 10-Q as filed
with the Commission for such quarter or if the Company is not publicly
traded its unaudited interim consolidated balance sheets of the Company and
its subsidiaries as at the end of such quarter and the related consolidated
statements of income, cash flow and stockholders' equity of the Company and
its subsidiaries for the period from the beginning of the current fiscal
year to the end of such quarter, all in reasonable detail and certified by
a principal financial officer of the Company, as prepared in accordance
with GAAP consistently applied (subject to year end adjustments and the
absence of footnotes), and fairly presenting the consolidated financial
position and results of operations of the Company and its subsidiaries for
such periods;
(ii) within one hundred and twenty (120) days after the end of each
fiscal year of the Company, its Form 10-K as filed with the Commission for
such fiscal year or if the Company is not publicly traded its consolidated
balance sheets of the Company and its subsidiaries as at the end of such
year and the related consolidated statements of income, cash flow and
stockholders'
Page 35 of 40
<PAGE>
equity of the Company and its subsidiaries for such fiscal year, setting
forth in each case in comparative form the consolidated figures for the
previous fiscal year, all in reasonable detail and accompanied by a report
thereon of independent public accountants of recognized national standing
selected, by the Company, which report shall state that such consolidated
financial statements present fairly the financial position of the Company
and its subsidiaries as at the dates indicated and the results of their
operations and changes in their financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with prior
years (except as otherwise specified in such report) and that the audit by
such accountants in connection with such consolidated financial statements
has been made in accordance with generally accepted auditing standards; and
(iii) promptly upon their becoming available, copies of all financial
statements, reports, proxy statements, notices, documents or other
communications sent or made available generally by the Company to any class
of its security holders or by any subsidiary of the Company to any class of
its security holders.
7. Notices.
-------
All notices, requests, demands, and other communications made in connection
with this Warrant shall be in writing and shall be deemed to have been duly
given on the date of delivery, if delivered to the persons identified below, or
upon receipt if (a)mailed by certified or registered mall, postage prepaid,
return receipt requested, (ii) upon receipt if sent by express courier service,
or (iii) sent by facsimile upon written confirmation of receipt by the recipient
of such notice:
If to Holder. Microsoft Corporation
------------ One Microsoft Way
Redmond, WA 98052-6399
Attention: Robert A. Eshelman
Telephone No.: (206) 852-8080
Facsimile No.: (206) 869-1327
If to the Company: Tut Systems, Inc.
----------------- 2495 Estrand Way
Pleasant Hill, CA 94523-391l
Attention: Neslon Caldwell
Telephone No.: (510) 682-6510
Facsimile No.: (510) 682-4125
Such addresses may be changed, from time to time, by means of a notice
given in the manner provided in this Section 7.
8. Successors.
----------
All the covenants, agreements, representations and warranties
contained in this Warrant shall bind the parties hereto and their respective
heirs, executors, administrators, distributees, successors, assigns and
transferees.
9. Law Governing.
-------------
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of California (not including the choice of
law rules thereof.
Page 36 of 40
<PAGE>
10. Entire Agreement: Amendments and Waivers.
-----------------------------------------
This Warrant sets forth the entire understanding of the parties with
respect to the transactions contemplated hereby. The failure of any party to
seek redress for the violation or to insist upon the strict performance of any
term of this Warrant shall not constitute a waiver of such term and such party
shall be entitled to enforce such term without regard to such forbearance. This
Warrant may be amended, and any breach of or compliance with any covenant,
agreement, warranty or representation may be waived, only if the Company has
obtained the written consent or written waiver of the holder, and then such
consent or waiver shall be effective only in the specific instance and for the
specific purpose for which given.
11. Severability; Headings.
----------------------
If any term of this Warrant as applied to any person or to any
circumstance is prohibited, void, invalid or unenforceable in any jurisdiction,
such term shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or invalidity without in any way affecting any other term of this
Warrant or affecting the validity or enforceability of this Warrant or of such
provision in any other jurisdiction. The Section headings in this Warrant have
been inserted for purposes of convenience only and shall have no substantive
effect.
[remainder of page intentionally blank]
Page 37 of 40
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of the date first written above.
TUT SYSTEMS, INC.
/s/ Matthew Taylor
By: --------------------
Name: Matthew Taylor
Title: Chairman
Accepted and agreed:
MICROSOFT CORPORATION
/s/ Paul Maritz
By:-----------------
Name: Paul Maritz
Title: Group V.P.
Page 38 of 40
<PAGE>
ANNEX A
-------
NOTICE OF EXERCISE
(TO BE EXECUTED UPON PARTIAL OR FULL
EXERCISE OF THE WITHIN WARRANT)
The undersigned hereby irrevocably elects to exercise the right to
purchase ____________ shares of Series G Preferred Stock of Tut Systems, Inc.
covered by the within Warrant according to the conditions hereof and herewith
makes payment of the Exercise Price of such shares in full in the amount of
$______________________.
By:__________________________________
(Signature of Registered Holder)
Dated:____________
Page 39 of 40
<PAGE>
ANNEX B
-------
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Series G Preferred Stock set forth below:
Name and Address of Assignee No. of Shares
- ---------------------------- -------------
and does hereby irrevocably constitute and appoint ______________________
attorney-in-fact to register such transfer onto the books of Tut Systems, Inc.
maintained for the purpose, with full power of substitution in the premises.
Dated:__________________ Print Name: ____________________
Signature:______________________
Witness:_______________________
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT 10.9
TUT SYSTEMS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of __________,
1998 by and between Tut Systems, Inc., a Delaware corporation (the "Company"),
and ___________ ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;
WHEREAS, the Company and Indemnitee desire to continue to have in place the
additional protection provided by an indemnification agreement and to provide
indemnification and advancement of expenses to the Indemnitee to the maximum
extent permitted by Delaware law; and
WHEREAS, in view of the considerations set forth above, the Company and
Indemnitee desire to amend and restate the Prior Agreement as set forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Certain Definitions.
-------------------
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as
<PAGE>
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 50% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% 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 the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of related transactions) all or substantially all of the
Company's assets.
(b) "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
(c) References to the "Company" shall include, in addition to Tut
Systems, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Tut Systems, Inc.
(or any of its wholly owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, 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.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
-2-
<PAGE>
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties 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,
of any Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) 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, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its 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.
(i) "Reviewing Party" shall mean, subject to the provisions of
Section 2(d), any person or body appointed by the Board of Directors in
accordance with applicable law to review the Company's obligations hereunder and
under applicable law, which may include a member or members of the Company's
Board of Directors, Independent Legal Counsel or any other person or body not a
party to the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
-3-
<PAGE>
2. Indemnification.
---------------
(a) Indemnification of Expenses. Subject to the provisions of
---------------------------
Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the
fullest extent permitted by law if Indemnitee was or is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, any Claim (whether by reason of or arising in
part out of a Covered Event), including all interest, assessments and other
charges paid or payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid in indemnifying Indemnitee; provided, however, that if
-------- -------
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee is entitled to
be indemnified hereunder under applicable law, any determination made by any
Reviewing Party that Indemnitee is not entitled to be indemnified hereunder
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any Expenses theretofore paid in indemnifying
Indemnitee until a final judicial determination is made with respect thereto (as
to which all rights of appeal therefrom have been exhausted or lapsed).
Indemnitee's obligation to reimburse the Company for any Expenses shall be
unsecured and no interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has
-----------------------------------------------
not been a Change in Control, any Reviewing Party shall be selected by the Board
of Directors, and if there has been such a Change in Control (other than a
Change in Control which has been approved by a majority of the Company's Board
of Directors who were directors immediately prior to such Change in Control),
any Reviewing Party with respect to all matters thereafter arising concerning
the rights of Indemnitee to indemnification of Expenses under this Agreement or
any other agreement or under the Company's Certificate of Incorporation or
Bylaws as now or hereafter in
-4-
<PAGE>
effect, or under any other applicable law, if desired by Indemnitee, shall be
Independent Legal Counsel selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably withheld). Such counsel, among other
things, shall render its written opinion to the Company and Indemnitee as to
whether and to what extent Indemnitee would be entitled to be indemnified
hereunder under applicable law and the Company agrees to abide by such opinion.
The Company agrees to pay the reasonable fees of the Independent Legal Counsel
referred to above and to indemnify fully such counsel against any and all
expenses (including attorneys' fees), claims, liabilities and damages arising
out of or relating to this Agreement or its engagement pursuant hereto.
Notwithstanding any other provision of this Agreement, the Company shall not be
required to pay Expenses of more than one Independent Legal Counsel in
connection with all matters concerning a single Indemnitee, and such Independent
Legal Counsel shall be the Independent Legal Counsel for any or all other
Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee
shall provide a written statement setting forth in detail a reasonable objection
to such Independent Legal Counsel representing other Indemnitees.
(e) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. Expense Advances.
----------------
(a) Obligation to Make Expense Advances. Upon receipt of a written
-----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefor by the Company, the Company shall make Expense Advances to Indemnitee.
(b) Form of Undertaking. Any written undertaking by the Indemnitee
-------------------
to repay any Expense Advances hereunder shall be unsecured and no interest shall
be charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agrees
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
(a) Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by
-5-
<PAGE>
Indemnitee therefor is presented to the Company, but in no event later than
forty-five (45) business days after such written demand by Indemnitee is
presented to the Company, except in the case of Expense Advances, which shall be
made no later than twenty (20) business days after such written demand by
Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances 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 at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). 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) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that Indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by this
Agreement or applicable law. In addition, neither the failure of any Reviewing
Party to have made a determination as to whether Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
determination by any Reviewing Party that Indemnitee has not met such standard
of conduct or did not have such belief, prior to the commencement of legal
proceedings by Indemnitee to secure a judicial determination that Indemnitee
should be indemnified under this Agreement or applicable law, shall be a defense
to Indemnitee's claim or create a presumption that Indemnitee has not met any
particular standard of conduct or did not have any particular belief. In
connection with any determination by any Reviewing Party or otherwise as to
whether the Indemnitee is entitled to be indemnified hereunder, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim 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 Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to provide indemnification for or make any Expense Advances
with respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of
-6-
<PAGE>
such Claim with counsel approved by Indemnitee (which approval shall not be
unreasonably withheld) upon the delivery to Indemnitee of written notice of the
Company's election to do so. 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 or
expenses of separate counsel subsequently employed by or on behalf of Indemnitee
with respect to the same Claim; provided that, (i) Indemnitee shall have the
right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's
expense and (ii) if (A) the employment of separate 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
continue to retain such counsel to defend such Claim, then the fees and expenses
of Indemnitee's separate counsel shall be Expenses for which Indemnitee may
receive indemnification or Expense Advances hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. 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, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. 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, employee, agent or fiduciary, such change, 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 except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision
-7-
<PAGE>
of the Company's Certificate of Incorporation, Bylaws or otherwise) of the
amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indem nifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission 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.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided 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, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
----------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law; provided, however, that notwithstanding any limitation set forth in this
-------- -------
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.
-8-
<PAGE>
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification or insurance recovery, as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and 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; provided, however, that
-------- -------
notwithstanding any limitation set forth in this Section 10(d) regarding the
Company's obligation to provide indemnification, Indemnitee shall be entitled
under Section 3 to receive Expense Advances hereunder with respect to any such
Claim unless and until a court having jurisdiction over the Claim shall have
made a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that Indemnitee has violated said statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether
-9-
<PAGE>
Indemnitee continues to serve as a director, officer, employee, agent or
fiduciary (as applicable) of the Company or of any other enterprise at the
Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until such final judicial determination is made,
Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action.
14. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent
-10-
<PAGE>
permitted by law. Furthermore, to the fullest extent possible, the provisions of
this Agreement (including without limitation each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts of laws.
18. 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
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
TUT SYSTEMS, INC.
By:____________________________
Name:__________________________
Title:_________________________
Address: Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, California 94523
AGREED TO AND ACCEPTED
______________________________
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<PAGE>
EXHIBIT 10.10
AGREEMENT AND GENERAL RELEASE
This Agreement and General Release (this Agreement) entered into on this
31st day of July, 1998 by and between Tut Systems, Inc., a California
corporation, 2446 Estand Way, Pleasant Hill, California 94523 (hereinafter Tut),
and Yet, Inc., a California corporation, 3060 Buena Vista Way, Berkeley,
California 94708 (hereinafter And Yet) and Martin H. Graham, 3060 Buena Vista
Way, Berkeley, California 94708 (hereinafter Graham) is made with respect to the
following facts:
A. Tut, And Yet and Graham entered into a Royalty Agreement dated June 1, 1992
concerning certain patent rights. An extension of Royalty Agreement was entered
into between Tut, And Yet and Graham having an effective date of June 1, 1995.
These Royalty Agreements are collectively referred to as the Prior Agreements;
B. Graham has assigned to And Yet his rights to the patents and patent
applications which are the subject of the Prior Agreements;
C. Tut intends to make an initial public offering (hereinafter IPO) of its
stock in the very near future;
D. In the event of an IPO, Tut wishes to make a lump sum payment for all its
royalty obligations under the Prior Agreements and And Yet is willing to accept
such payment as set forth in this Agreement; and
E. The parties to this Agreement wish to release each other from any and all
obligations owed to one another under the Prior Agreements.
NOW, THEREFORE, the parties agree as follows:
1. Subject to Paragraph 5, Tut shall pay to And Yet Two Million Five Hundred
Thousand ($2,500,000.00) Dollars within ten (10) business days from the date on
which Tut receives funds from its IPO (the "Closing Date") and shall notify
Graham by fax at (510) 848-1611 immediately upon the receipt of such funds.
2. In the event that Tut's IPO does not occur by November 30, 1998, any party
may terminate this Agreement at its option by giving written notice to the other
parties and in such event the Prior Agreements in their entirety shall continue
to remain in full force and effect.
1
<PAGE>
3. On the Closing Date the Prior Agreements shall be terminated and the parties
shall be relieved of any and all rights and obligations under the Prior
Agreements, including any obligations to make any additional royalty payments or
any other payments or to audit the books of Tut or any of its licensees.
4. Until the Closing Date the parties' obligations under the Prior Agreements,
including any obligations to make any additional royalty payments or any other
payments, shall continue in full force and effect.
5. On the Closing Date Tut shall pay to And Yet, in addition to the
$2,500,000.00 set forth in paragraph 1 above, all accrued but unpaid royalty
payments or other payments owing to And Yet under the Prior Agreements.
6. Except as hereinafter set forth, on the Closing Date And Yet and Graham
shall assign to Tut all of their right, title, and interest in all patents and
patent applications listed on the Schedule attached to this Agreement (including
all additional intellectual property relating solely to such patents and patent
applications) naming Graham or And Yet as an inventor or co-inventor and which
are covered by the Prior Agreements, as set forth in Exhibit A attached hereto.
---------
Effective the Closing Date, And Yet and Graham hereby confirm all prior
assignments of such patents and patent applications made to Tut under the Prior
Agreements.
a. Notwithstanding the foregoing, in regard to patent application Serial No.
09/024883, filed 2/17/98, And Yet and Graham shall assign only their interest,
and not any interest belonging to Howard Johnson.
b. In regard to patent application Serial No. 08/925205, filed 9/8/97, where
Hal Webber is the co-inventor with Graham, Tut shall cause Graham's name to
appear first on the patent when and if it is issued.
7. This Agreement is executed and delivered within the State of California and
its construction, interpretation, and performance shall be governed by the laws
of the State of California.
8. Effective on the Closing Date, this Agreement sets forth the entire
agreement and understanding between Tut, And Yet and Graham as to the subject
matter hereto and merges all prior discussions between them and neither party
shall be bound by any condition, definitions, warranties, understandings, or
representations with respect to such subject matter other than as expressly
provided in this Agreement or as duly set forth on a subsequent date in writing
and signed by the parties.
9. In consideration of the mutual covenants, agreements and promises set forth
herein, effective the Closing Date Tut, And Yet and Graham hereby fully and
forever
2
<PAGE>
release, acquit and discharge each other, their agents, employees,
attorneys, assigns, officers, directors, and stockholders from all causes of
action, liabilities, claims or demands of any nature whatsoever, whether known
or unknown, in law or in equity, which the parties now own, hereafter discover,
allege or may have had at any time heretofore owned, held or alleged against
each other and their respective officers, directors, stockholders, agents,
employees, attorneys and assigns with respect to any matter arising out of the
Prior Agreements or are connected to any events which form the basis for this
Agreement.
The parties hereto hereby waive the benefits of Section 1542 of the Civil
Code of California, which reads as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
10. Any dispute under this Agreement shall be resolved by binding arbitration
in the San Francisco office of J.A.M.S./Endlspute with the prevailing party
entitled to recover his or its reasonable costs and reasonable attorneys' fees.
11. This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute but one
instrument.
12. A facsimile copy of this Agreement and any signatures hereon shall be
considered for all purposes as originals.
Agreed to by:
/s/ Martin H. Graham
Date: _____________________________ ___________________________________
Martin H. Graham
AND YET, INC.
/s/ Martin H. Graham
Date: _____________________________ By: _____________________________
Martin H. Graham
/s/ Salvatore D'Auria
Date: _____________________________ ___________________________________
Salvatore D'Auria
TUT SYSTEMS, INC.
3
<PAGE>
__________________________________________________________________________
Consent of Spouse:
/s/ Selma Graham
Date: ____________________________ ______________________________
Selma Graham
4
<PAGE>
EXHIBIT 10.11
SOFTWARE LICENSE AGREEMENT
RouterWare, Incorporated ("RWI") a California corporation having its principal
office at 3961 MacArthur Boulevard, Newport Beach, California, 92660, United
States of America and Tut Systems, Inc. ("Licensee"), having its principal
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office at 2495 Estand Way, Pleasant Hill, California 94523, United States of
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America agree as follows:
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1. OWNERSHIP
---------
a) RWI hereby grants to Licensee a perpetual worldwide royalty free non-
exclusive license to use and modify Licensed Software (refer to
Appendix A) for the sole purpose of creating executable, object, or
binary programs based, in part or whole, upon Licensed Software
("Binary Programs") which are to be incorporated into Licensee's
Product (refer to Appendix B).
b) RWI shall remain the exclusive and sole owner of the Licensed Software
offered for license under this agreement.
c) Licensed Software and its documentation are the valuable, proprietary,
confidential, and trade secret property of RWI.
d) RWI represents that the Licensed Software is protected by both United
States copyright law and international treaty provisions.
e) All copies, whether in part or whole, made of Licensed Software must
contain a valid RWI copyright notice.
f) Licensee may distribute Binary Programs so long as the distributed
Binary Programs are restricted in use to Licensee's Product and bear,
or are accompanied by, Licensee's own valid copyright notice.
g) Except as provided herein, neither party shall have any right or
ability to assign, transfer, or sub-license any obligations or benefit
under this agreement without the written consent of the other;
provided, however, that either party may assign and transfer this
agreement and its rights and obligations hereunder to any party who
succeeds to substantially all its business or assets.
Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as [*]. A complete version of this exhibit
has been filed separately with the Securities and Exchange Commission.
<PAGE>
2. DISTRIBUTION OF LICENSED SOFTWARE
---------------------------------
a) Unless otherwise stated, Licensee may not distribute any Licensed
Software or its documentation without the prior written consent of
RWI.
b) Licensee is permitted to distribute Licensed Software and its
documentation to all companies wholly owned by Licensee, companies
under common control with Licensee, Licensee's employees, contractors,
and subcontractors ("Other Entities") provided the following
conditions are met :
i) Distribution is solely for the purpose of assisting Licensee in
engineering Licensee's Product.
ii) Licensee assumes full responsibility for ensuring that Licensed
Software and its documentation distributed by Licensee is used
according to the terms and conditions of this agreement.
iii) Licensee must notify RWI, in writing, prior to distributing
Licensed Software or its documentation to its contractors and
subcontractors.
iv) Such notice must list the Licensed Software and documentation
being distributed, the full company name (if applicable), street
address, phone number, and contact name of each contractor and
subcontractor.
c) Violation of the terms of Section 2b shall result in immediate payment
to RWI by Licensee for licenses for Licensed Software to Other
Entities found to be in violation of this agreement. The amounts due
will be the then current list price license fees for said licenses.
3. INDEMNIFICATION
---------------
a) RWI will hold Licensee harmless from all claims, liability, and
damages arising from unmodified Licensed Software.
b) Licensee will hold RWI harmless from all claims, liability, and
damages arising from Binary Programs composed, in part or whole, from
modified Licensed Software.
c) Except with respect to RWI's obligation to indemnify Licensee as
provided in this agreement, in no event shall RWI's liability for any
damages to Licensee, Licensee's customers, ever exceed the actual
price paid for the Licensed Software.
d) This Software License Agreement shall be construed, interpreted and
governed by the laws of the State of California and any action
hereunder shall be brought only in California.
<PAGE>
4. LIMITED SOFTWARE WARRANTY
-------------------------
a) RWI warrants that the Licensed Software does not infringe upon any
patent or copyright or otherwise violate the rights of any third
party.
b) If the Licensed Software supplied by RWI is found to infringe upon any
patent or copyright or otherwise violate the rights of any third
party, RWI must, in a timely manner, provide replacement source code
that is functionally equivalent to the Licensed Software and free of
the infringement or violation.
c) RWI will assume responsibility for all costs required to defend the
Licensed Software supplied by RWI against any patent, copyright, or
other violation claim
5. STANDARD MAINTENANCE AND SUPPORT
--------------------------------
a) RWI will provide Licensee, free of charge, with 90 days of Standard
Maintenance and Support, for each individual item comprising the
Licensed Software, commencing from the date each individual item is
received, in its entirety, by the Licensee.
b) Standard Maintenance and Support is comprised of the following
services:
i) RWI will make available to the Licensee any and all updates and
upgrades for the Licensed Software.
ii) RWI will provide Licensee, in a timely manner, with corrections
to Licensed Software shown to contain non-conformance to the
functions and features claimed to be supported by RWI.
iii) RWI will provide License with technical support for Licensed
Software via telephone, fax, electronic mail and FTP Server.
c) Standard Maintenance and Support is subject to cancellation if license
fee payments become past due.
<PAGE>
6. EXTENDED MAINTENANCE AND SUPPORT
--------------------------------
a) Maintenance and support beyond the period defined under Standard
Maintenance and Support is offered under Extended Maintenance and
Support.
b) The services offered under Extended Maintenance and Support are
identical to those offered under Standard Maintenance and Support
(refer to Section 5b).
c) Extended Maintenance and Support is offered for year long periods at
the rate of fifteen percent of the original license fee.
d) Extended Maintenance and Support may be purchased on a product by
product basis.
e) Licensee has a thirty day grace period after the Standard Maintenance
and Support period has expired to purchase Extended Maintenance and
Support, after which additional re-instatement charges may apply.
7. EXPORT
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a) The Licensed Software may be a regulated commodity under the
International Emergency Economic Powers Act, formerly the Export
Control Act of 1996, its amendments, and the regulations thereunder.
Licensee is solely responsible for securing any applicable export
licenses for Licensed Software or any direct product thereof.
b) Licensee certifies that, without a BXA license or License Exception,
they will neither reexport or release the Licensed Software, or its
technology, to a national of a country listed on the Commerce Control
List Groups D:1, E:2, or any country under embargo.
c) Licensee also certifies that they will not export the direct product
of the Licensed Software, or its technology, to a country listed on
the Commerce Control List Groups D:1, E:2, or any country under
embargo.
<PAGE>
ROUTERWARE
8. DELIVERABLES
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a) RWI is to provide Licensee with "C" source codes for items listed in
Appendix A on 3.5" DOS formatted floppy disk(s).
b) RWI is to provide Licensee printed documentation for the items listed
in Appendix A.
9. PAYMENT
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a) Licensee is to pay a one time license fee of [*] for the deliverables
listed in Appendix A.
b) NET30 terms of payment apply to all amounts due that are not disputed
in good faith. Amounts past due will accrue late payment charges per
the following schedule: For amounts 1 to 30 days past due, a charge of
1% of the amount due will be assessed. For each additional 30 day
period that amounts remain past due, the charge will increase by 1% of
the amount originally past due.
c) Any rights assigned to Licensee by this agreement are subject to
suspension for the duration that amounts payable to RWI for the
license fee remain past due.
d) Payment of taxes on the Deliverables are the sole responsibility of
the Licensee.
RouterWare, Inc. TUT SYSTEMS, INC.
- ------------------------ ------------------------
COMPANY NAME LICENSEE COMPANY NAME
/s/ John A Papadapoulos DEC. 15, 1997 /s/ Thomas Warner 12-16-97
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SIGNATURE DATE SIGNATURE DATE
________________________ ________________________
NAME NAME
________________________ ________________________
TITLE TITLE
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
Appendix A
The following RouterWare products are to be licensed to Licensee and herein
referred to as "Licensed Software":
PRODUCT NAME
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1. PPP
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2. MP
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3. CCP
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4. DHCP SERVER
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5. NAT
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6.
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7.
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8.
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9.
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10.
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<PAGE>
ROUTERWARE
Appendix B
The following description defines Licensee's Product:
A High-speed xDSL Internet access system which includes a compact modular
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central office site concentrator and stand alone SDSL modems complete with
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built-in Ethernet interfaces.
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<PAGE>
EXHIBIT 10.12
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
This Agreement is effective as of June 1, 1998 by and between IBM
Corporation ("IBM"), Hewlett-Packard Company ("HP"), Compaq Computer Corporation
("Compaq"), Advanced Micro Devices, Inc. ("AMD"), Intel Corporation ("Intel"),
Tut Systems, Inc. ("Tut"), Epigram, Inc. ("Epigram"), AT&T Wireless Services
Inc. ("ATTWS"), 3Com Corporation ("3Com"), Rockwell Semiconductor Systems, Inc.
("Rockwell"), and Lucent Technologies Inc. ("Lucent") and the Affiliates of
these Corporations, collectively referred to as the "Promoters".
BACKGROUND
A. The Promoters intend to define, establish and support a home
networking system specification which provides the basic networking capability
but is also compatible with other uses of the home telephone lines. This
specification is referred to as Home Phoneline.
B. The Promoters also intend to develop a verification testing portion of
the specification to verify compliance with the Home Phoneline specification.
C. The Promoters wish to encourage broad and open industry adoption of
Home Phoneline and wish to facilitate the provision of necessary licenses to do
so. The Promoters intend to provide the Home Phoneline specification to an
appropriate standards body.
D. The Promoters also desire to provide for the possibility of issuing
revisions and updates to the Home Phoneline specification.
AGREEMENT
1. DEFINITIONS.
1.1 "Adopter" means any entity that has executed an identical copy of
Attachment A ("Adopter's Agreement") and has delivered it to the Promoters as
provided in Section 2.2 below and its Affiliates.
1.2 "Affiliate" is an entity that directly or indirectly controls, is
controlled by, or is under common control with another entity, so long as such
control exists. This definition of Affiliate is modified for ATTWS to mean only
directly or indirectly controls another entity, as long as such control exists.
ATTWS agrees to make commercially reasonable efforts to obtain the necessary
approvals to allow ATTWS to utilize the unmodified Affiliates definition.
"Control" means beneficial ownership of more than fifty percent of the voting
stock or equity in an entity.
1.3 "Fellow Adopters" are the Promoters and all Adopters.
<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
1.4 "Participant" means an entity that has executed a copy of the
Participant Agreement in the form attached hereto as Attachment B
("Participant's Agreement"), delivered it to any Promoter, had the Promoter
execute it and then had the fully executed agreement received by the Secretary.
No changes to the Participant's Agreement shall be made without the unanimous
approval of the Promoters, except for the change specified in paragraph 2.3(a)
below. The Secretary shall keep a master Participants list that shall be made
available to the other Promoters at any time upon request.
1.5 "Necessary Claims" shall mean those claims of all patents, other than
design patents and design registrations, throughout the world entitled to an
effective filing date prior to January 1, 2003, which a Promoter or Adopter, as
applicable, or its Affiliates has the right, at any time during the term of this
Agreement, to grant licenses of the scope granted herein without such grant or
the exercise of rights thereunder resulting in payment of royalties or other
consideration to third parties (except for payments to Affiliates or to
employees within the scope of their employment) and (i) which are necessarily
infringed by an implementation of a version of the Specification adopted by the
Promoters pursuant to Section 4.3 below, where such infringement could not have
been avoided by another commercially reasonable noninfringing implementation of
such Specification, or (ii) for which infringement is based on an implementation
of any example included in the body of the Specification. Necessary Claims
shall not include, and no license shall apply to, implementation examples
included solely in any appendix, exhibit or other attachment to the actual
Specification.
1.6 "Specification" means the document entitled Home Phoneline as finally
adopted by the Promoters pursuant to Section 4.3 below, authored and published
by the Promoters; any updates as finally adopted pursuant to Section 4.4; and
non-final versions until a first final version is adopted. The scope of the
Specification shall be restricted to that information descriptive (i) of the
electrical characteristics and protocols of physical interfaces, (ii) of a
standard set of transmitted signals and (iii) of such test procedures as
required to establish conformance of devices to items (i) and (ii).
1.7 "Fully Compliant" means: (a) an implementation of the Specification
which supports or implements all of the portions of the Specification defined by
the Specification as being "Required" or (b) an implementation of all portions
of the Specification required for a specific type of product or component
thereof.
2. COVENANTS.
2.1 Grants of Licenses to Promoters and Adopters. Upon agreement by the
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Promoters as to the final version of the text of the Specification as set out in
Section 4.3, each Promoter (on behalf of itself and its Affiliates) hereby
covenants to grant to each of the other Promoters and to all Adopters under
reasonable terms and conditions that are demonstrably free of any unfair
discrimination, a nonexclusive, nontransferable, non-sublicenseable (except as
part of the transfer of an end user product), worldwide license under its
Necessary Claims to implement the Specification
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<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
and to make, have made, use, import, offer to sell, lease, sell, promote and
otherwise distribute the resulting implementation (whether implemented in
hardware, software, or some combination of hardware and software); provided,
however, (i) the resulting implementation is Fully Compliant, (ii) such license
shall not extend to features of a product which are not required to comply with
the Specification or to other specifications and APIs (Application Programming
Interfaces), such as a Promoter's operating system API, and (iii) such license
shall be granted only to the extent that the resulting implementation is used
for the purposes of home or LAN networking over home or any single pair in-
premises telephone lines. To the extent a Promoter becomes aware of any
Necessary Claims which are or will be subject to the above license and to the
extent that a Promoter intends to seek a reasonable royalty for such Necessary
Claims pursuant to the above license, such Promoter shall promptly notify the
other Promoters (and the Adopters in a manner agreed to by the Promoters) of
such Necessary Claims. If such notification is not provided prior to adoption of
the version of the Specification where such Necessary Claims develop, the
Promoter shall not request an injunction for such Necessary Claims in connection
with the Specification as used by the Promoters and Adopters. Additionally, to
the extent a Promoter becomes aware of claims which would be Necessary Claims
but for the obligation to pay royalties or other consideration to third parties,
the Promoter shall promptly notify the other Promoters (and the Adopters in a
manner agreed to by the Promoters) of such claims.
2.2 Licenses to Adopters. Any Promoter may provide the Adopter's
--------------------
Agreement (Attachment A hereto) to any third party who wishes to be an Adopter.
Upon the execution of the Adopter's Agreement by such Promoter and such third
party, and receipt by the Secretary (as defined in Section 2.3 below) of a
properly executed copy of such Agreement, such Agreement shall be effective. No
changes to the Adopter's Agreement shall be made without the unanimous approval
of the Promoters, except for the change specified in paragraph 2.3(a) below.
The Secretary shall keep a master Adopters list that shall be made available to
the other Promoters at any time upon request.
2.3 Administration of the Specification.
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(a) A Promoter shall be appointed as the secretary for the
Specification (the "Secretary"). The Secretary shall be responsible for keeping
a list of all Adopters and Participants and keeping copies of all Adopter's
Agreements and Participant's Agreements. Compaq agrees to act as the Secretary
for the Home Phoneline Specification. Should the acting Secretary desire to
cease acting as the Secretary, or should it withdraw as a Promoter from the
Specification or any proposed update thereto, the Promoters shall appoint
another Promoter as the new Secretary, and (i) the outgoing secretary shall
provide the new Secretary with its files of Adopters, Participants and their
agreements with the Promoters, and (ii) the Adopter's Agreement and
Participant's Agreements shall be amended so that newly executed Agreements
shall become effective upon receipt of the new Secretary.
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<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
(b) Each of the Promoters shall promptly notify each other of any
violation, that may come to such Promoter's attention, of any Adopter's
Agreement by an Adopter or Participant's Agreement by an Adopter or Participant.
Each Promoter shall have the right to enforce compliance with the terms of such
Agreements by Adopters and Participants upon notice to the other Promoters. Any
Promoter may, at its option, bring suit against such Adopter or Participant to
enforce such Agreement. The other Promoters shall, at their discretion, provide
reasonable assistance in the prosecution of such suit, at the expense of the
prosecuting party (except for the value of time of the assisting party's
employees); provided, however, that no Promoter shall be required to be named as
a party to such suit. In the event a Promoter does not wish to participate in
the enforcement action and is nonetheless joined as a necessary party or the
like, the Promoter(s) initiating the enforcement action agree(s) to pay the
reasonable expenses incurred by the joined Promoter in such enforcement action
(except for the value of time of the assisting party's employees). The
prosecuting party will retain any recovery in such suit.
2.4 Copyright Notices. Any publication of the Specification shall contain
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an appropriate copyright notice in the names of all the Promoters. Public
references to the Specification shall attribute authorship to the Promoters to
the extent practical.
2.5 References to Specification. The Promoters hereby agree not to assert
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against any Promoter or any Adopter any trademark or trade name rights they may
have now or hereafter in any name or logo unanimously adopted by the Promoters
for use in connection therewith or with this Agreement. If the Promoters agree
to claim or assert trademark or trade name rights in such name or logo, they
agree to use commercially reasonable efforts, that represent the best interests
of all parties, to agree on the nature of ownership, licensing, guidelines for
usage, and registration of such name or logo. Prior to adoption of a new name
or logo, the Promoters shall transmit a proposed name or logo to the
Participants and Adopters for comments regarding any claimed rights in such new
name or logo. The Promoters will not use any name or logo unanimously adopted
by the Promoters except to refer to the Specification and to products which
fully comply with the Specification.
3. COPYRIGHT OWNERSHIP/MODIFICATIONS TO SPECIFICATION.
3.1 Title. Each Promoter shall own, and is hereby conveyed, a non-
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exclusive, undivided, and equal ownership in the copyrights in the
Specification. Each Promoter may exercise any and all rights of copyright
ownership and sublicense such rights in the Specification as if such rights were
solely owned by such Promoter and without permission of the other Promoters and
without any duty to account. Any Promoter may propose an enforcement action,
and the other Promoters shall have the right to participate at their own expense
and at their own discretion. On request of any Promoter considering suit
against a third party, the other Promoters shall, at their discretion, provide
reasonable assistance in the prosecution of such suit, at the expense of the
prosecuting party (except for the value of time of the assisting party's
employees); provided, however, that no Promoter shall be required to be named as
a party to such suit. In the event a Promoter does not wish to participate
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<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
in the enforcement action and is nonetheless joined as a necessary party or the
like, the Promoter(s) initiating the enforcement action agree(s) to pay the
reasonable expenses incurred by the joined Promoter in such enforcement action
(except for the value of time of the assisting party's employees). The
prosecuting party will retain any recovery in such suit. If a Promoter wishes to
register the Specification with the Copyright Office, it may do so at its own
expense, and the other Promoters shall cooperate with such Promoter to the
extent reasonably required to file the application for copyright registration.
No further obligation will exist after the application is filed.
3.2 Modifications. Any modifications to or derivative works of the
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Specification shall be owned solely by the Promoter(s) creating them, subject to
the underlying copyright in the Specification, unless and until such
modification is adopted as an update. However, except for excerpts or
quotations from a published Specification, no Promoter shall publish such a
modified or derivative work or translation into a foreign language without the
express written consent of the other Promoters. This restriction on modified or
derivative works shall not apply to any Promoter once the Promoter withdraws.
The parties will cooperate from time to time with respect to responsibility for
translation of the Specifications into foreign languages, and shall equally
share the out-of-pocket costs therefor.
4. SPECIFICATION COMPLETION.
4.1 Specification Release to Participants and Adopters. The Promoters
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shall cooperate to finalize the Specification according to the following
procedure:
(a) Any proposal for the Specification shall be authorized for release
to third parties (including Adopters and Participants) only by 2/3 majority
agreement of the Promoters.
(b) The Promoters shall use reasonable efforts to expedite
edits/changes suggested to each revision of the Specification as quickly as
possible.
4.2 Specification Development. Non-final revisions of the Specification
-------------------------
may be designated unreleased or released and shall be maintained in confidence
and only disclosed pursuant to the terms herein. Unreleased revisions shall
only be shared among the Promoters. Agreement of a 2/3 majority of the
Promoters is required to designate an unreleased revision as a released
revision. Once a revision of the Specification has been authorized for release,
a Promoter may provide a copy of such revision to a Participant and solicit
suggestions for incorporation in the Specification from the Participant.
4.3 Published Specification. The Specification or any proposed update
-----------------------
thereof shall be deemed final and is adopted when the Promoters agree by a 2/3
majority, in writing, that such version of the Specification is final. For
purposes of voting on the Specification or for any other voting under this
Agreement, the Affiliates shall not be entitled to vote and their approval is
not
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<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
required in connection with any Vote. Such final Specification shall become
effective and be made publicly available after the thirty (30) day period
specified in Section 4.3(a).
(a) Any Promoter that votes against the Specification may choose to
withdraw from this Agreement under Section 6 by written notice to all other
Promoters sent within thirty (30) days after the date on which the Secretary
receives the 2/3 majority necessary for adoption of the Specification.
Following such withdrawal, the Promoter will have only those rights and
obligations hereunder set forth under Section 6.2. A Promoter shall be
considered to have adopted the Adopted Specifications, with all rights and
obligations with respect thereto under this Agreement, if such Promoter (i)
voted in favor of the proposed final Specifications or (ii) failed to vote or
voted against such proposed final Specifications and did not so withdraw.
4.4 Updates to the Specification. Once Promoters have agreed upon a
----------------------------
final Specification under Section 4.3 above, any updates or alterations to the
finalized Specification shall be treated as a proposal to develop a new
Specification, and shall be subject to the same processes and procedures used
for development of the original specification as outlined above. Each Promoter
may, in its sole discretion, cooperate with development of such new
Specification or withdraw with regard to such new Specification without
withdrawing from an earlier adopted Specification. Adoption of such a new
Specification shall not terminate any right or obligation of any Promoter under
this Agreement, including the licenses granted, received or agreed to be made
available with respect to the earlier adopted Specification.
5. CONFIDENTIALITY.
5.1 Confidential Information. Each Promoter will maintain the
------------------------
confidential information of the other Promoters, the non-final versions of the
Specification and the contributions each other Promoter and each Participant
makes to the specification in confidence with at least the same degree of care
that it uses to protect its own confidential and proprietary information, but no
less than a reasonable degree of care under the circumstances and will neither
disclose nor copy the non-final versions of the Specification except as
necessary for its employees and contractors (under obligation of
confidentiality) with a need to know for the purpose of developing or updating
the Specification or implementing a product according to the Specification. Any
information incorporated in a particular revision of the Specification,
including any exhibits or attachments thereto, shall be permitted to be released
upon agreement of the Promoters pursuant to Section 4 hereof. Any copies which
are made will be marked "confidential," "proprietary" or with a similar legend.
Unless the parties agree otherwise, this obligation of confidentiality will
expire 3 years from the date of disclosure of such information hereunder. A
party will not, however, be liable for the disclosure of any information which
is:
a) rightfully in the public domain other than by the recipient's breach
of a duty;
b) rightfully received from a third party without any obligation of
confidentiality; or
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<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
c) rightfully known to the recipient without any limitation on use or
disclosure prior to its receipt from the disclosing party; or
d) independently developed by employees of the recipient without access
to the disclosed information; or
e) rightfully disclosed as required by law; or
f) made public by unanimous agreement of the Promoters.
5.2 Residuals. This Agreement and the terms of confidentiality hereunder
---------
shall not be construed to limit any Promoter's right to independently develop or
acquire products or technology, including similar or competing products or
technology, without the use of another party's confidential information. Any
party shall be free to use for any purpose the residuals resulting from access
to or work with the confidential information defined in Section 5.1, provided
that such party shall maintain the confidentiality of such confidential
information as provided herein. The term "residuals" means information in non-
tangible form, which may be inadvertently retained by persons who have had
access to such confidential information, including ideas, concepts, know-how or
techniques contained therein. No party shall have any obligation to limit or
restrict the assignment of such persons or to pay royalties for any work
resulting from the use of residuals. However, the foregoing shall not be deemed
to grant to any party a license under the other party's copyrights or patents.
6. WITHDRAWAL.
6.1 Notice of Withdrawal. A Promoter may, on written notice to the other
--------------------
Promoters, withdraw from this Agreement.
6.2 Effect of withdrawal. Upon withdrawal by a Promoter:
--------------------
(a) All covenants and licenses granted by and to such withdrawing
Promoter with respect to any final Specification adopted by the withdrawing
Promoter as of the date of such withdrawal shall continue in full force and
shall extend to and from entities who are or later become Adopters (and their
Affiliates as provided in the license), even after such withdrawal. No covenant
or license shall be deemed granted or received or required to be granted by such
Promoter as to a new Specification or new revisions of the Specification adopted
after the date of such withdrawal, except as set forth in Section 6.2(c). For
the avoidance of doubt, in the event any Promoter withdraws prior to the
publication of the first final version of the Specification, the covenants to
grant licenses are extinguished and of no effect.
(b) A withdrawing Promoter must identify in its notice of withdrawal,
with reasonable specificity, any technical contribution it has made with regard
to any as yet unadopted revision or proposed update to the Specification being
considered at the time of withdrawal or to any Specification adopted within
thirty (30) days of such notice if such withdrawal is being done under
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<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
Section 4.3(a). Any technical contribution not noticed will be licensed under
Sections 2.1 and 2.2. Additionally, the copyrights in any materials contributed
by such Promoter as of the time of withdrawal shall still be subject to the
provisions of Section 3.1 above.
(c) The obligations of a withdrawn Promoter to license Necessary
Claims as set forth in Section 2 of this Agreement shall continue as to a new
Specification or revision if such new Specification or revision: (i) defines a
network which is backwards compatible to a prior Specification for which the
Promoter is obligated to grant licenses, and (ii) uses a Necessary Claim in a
substantially similar manner and to a substantially similar extent as the
Necessary Claim was used in a prior Specification for which the Promoter is
obligated to grant licenses. In no event is a withdrawn Promoter obligated to
license any additional Necessary Claims under this subsection.
7. GENERAL.
7.1 No Other Licenses. Except for the rights expressly provided by this
-----------------
Agreement, no Promoter grants or receives, by implication, or estoppel, or
otherwise, any rights under any patents or other intellectual property rights.
7.2 Limited Effect. This Agreement shall not be construed to waive any
--------------
Promoter's rights under law or any other agreement except as expressly set out
here.
7.3 No Warranty. Promoter acknowledges that the Specification is provided
-----------
"AS IS" WITH NO WARRANTIES WHATSOEVER, WHETHER EXPRESS, IMPLIED OR STATUTORY,
INCLUDING, BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY, NONINFRINGEMENT,
FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY WARRANTY OTHERWISE ARISING OUT OF ANY
PROPOSAL, SPECIFICATION, OR SAMPLE.
Notwithstanding the above, each Promoter warrants that the Promoter has not
contributed any third party confidential information to the Specification and
that it has the authority to enter into this Agreement.
7.4 Damages. In no event will Promoters be liable to each other for any
-------
loss of profits, loss of use, incidental, consequential, indirect, or special
damages arising out of this Agreement or any Adopter or Participant agreements
related hereto, whether or not such party had advance notice of the possibility
of such damages.
7.5 Notices. Shall be sent to:
-------
Compaq Computer Corporation
20555 SH 249
-8-
<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
Houston, TX 77070
Attn: General Counsel
IBM Corporation
Rt. 100
Somers, NY 10589
ATTN: Peter Hortensius (801/291)
Director, Technology Development
Hewlett-Packard Company
Home Products Division
10500 Ridgeview Court
Cupertino, CA 95015-4010
ATTN: R&D Manager
Advanced Micro Devices, Inc.
1160 Kern
Sunnyvale, CA 94086
Attn: General Counsel
Intel Corporation
Post Contract Management MS JF3 - 149
2111 N.E. 25th Ave.
Hillsboro, Oregon 97124
Attn: MDPO Counsel
MS JF3-147
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Attn: Chief Financial Officer
Epigram, Inc.
870 W. Maude Ave.
Sunnyvale, CA 94086
ATTN: Chief Financial Officer
AT&T Wireless Services Inc.
14520 N.E. 87th Street
Redmond, WA 98052
Attn: Cynthia Hayward
-9-
<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
V.P. - Chief Technology Counsel
3Com Corporation
5400 Bayfront Plaza
Santa Clara, California 95052
Attention: General Counsel
Rockwell Semiconductor Systems, Inc.
4311 Jamboree Road
Newport Beach, CA 92660
Attn: Kem McClelland
Dir. of Contracts & Technology Portfolio Management
Lucent Technologies Inc.
Microelectronics Group
Law Division
2 Oak Way
Berkeley Heights, NJ 07922
Attention: John W. Fisher
Corporate Counsel
7.6 Governing Law. This Agreement shall be construed and controlled by
-------------
the substantive laws of New York without reference to conflict of laws
principles. Any litigation arising out of this Agreement shall take place in
New York, and all parties irrevocably consent to jurisdiction of the state and
Federal courts there.
7.7 Not Partners. The Promoters are independent companies and are not
------------
partners or joint venturers with each other. While the Promoters may select an
entity to handle certain administrative tasks for them, no party is authorized
to make any commitment on behalf of all or any of them.
7.8 Complete Agreement. This Agreement sets forth the entire
------------------
understanding of the parties and supersedes all prior agreements and
understandings relating hereto. No modifications or additions to or deletions
from this Agreement shall be binding unless accepted in writing by an authorized
representative of all parties.
7.9 Termination: This agreement continues for each Promoter until
-----------
terminated with respect to such Promoter upon events such as withdrawal or
default.
7.10 Publicity: No Promoter may make any statement on behalf of the Home
---------
PhoneLine alliance, without the prior approval of all of the Promoters.
-10-
<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
7.11 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, each of which when so executed and timely delivered
shall be deemed an original, and such counterparts together shall constitute one
instrument.
8. COMPLIANCE WITH ANTITRUST LAWS.
Each Promoter acknowledges that the Promoters are committed to fostering
competition in the development of new products and services based on the
Specification. The Promoters further acknowledge that they may compete with one
another in various lines of business and that it is therefore imperative that
they and their representatives act in a manner which does not violate any
applicable antitrust laws and regulations. Without limiting the generality of
the foregoing, the Promoters acknowledge that the Promoters will not discuss
issues relating to product costs, product pricing, methods or channels of
product distribution, any division of markets, or allocation of customers or any
other topic which should not be discussed among competitors. Accordingly, each
Promoter hereby assumes responsibility to provide appropriate legal counsel to
its representatives acting under this Agreement regarding the importance of
limiting their discussions to subjects that relate to the purposes of the
Agreement, whether or not such discussions take place during formal meetings,
informal gatherings, or otherwise.
-11-
<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
IN WITNESS of their agreement, the Promoters have executed this Agreement
below:
Compaq Computer Corporation
By:________________________________ IBM Corporation
Name:______________________________ By:_______________________________
Title:_____________________________ Name:_____________________________
Date:______________________________ Title:____________________________
Advanced Micro Devices, Inc. Date:_____________________________
By:________________________________ Lucent Technologies Inc.
Name:______________________________ By:_______________________________
Title:_____________________________ Name:_____________________________
Date:______________________________ Title:____________________________
Tut Systems, Inc. Date:_____________________________
By:________________________________ Epigram, Inc.
Name:______________________________ By:_______________________________
Title:_____________________________ Name:_____________________________
Date:______________________________ Title:____________________________
3Com Corporation Date:_____________________________
By:________________________________ Rockwell Semiconductor Systems, Inc.
Name:______________________________ By:_______________________________
Title:_____________________________ Name:_____________________________
Date:______________________________ Title:____________________________
-12-
<PAGE>
HOME PHONELINE PROMOTER'S AGREEMENT
-----------------------------------
Date:______________________________ Intel Corporation
By:_______________________________
Hewlett-Packard Company
Name:_____________________________
By:________________________________
Title:____________________________
Name:______________________________
Date:_____________________________
Title:_____________________________
Date:______________________________
AT&T Wireless Services Inc.
By:________________________________
Name:______________________________
Title:_____________________________
Date:______________________________
-13-
<PAGE>
This is a patent license agreement among parties wishing to adopt the Home
Phoneline Specification
ATTACHMENT A
ADOPTER'S AGREEMENT
AS USED IN THIS AGREEMENT:
. The "PROMOTERS" are IBM Corporation, Hewlett-Packard Company, Compaq
Computer Corporation, Advanced Micro Devices, Inc., Intel Corporation, Tut
Systems, Inc., Epigram, Inc., AT&T Wireless Services Inc., 3Com
Corporation, Rockwell Semiconductor Systems, Inc. and Lucent Technologies
Inc. and their Affiliates.
. "ADOPTER" is the entity named at the end of this Agreement.
. "FELLOW ADOPTERS" are the Adopters who have executed an identical
counterpart of this Agreement and delivered it to the Promoters.
. "AFFILIATE" is an entity that directly or indirectly controls, is
controlled by, or is under common control with another entity, so long as
such control exists. This definition of Affiliate is modified for AT&T
Wireless Services Inc. to mean only directly or indirectly controls another
entity, as long as such control exists. "Control" means beneficial
ownership of more than fifty percent of the voting stock or equity in an
entity.
. "NECESSARY CLAIMS" shall mean those claims of all patents, other than
design patents and design registrations, throughout the world entitled to
an effective filing date prior to January 1, 2003, which a Promoter or
Adopter, as applicable, or its Affiliates has the right, at any time during
the term of this Agreement, to grant licenses of the scope granted herein
without such grant or the exercise of rights thereunder resulting in
payment of royalties or other consideration to third parties (except for
payments to Affiliates or to employees within the scope of their
employment) and (i) which are necessarily infringed by an implementation of
a version of the Specification adopted by the Promoters, where such
infringement could not have been avoided by another commercially reasonable
noninfringing implementation of such Specification, or (ii) for which
infringement is based on an implementation of any example included in the
body of the Specification. Necessary Claims shall not include, and no
license shall apply to, implementation examples included solely in any
appendix, exhibit or other attachment to the actual Specification.
. "SPECIFICATION" means the document entitled Home Phoneline authored and
published by the Promoters and updates thereto.
. "FULLY COMPLIANT" means: (a) an implementation of the Specification which
supports or implements all of the portions of the Specification defined by
the Specification as being
<PAGE>
"Required" or (b) an implementation of all portions of the Specification
required for a specific type of product or component thereof.
. "SECRETARY" shall mean the Promoter chosen to administrate the
Specification as the Promoters may determine from time to time. As of the
effective date of this Agreement, the Secretary is Compaq.
LICENSES:
Grants of Licenses. The following license has been granted by the
------------------
Promoters to all Adopters. Upon Adopter's execution of this Agreement, the
agreement to license is granted by Adopter to all Fellow Adopters (including the
Promoters), and the grants of all Fellow Adopters shall extend to Adopter. In
each case, the party (Promoter, Adopter, or Fellow Adopter) and its Affiliates
granting the covenant is referred to as the "Licensor."
Upon agreement by the Promoters as to the final version of the text of the
Specification, Licensor hereby covenants to grant to each Promoter and its
Affiliates and to each Fellow Adopter and its Affiliates under reasonable
terms and conditions that are demonstrably free of any unfair
discrimination, a nonexclusive, nontransferable, nonsublicenseable (except
as part of the transfer of an end user product), worldwide license under
its Necessary Claims to implement the Specification and to make, have made,
use, import, offer to sell, lease, sell, promote and otherwise distribute
the resulting implementation (whether implemented in hardware, software, or
some combination of hardware and software); provided, however, (i) the
resulting implementation is Fully Compliant, (ii) such license shall not
extend to features of a product which are not required to comply with the
Specification or to other specifications and APIs (Application Programming
Interfaces), such as a Promoter's operating system API, and (iii) such
license shall be granted only to the extent that the resulting
implementation is used for the purposes of home or LAN networking over home
or any single pair in-premises telephone lines. To the extent an Adopter
becomes aware of any Necessary Claims which are or will be subject to the
above license and to the extent that an Adopter intends to seek a
reasonable royalty for such Necessary Claims pursuant to the above license,
such Adopter shall promptly notify the Secretary of such Necessary Claims.
Additionally, to the extent an Adopter becomes aware of claims which would
be Necessary Claims but for the obligation to pay royalties or other
consideration to third parties, the Adopter shall promptly notify the
Secretary of such claims.
. Acceptance of Licenses. Adopter hereby accepts the agreement to make
----------------------
available Licenses granted by the Fellow Adopters.
. Withdrawal. Adopter may withdraw at any time by providing written notice
----------
to the Secretary. The effect of such withdrawal is that the withdrawing
Adopter's existing licenses and agreement to grant licenses, with respect
to a Specification published by the Promoters more than sixty (60) days
prior to the date of withdrawal, shall continue in full force and shall
extend to or be extended to entities who become Adopters and their
Affiliates as provided in
-2-
<PAGE>
the license even after such withdrawal. Further, the licenses granted to
such Adopter shall continue to apply with respect to the Specification and
any Updates published by the Promoters more than sixty (60) days prior to
the date of withdrawal. No license or agreement to license shall be deemed
granted or received by such Adopter as to the Specification revision
published less than sixty (60) days prior to or after the date of such
withdrawal. The obligations of a withdrawn Adopter to license Necessary
Claims as set forth in this Agreement shall continue as to a new
Specification or revision if such new Specification or revision: (i)
defines a network which is backwards compatible to a prior Specification
for which the Adopter is obligated to grant licenses, and (ii) uses a
Necessary Claim in a substantially similar manner and to a substantially
similar extent as the Necessary Claim was used in a prior Specification for
which the Adopter is obligated to grant licenses. In no event is a
withdrawn Adopter obligated to license any additional Necessary Claims
under this subsection.
. Trademarks. The Adopter and its Affiliates hereby agree not to assert
----------
against any Promoter or any Fellow Adopter any trademark or trade name
rights they may have now or hereafter in any name or logo adopted by the
Promoters for use in connection with such Specification. Prior to adoption
of a new name or logo, the Promoters shall transmit a proposed name or logo
to Adopter. Adopter shall have 30 days to notify the Secretary if it
possesses any rights to such name or logo. Failure to respond within such
30 days will waive any rights of Adopter to such proposed name or logo.
The Adopter and its Affiliates will not use the name or logo adopted by the
Promoters except to refer to the Specification and to products which fully
comply with the Specification.
GENERAL:
. No Other Licenses. Adopter neither grants nor receives any license to or
-----------------
right to use any trademark, tradename, copyright, or maskwork hereunder.
Except for the rights expressly provided by this Agreement, Adopter neither
grants nor receives, by implication, or estoppel, or otherwise, any rights
under any patents or other intellectual property rights.
. No Warranty. Adopter acknowledges that the Specification is provided "AS
-----------
IS" WITH NO WARRANTIES WHATSOEVER, WHETHER EXPRESS, IMPLIED OR STATUTORY,
INCLUDING, BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY,
NONINFRINGEMENT, FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY WARRANTY
OTHERWISE ARISING OUT OF ANY PROPOSAL, SPECIFICATION, OR SAMPLE.
. Damages. In no event will Promoters, Adopter or Fellow Adopters be liable
-------
to the other for any loss of profits, loss of use, incidental,
consequential, indirect, or special damages arising out of this Agreement,
whether or not such party had advance notice of the possibility of such
damages.
-3-
<PAGE>
. Governing Law. This Agreement shall be construed and controlled by the
-------------
substantive laws of New York without reference to conflicts of laws
principles. Any litigation arising out of this Agreement shall take place
in New York, and all parties irrevocably consent to jurisdiction of the
state and Federal courts there.
. Not Partners. Adopter understands that the Promoters are independent
------------
companies and are not partners or joint venturers with each other. While
the Promoters may select an entity to handle certain administrative tasks
for them, no party is authorized to make any commitment on behalf of all or
any of them.
. Promoters as Beneficiaries. While only a single Promoter has executed
--------------------------
this Agreement with Adopter, Adopter understands that all of the Promoters
are beneficiaries of this Agreement and any Promoter is entitled to enforce
its terms against Adopter.
. Complete Agreement. This Agreement sets forth the entire understanding of
------------------
the agreement between the Adopters and the Promoters and supersedes all
prior agreements and understandings relating hereto. No modifications or
additions to or deletions from this Agreement shall be binding unless
accepted in writing by an authorized representative of all parties.
. Execution in Counterparts. This Agreement may be executed in any number
-------------------------
of counterparts, each of which when so executed and timely delivered shall
be deemed an original, and such counterparts together shall constitute one
instrument.
. Effective Date. This Agreement shall be legally binding when:
--------------
1) the Promoter has signed the Agreement,
2) the Adopter has signed the Agreement, and
3) the Agreement has been received via overnight courier to the attention
of the Secretary at
Home Phoneline Adopter's Agreement Administration
Compaq Computer Corporation
20555 SH 249
Houston, TX 77070
. Notices. All notices under this Agreement shall be sent to:
-------
If to the Promoters: If to Adopter:
Home Phoneline Adopter's __________________________
Agreement Administration __________________________
Compaq Computer Corporation __________________________
20555 SH 249 __________________________
Houston, TX 77070 __________________________
-4-
<PAGE>
With a copy to:
Compaq Computer Corporation
20555 SH 249
Houston, TX 77070
Attn: General Counsel
Adopter: Promoter:
By:__________________________ By:___________________________
Name:________________________ Name:_________________________
Title:_______________________ Title:________________________
Date:________________________ Date:________________________
-5-
<PAGE>
ATTACHMENT B
PARTICIPANT'S AGREEMENT
Certain Promoters are developing a specification (the "Specification")
defining a home networking system using telephone lines. The Specification may
become appropriate for industry-wide adoption and the Promoters seek the
counsel, advice, and input of Participant. In order to facilitate consultations
between the Promoters and Participant, this Agreement sets out the legal terms
that will govern those consultations.
As used herein, "Promoters" means IBM Corporation, Hewlett-Packard Company,
Compaq Computer Corporation, Advanced Micro Devices, Inc., Intel Corporation,
Tut Systems, Inc., Epigram, Inc., AT&T Wireless Services Inc., 3Com Corporation,
Rockwell Semiconductor Systems, Inc., and Lucent Technologies Inc.
"Participant" refers to the industry participant named below and its Affiliates.
"Affiliate" is an entity that directly or indirectly controls, is controlled by,
or is under common control with another entity, so long as such control exists.
This definition of Affiliate is modified for AT&T Wireless Services Inc. to mean
only directly or indirectly controls another entity, as long as such control
exists. "Control" means beneficial ownership of more than fifty percent of the
voting stock or equity in an entity.
CONSULTATION. Any Promoter and Participant may consult with each other on
the content, feasibility, and other aspects of one or more revisions of the
Specification. The Promoters shall be free to incorporate the suggestions of
Participant into the Specification.
IN CONFIDENCE. Participant will maintain the non-final versions of the
Specification in confidence with at least the same degree of care that it uses
to protect its own confidential and proprietary information, but no less than a
reasonable degree of care under the circumstances and will neither disclose nor
copy the non-final versions of the Specification except as necessary for its
employees and contractors (under obligation of confidentiality) with a need to
know for the purposes of developing or updating the Specification. Any copies
which are made will be marked "confidential," "proprietary" or with a similar
legend. Unless the parties agree otherwise, this obligation of confidentiality
will expire 3 years from the date of disclosure to Participant. Participant
will not, however, be liable for the disclosure of any information that is:
a) rightfully in the public domain other than by Participant's breach of
a duty;
b) rightfully received from a third party without any obligation of
confidentiality; or
c) rightfully known to the Participant without any limitation on use or
disclosure prior to its receipt from the disclosing party; or
d) independently developed by employees of the Participant without access
to the disclosed information; or
e) rightfully disclosed as required by law; or
f) inherently disclosed in the marketing or sale of a product or service.
<PAGE>
Any party shall be free to use for any purpose the residuals resulting from
access to or work with the confidential information defined above, provided that
such party shall maintain the confidentiality of such confidential information
as provided herein. The term "residuals" means information in non-tangible
form, which may be inadvertently retained by persons who have had access to such
confidential information, including ideas, concepts, know-how or techniques
contained therein. No party shall have any obligation to limit or restrict the
assignment of such persons or to pay royalties for any work resulting from the
use of residuals. However, the foregoing shall not be deemed to grant to any
party a license under the other party's copyrights or patents.
LICENSING. The Promoters intend to license the right to implement the
final version of the Specification to all interested industry members on a
nondiscriminatory, reciprocal, reasonable basis. The Promoters have the right to
disclose the Specification in draft and in final form, including Participant's
suggestions to the Promoters.
Upon agreement by the Promoters as to the final version of the text of the
Specification, with respect to any suggestion or improvement to the
Specification made by Participant and incorporated in the Specification,
Participant and its Affiliates hereby covenants to grant to each Promoter and
its Affiliates and to each Adopter and its Affiliates under reasonable terms and
conditions that are demonstrably free of any unfair discrimination, a
nonexclusive, nontransferable, nonsublicenseable (except as part of the transfer
of an end user product), worldwide license under its Necessary Claims to
implement the Specification and to make, have made, use, import, offer to sell,
lease, sell, promote and otherwise distribute the resulting implementation
(whether implemented in hardware, software, or some combination of hardware and
software); provided, however, (i) the resulting implementation is Fully
Compliant, (ii) such license shall not extend to features of a product which are
not required to comply with the Specification or to other specifications and
APIs (Application Programming Interfaces), such as a Promoter's operating system
API, and (iii) such license shall be granted only to the extent that the
resulting implementation is used for the purposes of home or LAN networking over
home or any single pair in-premises telephone lines. To the extent a
Participant becomes aware of any Necessary Claims which are or will be subject
to the above license and to the extent that a Participant intends to seek a
reasonable royalty for such Necessary Claims pursuant to the above license, such
Participant shall promptly notify the Secretary of such Necessary Claims. If
such notification is not provided prior to adoption of the version of the
Specification where such Necessary Claims develop, the Participant shall not
request an injunction for such Necessary Claims in connection with the
Specification as used by the Promoters and Adopters. Additionally, to the
extent a Participant becomes aware of claims which would be Necessary Claims but
for the obligation to pay royalties or other consideration to third parties, the
Participant shall promptly notify the Secretary of such claims.
Additionally, effective upon the Promoters' agreement as to any final
version of the Specification, Participant grants to the Promoters, under any
copyright, trade secret right or other non-patent intellectual property right in
or applying to such contribution, a non-exclusive, non-transferable, royalty-
free worldwide license, with rights to sublicense to all Promoters and Adopters
of the Specification, to make, have made, use, reproduce, prepare derivative
works of, perform, display, import, offer to sell and sell and otherwise
distribute products, whether hardware, software,
-2-
<PAGE>
or some combination of hardware and software, which implement and comply with
the Specification so long as the product is Fully Compliant with such
Specification.
"NECESSARY CLAIMS" shall mean those claims of all patents, other than
design patents and design registrations, throughout the world entitled to an
effective filing date prior to January 1, 2003, which a Participant, or its
Affiliates, has the right, at any time during the term of this Agreement, to
grant licenses of the scope granted herein without such grant or the exercise of
rights thereunder resulting in payment of royalties or other consideration to
third parties (except for payments to Affiliates or to employees within the
scope of their employment) and (i) which are necessarily infringed by an
implementation of a version of the Specification adopted by the Promoters, where
such infringement could not have been avoided by another commercially reasonable
noninfringing implementation of such Specification, or (ii) for which
infringement is based on an implementation of any example included in the body
of the Specification. Necessary Claims shall not include, and no license shall
apply to, implementation examples included solely in any appendix, exhibit or
other attachment to the actual Specification.
"FULLY COMPLIANT" means: (a) an implementation of the Specification which
supports or implements all of the portions of the Specification defined by the
Specification as being "Required" or (b) an implementation of all portions of
the Specification required for a specific type of product or component thereof.
FELLOW PARTICIPANTS. The Promoters may invite additional parties to become
"Fellow Participants" by execution by those additional parties of a
Participant's Agreement identical to this agreement. When a Promoter identifies
such a Fellow Participant, the Participant shall be free to exchange information
relating to the non-final versions of the Specification with such party, and
such information shall be treated as confidential as provided above.
TRADEMARKS AND BRANDING. The Participant hereby agrees not to assert
against any Promoter or any Fellow Adopter any trademark or trade name rights
they may have now or hereafter in any name or logo adopted by the Promoters for
use in or with such Specification. Prior to adoption of a new name or logo, the
Promoters shall transmit a proposed name or logo to Participant. Participant
shall have 30 days to notify the Secretary if it believes it possesses any
rights to such name or logo. Failure to respond within such 30 days will waive
any rights of Participant to such proposed name or logo. The Participant will
not use the name or logo adopted by the Promoters except to refer to the
Specification and to products which fully comply with the Specification.
EARLY TERMINATION. A party may terminate this agreement as to itself at
any time without cause upon written notice to the other. All obligations of
confidentiality, and the license granted above, will survive the termination of
this agreement.
GENERAL. This Agreement does not create a joint venture, partnership or
other form of business association between the parties, nor an obligation to buy
or sell products implementing the draft Specification or its final version.
This Agreement will be governed by the substantive laws of New York without
reference to conflict of laws principles. Participant understands that all of
the
-3-
<PAGE>
Promoters are intended third party beneficiaries of this Agreement and may
enforce the provisions thereof against Participant. This Agreement may be
executed in any number of counterparts, each of which when so executed and
timely delivered shall be deemed an original, and such counterparts together
shall constitute one instrument. Each Participant warrants that the Participant
has not contributed any third party confidential information to the
Specification and that it has the authority to enter into this Agreement.
EFFECTIVE DATE. This Agreement shall be legally binding when:
1) the Promoter has signed the Agreement,
2) the Participant has signed the Agreement, and
3) the Agreement has been received via overnight courier to the attention
of the Secretary at
Home Phoneline Participant's Agreement Administration
Compaq Computer Corporation
20555 SH 249
Houston, TX 77070
NOTICES. All notices under this Agreement shall be sent to:
If to the Promoters: If to Participant:
Home Phoneline Participant's ____________________________
Agreement Administration ____________________________
Compaq Computer Corporation ____________________________
20555 SH 249 ____________________________
Houston, TX 77070 ____________________________
With a copy to:
Compaq Computer Corporation
20555 SH 249
Houston, TX 77070
Attn: General Counsel
-4-
<PAGE>
AGREED:
PARTICIPANT PROMOTER
Corp Name:______________________ Corp Name:________________________
Signed:_________________________ Signed:___________________________
Name:___________________________ Name:_____________________________
Title:__________________________ Title:____________________________
Date:___________________________ Date:_____________________________
With a copy to:
Compaq Computer Corporation
20555 SH 249
Houston, TX 77070
Attn: Group Counsel,
Communication Products
Intel Corporation
2111 N.E. 25th Ave.
Hillsboro, Oregon 97124
Attn: MDPO Counsel
MS JF3-147
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052
Attn: Assoc. Gen. Counsel (IP)
-5-
<PAGE>
ADOPTER: PROMOTER:
By:_________________________ By:___________________________
Name:_______________________ Name:_________________________
Title:______________________ Title:________________________
Date:_______________________ Date:_________________________
-6-
<PAGE>
EXHIBIT 10.13
MASTER AGREEMENT
BETWEEN
TUT SYSTEMS INC. AND COMPAQ COMPUTER CORPORATION
This is an agreement ("Agreement" as hereinafter more fully defined) between
Compaq Computer Corporation ("Compaq" as hereinafter more fully defined) having
its principal address at 20555 S.H. 249, Houston, Texas 77070, and Tut Systems,
Inc. ("Tut" as hereinafter more fully defined) having its principal address at
2495 Estand Way, Pleasant Hill, CA, 94523-3911 with an effective date of April
21, 1998.
1. BACKGROUND.
----------
Compaq designs, manufactures and distributes computers for use by consumers
in various environments, including their homes, and Tut designs and
manufactures devices that connect personal computers.
Compaq and Tut desire to work together to provide devices and methods that
improve the connectivity of such computers and consumer devices.
In consideration of the mutual promises and covenants herein and for other
good and valuable consideration, Compaq and Tut agree as follows:
2. SCOPE.
-----
This Agreement contains the terms and conditions that will apply to various
business transactions contemplated by the parties and more fully described
herein and in various Project Statements as hereinafter more fully defined
and attached hereto.
3. ALLIANCE RESPONSIBILITIES.
-------------------------
The parties' responsibilities under this Agreement include, but are not
limited to the following:
a. Technology Advisory Board. The parties shall create a Technology Advisory
-------------------------
Board that shall be responsible for advising the parties, subject to
appropriate protection of confidential information, on technology trends,
current and future needs and other such technology topics as the members
may select. The board shall meet periodically during the Term of this
Agreement. The board shall consist of
i. a member from Compaq, representing a computer systems perspective,
and
ii. a member from Tut, representing a connectivity perspective, and
iii. a third member, selected by Compaq and Tut, representing a software
operating system or application perspective, and
iv. fourth and or fifth members, as required and selected by the
majority of the other members of the Technology Board.
b. Right Of First Offer. Tut shall offer first to Compaq, the opportunity to
--------------------
participate in the design, development, manufacture, distribution, and
sale of home data connectivity technology that provides connectivity
greater than [*]. Compaq shall have thirty (30) days to evaluate such
offer and respond to Tut.
In the event that Compaq elects to have home data connectivity technology
greater than [*] designed and developed by a third party, then Compaq
may, but is not obligated to, solicit such development activity from Tut.
c. Partner Pricing Or Licensing. The parties agree that in a Project
----------------------------
Statement where both parties contribute to the development, the prices
paid, or license fees charged to the other party, if any, shall be less
than that charged to any other party, independent of volume, tiered
pricing, or other circumstance, other than as a joint participant in the
development of such technology. Such partner discount shall be no less
than [*]. No other PC OEM shall receive pricing or licensing terms from
Tut more advantageous than those provided to Compaq.
d. Right of First Refusal of Change of Control. During the period commencing
-------------------------------------------
on the Effective Date and ending on the earlier to occur of (1) the
closing of an underwritten initial public offering of Tut's common stock
and (2) the termination of this Agreement (the "Refusal Period"), in the
event that Tut or any officer, director, agent, representative or
affiliate which individually or together with any other Person (defined
below) or group controls Tut (each a "Control Person" and collectively,
the "Control Persons") receives an offer from any Persons set forth on
Exhibit 1 to this Agreement (each a "Specified Person" and collectively,
the "Specified Persons") to engage in an Acquisition Transaction (as
defined below), Tut shall promptly notify Compaq in writing of such offer
along with all of the material terms and conditions thereof, including,
but not limited to, the identity of the offeror, nature of the
transaction, price, nature of the consideration, and timing for closing.
During the Term of this Agreement but only so long as Compaq maintains an
equity position in Tut, Tut shall use all commercially reasonable efforts
to ensure that none of the Control Persons takes or causes or permits any
Person to take, directly or indirectly, any of the following actions with
any of the Specified Person unless such actions concurrently are
undertaken with Compaq: solicit, encourage, initiate or participate in
any negotiations, inquiries or discussions with respect to any offer or
proposal to acquire all of or any significant part of Tut's business,
assets(including its HomeRun(TM) technology ), stock or other equity
interest, whether by merger, consolidation, other business combination,
purchase of assets, tender or exchange offer or otherwise (each of the
foregoing, an "Acquisition Transaction"). If at any time during the
Refusal Period Tut (or to the extent that Tut is able to influence them,
the Control Persons) should desire to enter into or execute any agreement
with any Specified Person relating to an Acquisition Transaction, Tut (or
to the extent that the Corporation is able to influence them, the Control
Persons) shall first offer Compaq the same opportunity proposed with
respect to the Specified Person, and if Compaq agrees to substantially
the same economic terms and conditions proposed with respect to such
Specified Person within thirty three (33) days after Compaq's receipt of
written notice of such opportunity (the "Notification Period"), then Tut
(and/or each applicable Control Person) will enter into or execute such
proposed agreement with Compaq rather than the respective Specified
Person. For the purposes of this Agreement and without limitation to
"Specified Persons", the term "Person" shall mean any general
partnership, limited partnership, corporation, limited liability company,
joint venture, trust, business trust, governmental agency, cooperative
association, individual or other entity, and their heirs, executors,
administrators, legal representatives, successors and assigns of such a
Person as the context may require. For the purposes of this Section only,
Compaq's rights shall be secondary only to any similar rights that
Microsoft may have, but in no case shall Compaq's Notification Period
terminate any earlier than three (3) days later than Microsoft's.
e. Notice of Inquiry: Tut shall promptly notify Compaq when Tut receives a
-----------------
valid inquiry from any Company identified in Exhibit 2 that, in its sole
judgement may result in a Change of Control. Tut shall additionally
provide Compaq such information as may be permitted under a non-
disclosure
Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as [*]. A complete version of this exhibit
has been filed separately with the Securities and Exchange Commission.
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 1 of 9
<PAGE>
agreement, if any, with such Company, and shall provide updates that
generally reflect the status of such inquiries.
4. DEFINITIONS.
-----------
The capitalized terms as used within this Agreement shall have the same
meaning as ascribed to the terms below.
a. Activation - shall mean the initiation of access to a product as
----------
authorized by the product owner, its distributor or agent.
b. Agreement - shall mean this document, its attachments, all Project
---------
Statements, any schedules, attachments or addenda referred to in Project
Statements, and any amendments to the foregoing.
c. Baseline Materials - shall mean Materials described in a Project
------------------
Statement that are used as a starting point or baseline for a development
project.
d. Change Of Control - shall be deemed to have occurred with respect to a
-----------------
party if:
(1) any person, entity or group (within the meaning of Rule 13d-5 under
the Securities Exchange Act as in effect on the date hereof) shall
come to own, directly or indirectly, beneficially or of record,
voting securities representing more than 50% of the total voting
power of such party; or
(2) such party becomes a Subsidiary of some third party.
e. Code - shall mean computer programming instructions. Unless specifically
----
stated otherwise, Code shall include Software Code and Hardware Code and
any Maintenance Modifications or Enhancements thereto created from time
to time during the term of the relevant Project Statement.
(1) Software Code - shall mean computer programming instructions in
-------------
Executable Code or Source Code forms.
(1) Executable Code - shall mean the Code that results when Source
Code is processed by a software compiler, assembler or other similar
processor into the form generally intended for the End User.
(2) Source Code - shall mean the programming instructions in all
-----------
forms other than Executable Code including related or imbedded
comments, prologues and procedural language/code.
(2) Hardware Code - shall mean those source instructions, descriptions
-------------
and definitions in a hardware descriptive language, for example
Verilog or VHDL, that represent the design of an ASIC or programmable
logic component including related or imbedded comments or prologues.
(3) Compaq Code, Tut Code, or Third Party Code - shall mean Code in which
----------- -------- ----------------
Compaq, Tut, or another, respectively owns the copyrights and other
intellectual property rights or otherwise has sufficient
authorization to grant or assert rights in such Code.
f. Compaq - shall mean Compaq Computer Corporation and its Subsidiaries.
------
g. Tut- shall mean Tut Systems, Inc. and its Subsidiaries.
---
h. Deliverables - shall mean any Materials which are required to be
------------
delivered by a party hereunder as set forth in a Project Statement.
i. Derivative Work - shall mean a work which is based upon one or more
---------------
preexisting works, such as a revision, enhancement, modification,
translation, abridgment, condensation, expansion, or any other form in
which such a preexisting work may be recast, transformed, or adapted, and
which, if prepared without authorization of the owner of the copyright in
such preexisting work, would constitute copyright infringement under
United States law.
j. Development Environment - shall mean (1) the devices, code,
-----------------------
documentation, development tools, including compilers, workbenches,
tools, build scripts, object libraries and higher-level or proprietary
languages, used or required by a party for the development, test,
maintenance, support, implementation, manufacture or distribution of any
Deliverable other than Hardware, and (2) for the Hardware, the build
scripts, make files, bond-out files and documentation required to
synthesize and produce an ASlC sign-off tape from the Hardware Code. The
components of the Development Environment shall be described and
identified by name and version. Unless otherwise provided in a Project
Statement, the Development Environment shall not include any third party
commercial libraries, tools, products or foundry proprietary libraries
necessary to produce a sign-Off tape used as part of the Development
Environment.
k. Documentation - shall mean media that relate to particular Code or
------------
Hardware. Unless specifically stated otherwise, Documentation shall
include any Maintenance Modifications or Enhancements to such
Documentation created from time to time during the term of the relevant
Project Statement.
l. Enhancements - shall mean changes or additions, other than Maintenance
------------
Modifications, to Code or Hardware and related Documentation, including
all new releases, that improve functions, add new functions, or improve
performance by changes in system design or coding.
m. Error - shall mean a statement or condition:
-----
(1) in Code or Hardware that is not in conformity with the functions
described in the relevant Project Statement or Documentation; or
(2) in Documentation that is not in conformity with the relevant Project
Statement or which causes a reasonably competent user to be unable to
correctly operate the Code.
n. General Availability - shall mean, with respect to a particular product,
--------------------
the date on which the product is made available for purchase by members
of the general public.
o. Hardware - shall mean computer systems, motherboards, ASICs components,
--------
adapter cards or other similar hardware.
p. Invention - shall mean any idea, design, concept, technique, apparatus,
---------
method, discovery or improvement, whether or not patentable, that is
conceived or reduced to practice by one or more of the inventing party's
employees during the term and in the performance of a Project Statement
under this Agreement.
q. Joint Invention - shall mean any idea, design, concept, technique,
---------------
apparatus, method, discovery or improvement, whether or not patentable,
that is first conceived or reduced to practice by one or more of Tut's
employees with one or more of Compaq's employees, in the performance of a
Project Statement; provided in the case of a patentable invention that a
party's contribution in such shall meet the requirements for joint
invention under United States law.
r. Licensed Work - shall mean any Baseline Materials and/or Deliverables
-------------
licensed by one of the parties to the other pursuant to a Project
Statement.
Page 2 of 9
<PAGE>
s. Maintenance Modifications - shall mean any modifications or revisions,
-------------------------
other than Enhancements, to Code, Hardware, or Documentation that correct
Errors or provide other incidental corrections.
t. Materials - shall mean Code, Documentation, other written materials or
---------
tangible media, including machine-readable media with Code or
Documentation recorded thereon, Hardware, or any combination of the
foregoing.
u. Project Statements - shall mean documents which define specific projects
------------------
to be implemented under this Agreement.
v. Subsidiary - shall mean a corporation, company or other entity (1) more
----------
than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are, or (2) which does not have outstanding shares or
securities, as may be the case in a partnership, joint venture or
unincorporated association, but more than fifty percent (50%) of whose
ownership interest representing the right to make the decisions for such.
corporation, company or other entity is, now or hereafter, owned or
controlled, directly or indirectly, by a party hereto. However, such
corporation, company or other entity shall be deemed to be a Subsidiary
only so long as such ownership or control exists.
w. Version - shall mean Derivative Works that result from changes or
-------
additions to Code and related Documentation that (1) provide additional
value and utility and, as a practical matter, may be priced and offered
separately as optional additions to the Code and Documentation, or (2)
are not made available without separate charge.
5. LICENSES.
--------
a. Licenses granted by any one party ("Licensor") to the other party
("Licensee"), if any, shall be as set forth in the applicable Project
Statement. Examples of such licenses are:
(1) Copyright Licenses. The following copyright license grants are
------------------
available, but are not required, for inclusion in a Project Statement
and may, in any event, be subject to more detailed terms and
provisions set forth in the applicable Project Statement.
(a) Full Copyright License. Under a Full Copyright License, Licensor
----------------------
grants to Licensee a non- exclusive, worldwide, non-transferable
license under Licensor's copyright rights to reproduce, execute,
perform, display and distribute internally and/or externally
copies of the Licensed Work, prepare or have prepared Derivative
Works based upon such Licensed Work, and to reproduce, execute,
perform, display and distribute internally and/or externally
copies of such Derivative Works. Such license includes the right
of the Licensee to grant sublicenses, of or within the scope of
the license granted to it herein, to third-parties, including
Licensee's distributors. Each licensed third party shall have a
corresponding right to license other third-parties.
(b) Limited Copyright License. Under a Limited Copyright License, the
-------------------------
Licensee receives the same grant of rights as provided under a
Full Copyright License except for the rights to distribute either
internally or externally and sublicense Source Code.
(c) OEM Copyright License: Under an OEM Copyright License, Licensee
---------------------
receives the same grant of rights as provided under a Limited
Copyright License except for the right to prepare Derivative
Works based upon Licensed Works and all rights with respect to
Source Code.
(d) Distribution Copyright License. Under a Distribution Copyright
------------------------------
License, Licensee receives the same grant of rights as provided
under an OEM Copyright License, except for the rights to
reproduce Licensed Works or to sublicense such rights. The
foregoing shall not be interpreted to prevent end-users or
Licensee from making backup or archive copies of Code.
(e) Internal Use Copyright License. Under an Internal Use Copyright
------------------------------
License, Licensee receives the same grant of rights as provided
under a Full Copyright License, except for the rights to
distribute externally and sublicense Licensed Works.
(2) Other Copyright Matters.
-----------------------
(a) Pictorial, Graphic, Audio/Visual Works and Moral Rights. The
-------------------------------------------------------
licenses specified, in Sections 5a(1) through 5a(5) include
corresponding licenses under Licensor's copyright and waiver of
any moral rights to pictorial, graphic or audio/visual works,
including icons, screens, music and characters, created as a
result of execution of any Code or any Derivative Works thereof
in accordance with the license.
(b) Development Environment Materials. For all Development
---------------------------------
Environment Materials not commercially available licensed under
a Full Copyright License or a Limited Copyright License,
Licensor shall grant to or obtain for Licensee a grant of right
and license that shall be at least sufficient to allow Licensee
to use delivered Code as set forth in a Project Statement.
(c) Ownership of Derivative Works. Derivative Works created by
-----------------------------
Licensee pursuant to a Full Copyright License or Limited
Copyright License shall be owned by Licensee subject the
intellectual property rights of Licensor in the relevant
Licensed Works.
(d) Copyright Notices. Any publication by Compaq or Tut of
-----------------
copyrighted works shall contain an appropriate copyright notice
in accordance with, and in the form prescribed by, the copyright
statutes. Each party shall not alter, modify or delete the other
party's copyright notice without the other party's written
consent.
(e) Registrations. Each party shall be responsible for registration
-------------
of its Licensed Works and Derivative Works with the US Copyright
Office. If either party elects not to register any such Licensed
Work or Derivative Work, the other party may at its option and
expense register the Licensed Work or Derivative Work, but only
in the name of, and as the agent of, the party owning the
Licensed Work or Derivative Work.
(f) Copyright Enforcement. Each party shall have the exclusive
---------------------
right, but no obligation to, maintain the validity and
enforceability of its copyrights in its Licensed Works and
Derivative Works.
(3) Invention License. For each Project Statement, Licensor grants to
-----------------
the Licensee under all Inventions
Page 3 of 9
<PAGE>
(other than Joint Inventions), applications filed on such
Inventions, and patents issuing thereon, a worldwide, nonexclusive,
nontransferable license to make, have made, use, have used, lease,
sell, offer to sell, import or export and/or otherwise transfer
Licensed Works incorporating such Inventions; and to practice and
have practiced such Inventions, but only as necessary to make, have
made, use or have used, lease, sell, import, export and/or otherwise
transfer Licensed Works. Such Invention license does not extend to
the manufacture, use, lease, sale, importation, exportation or other
transfer of any combination or sub-combination which does not
include Licensed Works.
b. Unless modified in a Project Statement, the following sections shall
apply:
(1) Ownership of Inventions. The inventing party shall own each Invention
-----------------------
made by its employees, applications filed thereon and patents issuing
thereon (subject to the license set forth in Section 5(a)3, except
Joint Inventions which, unless specified otherwise in a Project
Statement, shall be jointly owned.
(2) With respect to Joint Inventions, Tut and Compaq shall share equally
in the expenses of seeking and maintaining patent protection,
provided that either party may elect at its own expense to seek and
maintain patent protection if the other party declines to share
expenses. Tut and Compaq may each license others under such Joint
Inventions, applications filed thereon and patents issuing thereon
without accounting to the other except.
c. Notice of Patent Infringement. If either party becomes aware that an item
-----------------------------
it has produced under this Agreement infringes, or allegedly infringes, a
patent of a third-party, that party agrees to notify the other party
promptly in writing.
d. Additional and/or Limited License Terms. Each Project Statement may
---------------------------------------
contain provisions which add to and/or limit the licenses specified in
this Section 5. in the event that added and/or limited provisions are not
included in a Project Statement, the license types defined in this
Section 5 shall be construed narrowly so as to grant only those rights
specified. Except as expressly set forth in a Project Statement, no other
licenses shall be deemed granted, at any time to either party, whether
expressly, by implication, estoppel or otherwise.
6. COMPENSATION.
------------
a. Payment. Each party agrees to pay the other any fee, royalty, non-
-------
recurring expense ("NRE") reimbursement or other payment that may be
specified in a Project Statement. Other than as specifically set forth in
Project Statements, no other fees, royalties, NRE reimbursements or other
payment obligations shall accrue under this Agreement.
b. No Royalties for Certain Uses. Unless specified otherwise in a Project
-----------------------------
Statement, no royalty or other charge shall be payable by either party
for any Licensed Works used for:
(1) development, maintenance or support activities;
(2) sales demonstrations or temporary customer testing periods, excluding
customer evaluation units that convert to bona fide sales within one
hundred twenty (120) days of any termination of this Agreement;
(3) training or educational purposes that are directly related to the
sales and/or licensing of the Licensed Works; or
(4) back-up copies of Licensed Works subject to copyright protection.
c. Payments. Payment obligations shall accrue only as stated in a project
--------
Statement.
(1) For royalties, Licensee shall pay to Licensor within forty-five (45)
days after the conclusion of each calendar quarter, the amount of
payment obligations accruing during such calendar quarter, net of
refunds to customers and adjustments as set forth in Section 6b,
provided that payment obligations resulting from non-US activities
may be paid within sixty (60) days after conclusion of the calendar
quarter. Payment shall be accompanied by a summary of the basis for
determining the amount of such payment and shall be paid in US
dollars. Payment for activities in Countries where the transaction
was stated in local currency will be. converted to US currency on the
last business day of the quarter for which the payment is being made.
(2) For other payment obligations, payments shall be made within forty-
five (45) days after the receipt of an acceptable invoice detailing
the nature and amount of the expense and the Project Statement
reference indicating the payment obligation.
d. Audit. The parties shall maintain complete and accurate accounting
-----
records, in accordance with generally acceptable accounting practices, to
support and document payments payable in connection with activities
hereunder. Such records shall be retained for a period of at least two
(2) years alter the payments to which such records relate have been paid.
Each party shall, upon written request, during normal business hours, but
not more frequently than once each calendar year, provide access to such
accounting records to an independent accounting firm chosen and
compensated by the requesting party, for purposes of an audit. Such
accounting firm shall be required to sign an agreement protecting the
party's confidential information and shall be authorized to report only
the amount of payments due and payable for the period requested. The
requesting party shall bear the costs of the auditor unless it is
determined by the auditor that there was an underpayment of royalties of
five percent (5%) or greater in any calendar quarter period. In such
event, the audited party shall bear the reasonable costs of the audit for
such calendar quarter period.
7. PROCEDURE FOR ENTERING INTO PROJECT STATEMENTS.
----------------------------------------------
Each Project Statement issued under this Agreement shall become effective
only when executed by authorized representatives of both parties. Neither
party gives any assurance as to the issuance or execution of any subsequent
Project Statements. Each Project Statement entered into under this Agreement
shall be construed to incorporate the provisions of, and to be governed by,
this Agreement.
8. CONTRACT ADMINISTRATION.
-----------------------
Executive Coordinator. Upon the execution of this Agreement, Compaq and Tut
shall each submit to the other party in writing the name, business address
and telephone number of the Executive Coordinator(s) who shall be
responsible for overall contract compliance. The responsibilities of the
Executive Coordinators are as follows:
a. administer and coordinate the overall aspects of the Agreement;
b. arrange meetings, visits and consultations between the parties concerning
matters related to this Agreement;
c. appoint Program Managers and Project Managers as appropriate; and
Page 4 of 9
<PAGE>
d. appoint technical advisory board members.
9. CHANGES TO CONTRACT DOCUMENTS.
-----------------------------
a. Material Increases. In the event that a party proposes changes which
------------------
materially increase the other party's cost or work effort, such proposal
shall include a proposed equitable adjustment in payments and/or
schedule. Where the parties agree to make a change to the Agreement
documents, the parties shall negotiate in good faith such adjustments.
Such revised payments will be based on a charge schedule similar to those
applicable to unchanged work.
b. Technical Changes. Program Managers or Project Managers, if appointed,
-----------------
may mutually propose, accept (by signature or initials) and implement
changes to technical aspects of such Project Statement, provided such
changes do not change dollar amounts, intellectual property rights or
materially change Deliverables or time schedules.
10. CONFIDENTIALITY AND INFORMATION EXCHANGE.
----------------------------------------
a. Exchange. The obligations of the parties regarding confidentiality under
--------
this Agreement and any Project Statement entered into by the parties
pursuant to the Agreement shall be governed by the nondisclosure
agreement between the parties effective 12/3/97 or any renewals thereof.
b. Disclosure to Others. Neither party shall, without the prior written
--------------------
authorization of the other party, disclose to any third- party the terms
and conditions of this Agreement, except as may be necessary to establish
or assert rights hereunder, or as may be required by law or governmental
regulations. Notwithstanding the foregoing, the parties may disclose the
terms and conditions of this Agreement to subcontractors with a need to
know, provided they have signed nondisclosure agreements no less
restrictive than that signed between the parties.
11. REQUIREMENTS REGARDING AGREEMENTS WITH EMPLOYEES AND SUBCONTRACTORS.
-------------------------------------------------------------------
Each party agrees that it shall have and maintain, for so long as this
Agreement and any Project Statements are in effect, written agreements with
all employees, subcontractors or agents engaged by such party who assist
with or contribute to that party's duties, obligations or performance under
any Project Statement. The written agreements shall contain provisions
sufficient to establish the rights and benefits contemplated by, and to
assure compliance with this Agreement.
12. REPRESENTATIONS AND WARRANTIES.
------------------------------
Each-party makes the following representations and warranties for the
benefit of the other.
a. No Extrinsic Assurances. Each party represents and warrants that, in
-----------------------
entering into this Agreement and from time to time during the term of
this Agreement, it does not and will not rely on any promises,
inducements, or representations made by the other with respect to the
subject matter of this Agreement, nor on the expectation of any other
business dealings with the other party, now or in the future, except as
specifically provided in this Agreement.
b. Ownership and Authority.
-----------------------
(1) PAYMENT. WHEN A PROJECT STATEMENT GRANTS LICENSES THAT RESULT IN A
-------
ROYALTY OR OTHER PAYMENT OBLIGATION, THE PARTY GRANTING SUCH
LICENSES REPRESENTS AND WARRANTS (a) THAT IT IS THE SOLE OWNER OF
ALL LICENSED WORKS PROVIDED BY IT UNDER THE PROJECT STATEMENT,
EXCEPT FOR ANY IDENTIFIED BASELINE MATERIALS AND/OR DELIVERABLES
BELONGING TO THE OTHER PARTY OR THIRD PARTIES, (b) THAT SUCH PARTY
HAS FULL AND SUFFICIENT AUTHORITY TO GRANT THE RIGHTS AND OR
LICENSES GRANTED TO THE OTHER PARTY UNDER THIS AGREEMENT, AND (c)
THAT LICENSED WORKS TO THE BEST KNOWLEDGE OF THE PARTY GRANTING THE
LICENSE DO NOT INFRINGE A PATENT COPYRIGHT OR TRADE SECRET OF A
THIRD PARTY.
(2) NO PAYMENT. WHEN A PROJECT STATEMENT GRANTS LICENSES THAT DO NOT
----------
RESULT IN A ROYALTY OR OTHER PAYMENT OBLIGATION, ALL LICENSED WORKS
ARE PROVIDED "AS IS" WITHOUT ANY WARRANTY, INCLUDING, BUT NOT
LIMITED TO, ANY IMPLIED WARRANTIES OF OWNERSHIP, MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NONINFRINGEMENT.
EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 12, NEITHER PARTY MAKES ANY
WARRANTIES OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, UNDER THIS
AGREEMENT.
13. INDEMNIFICATION.
---------------
a. Statement of Indemnification. As to each Licensed Work covered by
----------------------------
representations and warranty under Section 12(b)(1), Licensor agrees to
defend, at its expense, any suit, claim or the like against Licensee to
the extent such suit, claim or the like is based upon an assertion that
(1) the Licensor does not have sufficient right, title and interest in
the Licensed Works to enter into and/or convey the rights and licenses
granted under any Project Statement, and/or (2) that the Licensed Works
infringe the patent, copyright or trade secret rights of a third-party.
Licensor agrees to pay the amount of any settlement or the costs,
damages, and reasonable attorney's fees finally awarded in any such suit,
claim or the like provided, that:
(1) Licensor is notified promptly in writing of any notice of claim or of
threatened or actual Suit;
(2) Licensor has sole control of the defense of such suit, claim or the
like and related settlement negotiations;
(3) Licensee cooperates in the defense and settlement of such suit, claim
or the like at the expense of Licensor; and
(4) Any such settlement shall contain no admission of Licensor's
liability without the prior written approval of the Licensor.
Following notice from Licensee of a claim or of a threatened or actual
suit, to the extent based on the above, Licensor shall, at its expense,
procure for Licensee the right to continue to market, use, and/or have
others market or use the allegedly infringing Licensed Work, or replace
or modify the same to make it non-infringing. If Licensor elects to
replace or modify such Licensed Work, such replacement shall
substantially meet the specifications contained in the applicable Project
Statement.
b. Exceptions. Neither party shall have liability for any intellectual
----------
property infringement claim based on the combination of a Licensed Work
with a third party's software
Page 5 of 9
<PAGE>
or equipment if (1) such infringement would have occurred with such
software or equipment being used alone or in combination with each other
or (2) there is a commercially reasonable non-infringing implementation
having similar performance or (3) such claim of infringement is based on
patent claims whose novelty resides in (a) features outside of the
Licensed Work or (b) a combination of features where the Licensed Work
could be replaced with a generic functional equivalent without
eliminating an element from the claimed combination.
c. Exclusive Statement. Sections 12 and 13 contain the entire and exclusive
-------------------
rights and obligations of the parties regarding any claim of
infringement.
14. TERM AND TERMINATION.
--------------------
a. Stated Term of Agreement. After an initial five (5) year term, this
------------------------
Agreement shall automatically renew for additional one (1) year periods
unless either party provides the other with written notice one hundred
eighty (180) days or more before the end of any term; provided, however,
that this Agreement shall continue to remain in effect with respect to
any Project Statement already in effect prior to such expiration until
such Project Statement is terminated and/or performance thereunder is
completed.
b. Termination for Convenience. Neither party may terminate this Agreement
---------------------------
prior to the first anniversary of the Effective Date. Either party may
then terminate this Agreement upon not less than one hundred eighty (180)
days' notice to the other party; provided, however, that its terms shall
survive with respect to any Project Statement already in effect prior to
such termination until performance thereunder is completed.
c. Termination for Cause. Either party shall have the option to terminate
---------------------
this Agreement or any Project Statement in the event that the other party
materially breaches any Agreement document and the breach remains uncured
for sixty (60) days after written notification to the breaching party.
d. Change of Control or Acquisition. If either party undergoes a Change of
--------------------------------
Control, the other party shall have the option to immediately terminate
this Agreement and have returned any or all Confidential Information then
in the possession of the other party and any Materials delivered under
any Agreement documents, provided, however, that nothing in this Section
shall be deemed to waive any obligation Tut has on account of such change
of control pursuant to Section 3(e).
e. Survival. In the event of expiration or termination of this Agreement,
--------
those Sections which by their nature are intended by the parties to
survive shall survive and continue in effect to the extent necessary to
protect the rights of the parties and their sublicensees (including end-
users). In addition, Sections 3a, 3b, 3e, and 3f shall survive so long as
Compaq maintains an equity investment in Tut.
15. LIMITATION OF LIABILITIES.
-------------------------
EXCEPT AS SET FORTH IN SECTION 13, NEITHER PARTY SHALL BE ENTITLED TO
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT, EVEN IF ADVISED OF THE
LIKELIHOOD OF SUCH DAMAGES, OR FOR ANY DIRECT DAMAGES EXCEEDING [*].
16. FREEDOM OF ACTION.
-----------------
Unless specifically set forth in a Project Statement or signed addendum to
this Agreement, nothing in any Agreement document shall be construed as
prohibiting or restricting either party from independently developing or
acquiring and marketing materials and/or programs which are competitive with
the Licensed Works or from entering into similar agreement with other
parties.
17. GENERAL.
-------
a. Notice. Unless otherwise agreed to by the parties, all notices required
------
under this Agreement (except those relating to product pricing, changes
and upgrades) shall be deemed effective when received and made in writing
by either (i) registered mail, (ii) certified mail, return receipt
requested, or (iii) overnight mail, addressed and sent to the attention:
Tut: Tut Systems, inc.
--- 2495 Estand Way
Pleasant Hill, CA 94523-3911
Attn: Matt Taylor CTO
Compaq: Compaq Computer Corporation.
------ 20555 S. H. 249
Houston, Texas 77070
Attn: Mark Carpenter
with a copy of non-technical notices to:
Tut: Tut Systems, Inc.
--- 2495 Estand Way
Pleasant Hill, CA 94523-3911
Attn: CFO
Compaq: Compaq Computer Corporation
------ 20555 S.H. 249
Houston, Texas 77070
Attn: General Counsel,
Consumer Products Group
b. Construction.
------------
(1) Headings. The headings of this Agreement are provided for reference
--------
only and shall not be used as a guide to interpretation.
(2) Order of Precedence. In the event of inconsistency between or among
-------------------
the various Agreement documents, the following order of precedence
shall govern interpretation:
(a) Project Statements;
(b) This document;
(c) Documents incorporated by reference; and
(d) Purchase Orders.
c. Independent Contractor. Each party is and shall remain an independent
----------------------
contractor with respect to all performance rendered pursuant to the
Agreement documents. Neither party nor any employee thereof shall be
considered an employee or agent of the other party for any purpose and
shall have no authority to bind or make commitments on behalf of such
other party for any purpose and shall not hold itself or themselves out
as having such authority.
Each party assumes full responsibility for its actions and the actions of
its personnel in rendering performance pursuant to this Agreement, and
each party shall have sole responsibility for the supervision, daily
direction and control, payment of salary (including withholding of income
taxes and social security), worker's compensation, disability benefits
and the like of its personnel. Each party assumes full responsibility
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 6 of 9
<PAGE>
for the acts of all its subcontractors.
d. Compliance with Laws. Each party shall, at its own expense, comply with
--------------------
any governmental law, statute, ordinance, administrative order, rule or
regulation relating to its duties, obligations and performance under this
Agreement and shall procure all licenses and pay all fees and other
charges required thereby.
e. Export of Technical Data. The parties shall not, nor shall they authorize
------------------------
or permit their employees, agents or subcontractors to, export or
reexport any Licensed Works, any technical information, or any process,
product or service that is produced under this Agreement to any country
specified as a prohibited destination in applicable national, state and
local laws, regulations and ordinances, including the Regulations of the
U.S. Department of Commerce and/or the U.S. State Department, without
first obtaining government approval.
f. Taxes. Each party shall have sole responsibility for the payment of all
-----
taxes and duties imposed by all governmental entities, as they pertain to
its duties, obligations and performance under this Agreement.
g. Force Majeure. Neither party shall be held liable for failure to fulfill
-------------
its obligations other than payment obligations under this Agreement, if
the failure is caused by flood, extreme weather, fire, or other natural
calamity, acts of governmental agency, or similar causes beyond the
control of such party, and the term for performance shall be increased to
a reasonable period of time.
Assignment. Neither party may sell, transfer, assign, or subcontract this
----------
Agreement or any right or obligation set forth herein, except as
expressly provided herein, without the prior written consent of the other
party. Any act in derogation of the foregoing shall be null and void.
i. Governing Law. The validity, construction, and performance of this
-------------
Agreement shall be governed by the substantive law of the State of Texas
without regard to the conflicts of law provisions thereof.
j. No Other Rights. This Agreement shall not be construed to grant any
---------------
rights by implication, estoppel, or otherwise, that are not granted
through its express provisions.
k. Amendments. All changes to Agreement documents must be made in writing
----------
and executed by authorized representatives of both parties. The terms of
the Agreement may only be changed by a written amendment signed by an
authorized representative of each party. Amendments implemented by a
signed Project Statement shall be effective only with respect to that
Project Statement.
l. Severability. If any provision of this Agreement is held by a court of
------------
competent jurisdiction to be contrary to law, the remaining provisions of
this Agreement will remain in full force and effect and shall be
interpreted, to the extent possible, to achieve its purposes without the
invalid, illegal or unenforceable provision.
m. Entire Agreement. The provisions of this Agreement, as in effect from
----------------
time to time by their terms, constitute the entire agreement between the
parties and supersede all prior agreements, oral or written, and all
other communications relating to the subject matter of this Agreement.
Any terms contained in invoices, acknowledgments, shipping instructions,
or other forms that are inconsistent with or different from the terms of
this Agreement shall be void and of no effect.
18. SIGNATURES. The parties have caused this Agreement to be executed by their
----------
duly authorized representatives.
COMPAQ COMPUTER CORPORATION
Signature /s/ Michael Baker
---------------------------
Name Mike Baker
---------------------------
Title VP Controller
---------------------------
Date 7/14/98
---------------------------
TUT SYSTEMS, INC
Signature /s/ Matthew Taylor
---------------------------
Name Matthew Taylor
---------------------------
Title Chairman
---------------------------
Date 7/7/98
---------------------------
Page 7 of 9
<PAGE>
EXHIBIT 1
Specified Persons
-----------------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 8 of 9
<PAGE>
EXHIBIT 2
Companies
---------
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 9 of 9
<PAGE>
PROJECT STATEMENT NO. 1
to the
MASTER AGREEMENT
between
COMPAQ COMPUTER CORPORATION
and
Tut SYSTEMS, INC.
This is Project Statement No. 1 with an Effective Date of April 21, 1998 by
Compaq Computer Corporation ("Compaq") and Tut Systems, Inc. ("Tut"), pursuant
to the Alliance Agreement executed between Compaq and Tut with an effective date
of April 21, 1998 (Agreement) into which this Project Statement is incorporated
by reference.
1. COMMENCEMENT
------------
This Project Statement shall commence on the Effective Date.
2. PROJECT DESCRIPTION
-------------------
The purpose of this Project Statement is to describe the responsibilities
and obligations of the parties regarding the development, testing, release
to manufacture by Tut of HomeRun(TM) (Hardware) and supporting software
(Code) more fully described in Attachment 1 hereto.
3. PROJECT LOCATION
----------------
This Project Statement shall be performed at, or managed by (i) Compaq's
office in Houston, Texas, (ii) Tut's office at 2495 Estand Way, Pleasant
Hill, CA 94523-3911. All Tut Deliverables shall be due at Compaq's Houston
office.
4. BRANDING
--------
Compaq agrees to affix a mutually agreeable logo ("Logo") representing the
HomeRun(TM) technology and not remove such Logo if previously affixed to
chipsets or adapter cards acquired or manufactured by, or on behalf of,
Compaq, and in any advertising, marketing, technical or other materials
related thereto. The preceding notwithstanding, Compaq shall not be
obligated to affix or reference such Logo unless a specific reference is
made to the HomeRun(TM) technology directly in such advertising, marketing,
technical or other materials. Tut agrees that it shall use its best efforts
to ensure that any use of the Logo (i) shall be consistent among all
licensees of the technology.
5. DEFINITIONS
-----------
All capitalized terms herein shall have the same meaning ascribed to them in
the Master Agreement unless the context expressly provides otherwise. For
purposes of this Project Statement, the following definitions shall also
apply:
a. Alpha Release - shall mean the Hardware and Code whose features are 100%
-------------
complete, whose functionality is 70% complete, and that is fully
localization enabled (per requirements).
b. Beta Release - shall mean the Hardware and Code that includes 100%
------------
functionality and functional completion.
c. Go To Silicon (GTS) - shall mean the Hardware and Code that includes
-------------------
functionally complete with no Priority 1/Priority 2 defects (as detected
during component level test), Hardware and Code freeze. Design is ready
to be integrated into silicon.
Page 1 of 9
<PAGE>
d. Production Release - shall mean the version of the Hardware and Code
------------------
after complete system integration testing, and all Priority 1/Priority 2
defects are corrected and closed.
e. Compaq Acceptance - shall mean the independent testing conducted by
-----------------
Compaq Quality Engineering to verify compliance with the Functional
Specification.
f. Functional Specification - shall mean the HomeRun(TM). Physical Layer
------------------------
Specification, dated 3/17/98 attached hereto, and incorporated herein.
g. Error Severity Classification - shall mean the following:
-----------------------------
i. Priority 1 Error shall mean a feature/function as specified in the
associated specifications does not work and there are no known
Workarounds:
ii. Priority 2 Error shall mean a feature/function as specified, in the
associated specifications does not work and there is a Workaround.
iii. Priority 3 shall mean a feature/function as specified in associated
specifications does not conform to the specification and there are
reasonable Workarounds.
iv. Priority 4 Error shall mean a Cosmetic issue which does not impact
features or functions as specified in the associated specifications.
h. Product Announcement - shall mean a public announcement containing
--------------------
availability, pricing and customer ordering information.
i. [*]
j. HomeRun(TM) - shall mean the Tut HomeRun(TM) technology developed for
-----------
phoneline home networking running at a data rate of [*]
k. Silicon Manufacturer - shall mean a manufacturer of silicon devices who
--------------------
is capable of developing and manufacturing high quality Application
Specific Integrated Circuits (ASICs) from basic circuit designs as may be
provided by Tut.
l. Market Development - - shall mean those activities that directly promote
------------------
the joint interests of the parties related to home networking and the
creation of standards related thereto.
m. UADSL - shall mean Universal Asynchronous Digital Subscriber Line.
-----
n. Preferred OEM Status - shall mean a most preferential position relative
--------------------
to any other OEM that Tut might engage with. Under such preferential
position, Compaq shall be afforded no less favorable licensing terms than
any other OEM.
o. [*]
6. CONSIDERATION.
-------------
In consideration of the development, test and other activities associated
with providing Compaq the Hardware and Code specified in the Functional
Specifications, the parties have exchanged [*], the sufficiency of which the
parties hereby agree.
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 2 of 9
<PAGE>
7. PROJECT MANAGERS.
----------------
The Project Managers for the parties shall be specified in writing within
thirty (30) days of the Effective Date of this Project Statement.
8. BASELINE MATERIALS.
------------------
The Baseline Materials, if any, of each party are specified in Attachment 2
of this Project Statement.
9. Tut RESPONSIBILITIES.
--------------------
Tut shall:
a. Grant a license to Compaq for the right to use the HomeRun(TM) technology
per Section 15.
b. Ensure that at least two (2) Silicon Manufacturers are contractually
obligated to provide HomeRun-based Network Interface Controller ASICs.
c. [*]
d. [*]
e. Work jointly with Compaq to evangelize phoneline home networking in the
industry through Market Development and participation in standards
activities (IEEE).
f. Develop and deliver to Compaq HomeRun(TM) technology per the schedule in
Attachment 1.
g. Provide an access controlled environment for any Compaq unannounced
products provided by Compaq to Tut under this Project Statement.
h. Provide to Compaq periodic defect reports for all Hardware and Code
provided under this Project Statement. These reports shall be provided as
needed, but no less frequently than once per. month, the content and
format to be mutually agreed to, but to include, at minimum, an
itemization of each outstanding defect and the estimated resolution date.
i. Isolate and resolve any issues found during Compaq testing of the
Reference Design. Tut shall support isolation and resolution of issues
found during integration of the resulting hardware based Reference Design
into Compaq platforms. To the extent that isolation of said integration
issues determine that Tut deliverables are at fault, Tut shall own their
resolution to Production Release definition.
j. Provide HomeRun(TM) specifications including analog front end, both
analog and digital physical layer components and analog modifications.
k. Provide any Maintenance Modifications of Tut deliverables created during
the Term of this Project Statement.
l. Prepare "Train The Trainer" education materials for HomeRun(TM).
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 3 of 9
<PAGE>
10. COMPAQ RESPONSIBILITIES.
-----------------------
Compaq shall:
a. Conduct the Compaq Acceptance in accordance with the schedule specified
Attachment 1.
b. Provide to Tut the following Compaq Confidential Documents in accordance
with the schedule specified in Attachment 1
i. Hardware Functional Specification
c. Review and approve the Tut test plan documents in accordance with the
schedule in Attachment 1.
d. Review and approve the Tut Reference Design in accordance with the
schedule in Attachment 1.
e. Work jointly with Tut to evangelize phoneline home networking in the
industry through Market Development and participation in standards
activities.
f. Participate in field testing of HomeRun(TM) in conjunction with Compaq
and other 3rd parties.
11. JOINT RESPONSIBILITIES
----------------------
a. Negotiate in good faith a Marketing Project Statement with a target date
for completion of sixty (60) days from the Effective Date of this Project
Statement. Such Marketing Project Statement shall address the method of
funding, schedule of events, roles and responsibilities of the parties
and shall consider activities, communications or announcements that may
be of mutual interest and benefit to both parties.
b. Investigate areas whereby Tut can provide technology and Services other
than the HomeRun(TM) technology
c. Ensure that training on HomeRun(TM) technology insofar as it is included
with Compaq systems, or otherwise available from Compaq is included in
the training materials for Compaq representatives and sales consultants.
d. Upon a mutually agreed to date and forum, announce
i. Compaq's investment in Tut
ii. The signing of an agreement with Tut.
iii. The participation with Tut in the formation of a 1Mbps home
networking consortium
[*]
e. [*]
12. COMPAQ ACCEPTANCE
-----------------
Tut shall select and qualify a silicon manufacturer and verify the Reference
Design through GTS.
[*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 4 of 9
<PAGE>
Within thirty (30) working days of the delivery of a Reference Design
version by Tut, Compaq shall provide Tut with a written notice of acceptance
or rejection. Any notice of rejection shall include a statement of Errors to
be corrected in the Reference Design. If Compaq fails to provide such notice
of acceptance or rejection, then the subject Reference Design version shall
be deemed to be accepted. Upon receipt of a notice of rejection, Tut shall,
within a commercially reasonably period of time based upon the Error
Severity Classification, or as otherwise mutually agreed upon, correct the
Errors in the Reference Design version as set forth in the notice of
rejection. Compaq shall, within ten (10) working days after such redelivery
by the manufacturer, provide Tut with a written notice of acceptance or
rejection. The procedure set forth in the previous sentence will be repeated
until Compaq accepts the Reference Design version or after a reasonable
number of attempts based upon the Error Severity Classification terminates
this Project statement.
Errors reported to Tut for correction in the Reference Design during this
Acceptance process shall be deemed Development Errors and shall be
identified by Error Severity Classification. Errors reported between
completion of the Acceptance process and manufacturing release of [*] from
the Consumer Products Group at Compaq shall be deemed Integration Errors,
which shall also be identified by Error Severity Classification and be
treated as Development Errors. The period of time for the discovery of
Integration Errors shall not extend, beyond [*]. To the extent that such
Integration Errors fail to meet Reference Design criteria, a new Reference
Design Release shall be delivered by Tut in accordance to the process
outlined in the previous paragraph. Errors that are subsequently identified
in the Reference Design by Tut, Compaq or other third parties in the
Production Release version shall be considered Errors to be corrected under
the support provisions for Licensed Products.
13. PROJECT MANAGEMENT.
------------------
The Project Managers shall issue semi-monthly a joint written status report
clearly describing the status of the development activity.
Project status/review meetings may be held weekly. These meetings shall be
at either party's office location, by teleconference, or may be waived as
deemed appropriate by the Tut and Compaq Project Managers. Attendees shall
include all individuals from either Compaq or Tut required to present and/or
discuss the project status and/or outstanding issues.
14. SUPPORT.
-------
Tut shall provide support for the Hardware by using its best efforts to
correct Errors reported and demonstrable in the Reference Design.
Additionally, it shall use commercially reasonable best efforts to assist in
the correction of Errors reported after Production Release by Compaq or
other third parties in the Production Release version.
15. LICENSE GRANTS.
--------------
For the Hardware provided under this Project Statement or otherwise acquired
from a licensed silicon manufacturer or other third party with appropriate
licenses from Tut, Tut hereby grants to Compaq a royalty free
1. Manufacturing License as defined in the Agreement that provides Compaq
the right to manufacture or have manufactured integrated circuits and
discrete components based upon the HomeRun(TM) technology-only for use in
fulfillment of Compaq's internal needs for chips or chipsets that embody
the HomeRun(TM) technology, and only in the event that (i) no more than
one Silicon Manufacturer is contractually obligated by Tut to manufacture
the HomeRun(TM)-based Network Interface Controller ASIC by 8/1/98, or
(ii) one of the two previously licensed manufacturers ceases to be a
licensed manufacturer and Tut has not licensed a replacement second
manufacturer within one hundred twenty (120) days. Such license shall
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 5 of 9
<PAGE>
include the obligation to provide the deliverables as defined in
Attachment 3 (Manufacturing License Deliverables).
2. Trademark License as defined in the Agreement that permits Compaq to use
the Tut and/or HomeRun(TM) logo in compliance with its obligations in
this Project Statement.
3. [*]
16. TERM.
----
This Project Statement shall expire five (5) years from the Effective Date.
Notwithstanding any termination of this Project Statement, Compaq's Licenses
granted in Section 15 above shall survive.
IN WITNESS WHEREOF, THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE EXECUTED BY
THEIR DULY AUTHORIZED REPRESENTATIVES,
COMPAQ COMPUTER CORPORATION Tut SYSTEMS, INC.
By: /s/ Mike Baker By: /s/ Matthew Taylor
------------------------------ ------------------------------
Name: Mike Baker By: Matthew Taylor
-------------------------- --------------------------
Title: VP Controller Title: Chairman
-------------------------- --------------------------
Date: 7/14/98 Date: 7/17/98
-------------------------- -------------------------
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 6 of 9
<PAGE>
ATTACHMENT 1
PROJECT DELIVERABLES AND SCHEDULES
DESCRIPTION DUE DATE
SPECIFICATIONS
1. [*]
2. [*]
3. [*]
FIELD TESTING/COMPATABILITY TESTING
1. [*]
2. [*]
3. [*]
4. [*]
5. [*]
6. [*]
DESIGN MODIFICATIONS
1. [*]
2. [*]
3. [*]
4. [*]
SILICON MANUFACTURING SOURCES
1. [*]
2. [*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 7 of 9
<PAGE>
ATTACHMENT 2
BASELINE MATERIALS
Page 8 of 9
<PAGE>
ATTACHMENT 3
MANUFACTURING LICENSE DELIVERABLES
1. [*]
2. [*]
3. [*]
4. [*]
5. [*]
6. [*]
7. [*]
8. [*]
[*] Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Page 9 of 9
<PAGE>
EXHIBIT 10.14
LOAN AGREEMENT
This LOAN AGREEMENT is entered into as of August 16, 1997 (this "Loan
Agreement") between TUT SYSTEMS, INC., a California corporation (herein called
"Borrower"), and IMPERIAL BANK (herein called "Bank").
1. Commitments.
A. FACILITY-A COMMITMENT. Subject to all the terms and conditions of
this Loan Agreement and prior to the termination of its commitment as
hereinafter provided, Bank hereby agrees to make loans (each a "Facility-A
Loan") to Borrower, from time to time and in such amounts as Borrower shall
request pursuant to this Section 1.A., up to an aggregate principal amount
outstanding under the Facility-A Loan Account (as hereinafter defined) not to
exceed the lesser of: (a) seventy percent (70.0%) of Eligible Accounts (as the
same may be adjusted from time to time as provided for under Section 9.B. hereof
the "Borrowing Base") and (b) $2,000,000.00 (the "Facility-A Commitment"). If
at any time or for any reason, the outstanding principal amount of the Facility-
A Loan Account, as such amount may be increased as set forth in Section 1.A.(1)
hereof (as said term is hereinafter defined), is greater than the lesser of: (x)
the Borrowing Base or (y) the Facility-A Commitment, Borrower shall immediately
pay to Bank in cash, the amount of such excess. Any commitment of Bank, pursuant
to the terms of this Loan Agreement, to make Facility-A Loans shall expire on
the Facility-A Maturity Date (as hereafter defined), subject to Bank's right to
renew said commitment in its sole and absolute discretion at Borrower's request.
Any such renewal of said commitment shall not be binding upon Bank unless it is
in writing and signed by an officer of Bank. Provided that no Event of Default
(as hereinafter defined) has occurred and is continuing, all or any portion of
the Facility-A Loans advanced by Bank which are repaid by Borrower shall be
available for reborrowing in accordance with the terms hereof. Borrower promises
to pay to Bank the entire outstanding unpaid principal balance (and all accrued
unpaid interest thereon) of the Facility-A Loan Account on August 15, 1998
("Facility A Maturity Date").
(1) INCREASE IN FACILITY-A COMMITMENT. Provided that no Event of
Default has occurred is continuing, Borrower shall have the option to increase
the Facility-A Commitment to $2,500,000.00, subject to the satisfaction of the
following condition precedent:
(a) Borrower shall have received no later than December 31,
1997, new or additional equity investments from any new or existing shareholders
of Borrower totaling at least Five Million Dollars ($5,000,000.00) ("Next Equity
Round"), and delivered evidence to Bank of such equity investment, in form
satisfactory to Bank.
(2) FACILITY-A LOANS. The amount of each Facility-A loan made by
Bank to Borrower hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Facility-A Commitment (herein called the
"Facility-A Loan Account") and Bank shall credit the Facility-A Loan Account
with all loan repayments in respect thereof made by Borrower. When Borrower
desires to obtain a Facility-A Loan, Borrower shall notify Bank (which notice
shall be signed by an officer of Borrower and shall be irrevocable) in
accordance with Section 2 hereof, to be received no later than 3:00 p.m. Pacific
time one (1) Banking Day (as hereinafter defined) before the day on which the
Facility-A Loan is to be made. Facility-A Loans may only be used for working
capital purposes.
(3) INTEREST PAYMENTS ON FACILITY-A LOANS. Borrower further
promises to pay to Bank from the date of the advance of the initial Facility-A
Loan through the Facility-A Maturity Date, on or before the tenth (10th) day of
each month, interest on the average daily unpaid balance of the Facility-A Loan
Account during the immediately preceding month at a rate of interest equal to
three quarters of one percent (0.75%) per annum in excess of the rate of
interest which Bank has announced as its prime lending rate (the "Prime Rate"),
which shall vary concurrently with any change in the Prime Rate. Interest shall
be computed at the above rate on the basis of the actual number of days during
which the principal balance of the Facility-A Loan Account is outstanding
divided by 360, which shall for interest computation porposes be considered one
(1) year.
B. FACILITY-B COMMITMENT. Subject to all the terms and conditions of
this Loan Agreement and prior the termination of its commitment as hereinafter
provided, Bank hereby agrees to make loans (each a "Facility-B Loan") Borrower
in such amounts as Borrower shall request pursuant to this Section 1.B. at any
time from the date hereof
1.
<PAGE>
through February 28. 1998 (the "Facility-B Availability End Date"), in an
aggregate principal amount not to exceed 100.000.00 (the "Facility-B
Commitment"). If at any time or for any reason, the outstanding principal amount
of the Facility-B Loan Account (as hereinafter defined) is greater than the
Facility-B Commitment, Borrower shall immediately pay to Bank, in cash, the
amount of such excess. Any commitment of Bank, pursuant to the terms of this
Loan Agreement, to make Facility-B Loans shall expire on the Facility-B
Availability End Date, subject to Bank's right to renew said commitment in its
sole and absolute discretion at Borrower's request. Any such renewal of said
commitment shall not be binding upon Bank unless it is in writing and signed by
an officer of Bank. Facility-B Loans which are repaid by Borrower may not be
reborrowed. Borrower promises to pay to Bank the outstanding unpaid principal
balance (and all accrued unpaid interest thereon) of the Facility-B Loan Account
on February 28, 2000 ("Facility-B Maturity Date").
(1) FACILITY-B LOANS. The amount of each Facility-B Loan made by
Bank to Borrower hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Facility-B Commitment (herein called the
"Facility-B Loan Account") and Bank shall credit the Facility-B Loan Account
with all loan repayments in respect thereof made by Borrower. When Borrower
desires to obtain a Facility-B Loan, Borrower shall notify Bank (which notice
shall be signed by an officer of Borrower and shall be irrevocable) in
accordance with Section 2 hereof, to be received no later than 3:00 p.m. Pacific
time one (1) Banking Day before the day on which the Facility-B Loan is to be
made. The notice shall be signed by an officer of Borrower and include a copy of
the invoice for the capital equipment to be financed. Facility-B Loans may only
be used to purchase capital equipment and will be limited to ninety percent
(90.0%) of the invoice amount for such capital equipment, approved from time to
time by Bank, less any taxes, shipping and freight charges or discounts,
warranty charges, installation expenses and other soft costs.
(2) INTEREST PAYMENTS ON FACILITY-B LOAN. Borrower further
promises to pay to Bank from the date of the advance of the initial Facility-B
Loan through the Facility-B Maturity Date, on or before the tenth (10th) day of
each month, interest on the average daily unpaid balance of the Facility-B Loan
Account during the immediately preceding month at a rate of interest equal to
one and one-quarter percent (1.25%) per annum in excess of the Prime Rate, which
shall ^^ILLEGIBLE TEXT^^ concurrently with any change in the Prime Rate.
Interest shall be computed at the above rate on the basis of the actual number
of days during which the principal balance of the Facility-B Loan Account is
outstanding divided by 360, which shall for interest computation purposes be
considered one (1) year.
(3) PRINCIPAL REPAYMENT FOLLOWING FACILITY-B AVAILABILITY END
DATE. Borrower further promises to pay to Bank, on or before March 10, 1998 and
on or before the tenth (10th) day of each month thereafter through the Facility-
B Maturity Date, (a) the outstanding principal balance of the Facility-B Loan
Account on the Facility-B Availability End Date in twenty-four (24) equal
monthly installments plus (b) interest on the average daily unpaid principal
balance of the Facility-B Loan Account during the immediately preceding month at
the rate of interest computed in accordance with Section 1.B.(2) hereof.
C. FACILITY-C COMMITMENT. Subject to all the terms and conditions of
this Loan Agreement and prior to the termination of its commitment as
hereinafter provided, Bank hereby agrees to make loans (each a "Facility-C
Loan") to Borrower in such amounts as Borrower shall request pursuant to this
Section 1.C. at any time from the date of closing of the Next Equity Round and
six (6) months following thereafter (the "Facility-C Availability End Date"), in
an aggregate principal amount not to exceed $100,000.00 (the "Facility-C
Commitment"). If at any time or for any reason, the outstanding principle amount
of the Facility-C Loan Account (as hereinafter defined) is greater than the
Facility-C Commitment, Borrower shall immediately pay to Bank, in cash, the
amount of such excess. Any commitment of Bank, pursuant to the terms of this
Loan Agreement, to make Facility-C Loans shall expire on the Facility-C
Availability End Date, subject to Bank's right to renew said commitment in its
sole and absolute discretion at Borrower's request. Any such renewal of said
commitment shall not be binding upon Bank unless it is in writing and signed by
an officer of Bank. Facility-C Loans which are repaid by Borrower may not be
reborrowed. Borrower promises to pay to Bank the outstanding unpaid principal
balance (and all accrued unpaid interest thereon) of the Facility-C Loan Account
on the date that is thirty (30) months from the date of closing the Next Equity
Round, but in no event later than June 20, 2000 ("Facility-C Maturity Date").
(1) FACILITY-C LOANS. The amount of each Facility-C Loan made by
Bank to Borrower hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Facility-C Commitment (herein entitled the
"Facility-C Loan Account") and Bank shall credit the Facility-C Loan Account
with all loan repayments in respect
2.
<PAGE>
hereof made by Borrower. When Borrower desires to obtain Facility-C Loan,
Borrower shall notify Bank (which notice shall be signed by an officer of
Borrower and shall be irrevocable) in accordance with Section 2 hereof, to be
received no later than 3:00 p.m. Pacific time one (1) Banking Day before the day
on which the Facility-C Loan is to be made. The notice shall be signed by an
officer of Borrower and include a copy of the invoice for the capital equipment
to be financed. Facility-C Loans may only be used to purchase capital equipment
and will be limited to ninety percent (90.0%) of the invoice amount for such
capital equipment, approved from time to time by Bank, less any taxes, shipping
and freight charges or discounts, warranty charges, installation expenses and
other soft costs.
(2) INTEREST PAYMENTS ON FACILITY-C LOAN. Borrower further
promises to pay to Bank from the date of the advance of the initial Facility-C
Loan through the Facility-C Maturity Date, on or before the tenth (10th) day of
each month, interest on the average daily unpaid balance of the Facility-C Loan
Account during the immediately preceding month at a rate of interest equal to
one and one-quarter percent (1.25%) per annum in excess of the Prime Rate,
which shall vary concurrently with any change in the Prime Rate. Interest shall
be computed at the above rate on the basis of the actual number of days during
which the principal balance of the Facility-C Loan Account is outstanding
divided by 360, which shall for Interest computation purposes be considered one
(1) year.
(3) PRINCIPAL REPAYMENT FOLLOWING FACILITY-C AVAILABILITY END
DATE. Borrower further promises to pay to Bank, on or before the tenth (10th)
day of the month immediately following the Facility-C Availability End Date, and
on or before the tenth (10th) day of each month thereafter through the Facility-
C Maturity Date, (a) the outstanding principal balance of the Facility-C Loan
Account on the Facility-C Availability End Date in twenty-four (24) equal
monthly installments plus (b) interest on the average daily unpaid principal
balance of the Facility-C Loan Account during the immediately preceding month at
the rate of interest computed in accordance with Section 1.C.(3) hereof.
2. LOAN REQUESTS. Requests for Loans hereunder shall be in writing duly
executed by Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in Section 1, which shall
disclose Borrower is entitled to the amount and type of Loan being requested.
Bank is hereby authorized to charge Borrower's deposit account with Bank for all
sums due Bank under this Loan Agreement.
3. DELIVERY OF PAYMENTS. Payment to Bank of all amounts due hereunder
shall be made at its Santa Clara Valley Regional office, or at such other place
as may be designated in writing by Bank from time to time. If any payment date
fall on a day that is not a day that Bank is open for the transaction of
business ("Banking Day"), the payment due date shall be extended to the next
Banking Day.
4. LATE CHARGE. If any interest payment, principal payment or principal
balance payment required hereunder is not received by Bank on or before ten (10)
days from the date in which such payment become due, Borrower shall pay to Bank,
a late charge equal to the lesser of (a) five percent (5.0%) of the amount of
such unpaid payment, in addition to said unpaid payment or (b) the maximum
amount permitted to be damaged by applicable law, until remitted to Bank;
provided; however, nothing contained in this Section 4, shall be construed as
any obligation on the part of Bank to accept payment of any past due payment or
less than the total unpaid principal balance of the applicable Loan Account
following the Facility-A Maturity Date, the Facility-B Maturity Date and/or the
Facility-C Maturity Date, as applicable. All payments shall be applied first to
any late charges due hereunder, next to accrued interest then payable and the
remainder, if any, to reduce any unpaid principal due under the applicable Loan
Account.
5. DEFAULT INTEREST. From and after the Facility-A Maturity Date, the
Facility-B Maturity Date and/or the Facility-C Maturity Date, as applicable, or
such earlier date as all sums owing under any Loan Account becomes due and
payable by acceleration or otherwise, or upon the occurrence of an Event of
Default, at the option of Bank all sums owing under the applicable Loan Account
shall bear interest until paid in full at a rate equal to the lesser of (a) five
percent (5.0%) per annum in excess of the then applicable interest rate provided
for in Sections 1.A.(3), 1.B.(2) and 1.C.(3) hereof or (b) the maximum amount
permitted to be charged by applicable law, until all obligations hereunder are
repaid in full or the Event of Default is waived or cured to the satisfaction of
Bank, as applicable.
6. DEFINITIONS. As used in this Loan Agreement and unless otherwise
defined herein, all initially capitalized sums shall have the meanings set forth
on Exhibit A attached hereto and incorporated herein by reference.
3.
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7. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Bank: (a) That Borrower is a corporation, duly organized and existing in the
State of its incorporation and the execution, delivery and performance of each
of the Loan Documents are within Borrower's corporate powers, have been duly
authorized and are not in conflict with any applicable law or the terms of any
charter, by-law or other incorporation papers, or of any indenture, agreement or
undertaking to which Borrower is a party or by which Borrower is bound or
affected; (b) Borrower is, and at the time the Collateral becomes subject to
Bank's security interest will be, the true and lawful owner of and has, and at
the time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights therein
and to Permitted Liens; (c) Each Account is, and at the time the Account comes
into existence will be, the true and correct statement of a bona fide
indebtedness incurred by the debtor named therein in the amount of the Account
for either merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by, the
account debtor; (d) That there are and will be no defenses, counterclaims, or
setoffs which may be asserted against the Accounts from time to time represented
by Borrower to be Eligible Accounts, except as permitted in the definition
thereof; (e) Any and all financial information, including information relating
to the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is and will be true and correct; (f) There is no litigation or other
proceeding pending or threatened against or affecting Borrower, and Borrower is
not in default with respect to any order, writ, injunction, decree or demand of
any court or other governmental or regulatory authority; (g) (i) The
consolidated balance sheets of Borrower dated as of July 31, 1997, and the
related consolidated profit and loss statements for the fiscal year then ended,
copies of which have heretofore been delivered to Bank by Borrower, and all
other statements and data submitted in writing by Borrower to Bank in connection
with Borrower's request for credit are true and correct, and said balance sheet
and profit and loss statement accurately present the financial condition of
Borrower as of the date thereof and the results of the operations of Borrower
for the period covered thereby, and have been prepared in accordance with GAAP,
(ii) since such date, there have been no material adverse changes in the
financial condition of Borrower, and (iii) Borrower has no knowledge of any
liabilities, contingent or otherwise, which are not reflected in said balance
sheet, and Borrower has not entered into any special commitments or substantial
contracts which are not reflected in said balance sheet, other than in the
ordinary and normal course of its business, which may have a Material Adverse
Effect upon its financial condition, operations or business as now conducted;
(h) Borrower has no liability for any delinquent local, state or federal taxes,
and, if Borrower has contracted with any government agency, it has no liability
for renegotiation of profits; and (i) Borrower, as of the date hereof, possesses
all necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with valid trademarks, trade names, copyrights, patents, patent rights and
license rights of others.
8. NEGATIVE COVENANTS. Borrower agrees that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, neither Borrower, nor any of its
subsidiaries ("Subsidiaries") will, without the prior written consent of Bank;
which consent not to be unreasonably withheld;
A. Make any substantial change in the character of its business as
now conducted;
B. Create, incur, assume or permit to exist any Indebtedness other
than loans from Bank except obligations now existing as shown in the financial
statements referenced in Section 7.(g)(i), excluding those being refinanced by
Bank, Subordinated Debt and Permitted Indebtedness; or sell or transfer, either
with or without recourse, any accounts or notes receivable or any monies due or
to become due;
C. Create, incur, assume or permit to exist any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
Permitted Liens and liens in favor of Bank;
D. Sell dispose of or grant a security interest in any of the
Collateral other than to Bank (other than the disposing of such Collateral in
the ordinary and normal course of its business as now conducted or other assets
which are obsolete or otherwise considered surplus), or execute any financing
statements covering the Collateral in favor of any secured party or Person other
than Bank;
4.
<PAGE>
E. Make any loan or advances to any Person or other entity other
than in the ordinary and normal course of its business as now conducted
(provided that such loans or advances are not made to any Person or entity which
is controlled by or under common control with Borrower);
F. Purchase or otherwise acquire all or substantially all of the
assets or business of any Person or other entity; or liquidate, dissolve, merge
or consolidate, or commence any proceedings therefore; or, except in the
ordinary and normal course of its business as now conducted, sell (including,
without limitation, the selling of any property or other asset accompanied by
the leasing back of the same) any assets including any fixed assets, any
property, or other assets necessary for the continuance of its business as now
conducted; and
G. Declare or pay any dividend or make any other distribution on any
of its capital stock now outstanding or hereafter issued or purchase, redeem or
retire any of such stock other than in dividends or distributions payable in
Borrower's or any such Subsidiary's capital stock.
9. AFFIRMATIVE COVENANTS. Borrower affirmatively covenants that so long
as any loans, obligations or liabilities remain outstanding or unpaid to Bank or
the commitment of Bank hereunder is in effect, it will:
A. Furnish Bank from time to time such financial statements and
information as Bank may reasonably request and inform Bank immediately upon the
occurrence of a material adverse change therein;
B. Permit representatives of Bank to conduct an audit of Borrower's
books and records relating to the Collateral and make extracts therefrom, with
results satisfactory to Bank, provided that Bank shall use its best efforts to
not interfere with the conduct of Borrower's business, and to the extent
possible to arrange for verification of the Accounts directly with the account
debtors obligated thereon or otherwise all under reasonable procedures
acceptable to Bank and at Borrower's sole expense; provided further that, prior
to an Event of Default, Borrower shall not be responsible for the expense of
more than one (1) such audit, in any fiscal year. Borrower hereby acknowledges
and agrees that upon completion of any such audit, Bank shall have the right to
adjust the Borrowing Base percentage, in its sole and reasonable discretion,
based on its review of the results of such Collateral audit;
C. Promptly notify Bank of any attachment or other legal process
levied against any of the Collateral and any information received by Borrower
relative to the Collateral, including the Accounts, the account debtors or other
Persons obligated in connection therewith, which may in any way affect the value
of the Collateral or the rights and remedies of Bank in respect thereto;
D. Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any sums
payable by Borrower under any Loan Account or any other obligation secured
hereby enforcing any term or provision of this Loan Agreement or otherwise or in
the checking, handling and collection of the Collateral and the preparation and
enforcement of any agreement relating thereto;
E. Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept;
F. Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms and
companies as Bank may require (to the extent customarily maintained by
business similar to Borrower) and with loss payable to Bank, and, in the event
Bank takes possession of the Collateral, the insurance policy or policies and
any unearned or returned premium thereon shall at the option of Bank become the
sole property of Bank, such policies and the proceeds of any other insurance
covering or in any way relating to the Collateral, whether now in existence or
hereafter obtained, being hereby assigned to Bank;
G. In the event the unpaid balance of any Loan Account shall exceed
the maximum amount of outstanding loans to which Borrower is entitled under
Section I hereof, as applicable, Borrower shall immediately pay to Bank for
credit to such Loan Amount the amount of such excess;
5.
<PAGE>
H. Maintain and preserve all rights, franchises and other authority
adequate and necessary for the conduct of its business and maintain
and preserve its existence in the State of its incorporation and any other
state(s) in which Borrower conducts its business, except with respect to such
other state(s), as the failure to do so would not have a Material Adverse
Effect;
I. Maintain public liability, property damage and workers
compensation on insurance and insurance on all its insurable property against
fire and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to Bank, and certificates naming Bank
as a loss payee;
J. Pay and discharge, before the same becomes delinquent and
penalties accrue thereon, all taxes, assessments and governmental charges upon
or against it or any of its properties, and any of its other liabilities at any
time existing, except to the extent and so long as: (1) the same are being
contested in good faith and by appropriate proceedings in such manner as not to
cause any Material Adverse Effect or the loss of any right of redemption from
any sale thereunder; and (2) it shall have set aside on its books reserves
(segregated to the extent required by GAAP);
K. Maintain a standard and modern system of accounting in accordance
with GAAP on a basis consistently maintained; permit Bank's representatives to
have access to, and to examine its properties, books and records at all
reasonable times; provided that Bank shall use its best efforts to not interfere
with the conduct of Borrower's business;
L. Maintain its properties, equipment and facilities in good order
and repair;
M. Maintain its primary banking accounts with Bank; and
N. Prior to allowing any of Borrower's raw materials, work in
process, finished goods inventory and property, plant and equipment to be
transported to or be held at any contract manufacturer, warehouse or other
location other than with bona fide distributors and retail accounts), Borrower
shall provide notice to Bank and Borrower shall have complied with such filing
and notice requirements as shall, in Bank's opinion, assure Borrower's and
Bank's priority in such property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including, without limitation,
making filings under California Commercial Code (S)2326, providing notice under
California Commercial Code (S)9114 and making filings and publications as
required under California Civil Code (S)3440.1 and (S)3440.5 All such filings,
notices and publications shall be in form and substance satisfactory to Bank.
10. FINANCIAL COVENANTS AND INFORMATION. All financial covenants and
financial information referenced herein shall be interpreted and prepared in
accordance with GAAP as used in the United States of America applied on a basis,
consistent with previous years. Compliance with the financial covenants shall be
calculated and monitored on a monthly basis, except as shall be expressly stated
to the contrary. Borrower affirmatively covenants that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or any
commitment is outstanding hereunder, it will, on a consolidated basis:
A. At all times, maintain a Minimum Tangible Net Worth (meaning all
assets, excluding any value for goodwill, trademarks, patents, copyrights,
organization, expense and other similar intangible items, less all liabilities,
plus Subordinated Debt) of not less than $4,000,000.00 and beginning with the
month ending December 31, 1997, of not less than $5,000,000.00;
B. At all times maintain a Maximum Ratio of Total Liabilities
(meaning all liabilities, excluding Subordinated Debt) to Tangible Net Worth (as
defined in Section 10.A. hereof) not to exceed 1.00:1.00;
C. At all times maintain a Minimum Quick Ratio (meaning all cash
plus Accounts divided by current liabilities) of not less than 1.25:1.00 and
beginning with the month ending December 31, 1997, of not less than 1.50:1.00;
D. As soon as it is available, but not later than twenty (20) days
after and as of the end of each month, deliver to Bank an internally-prepared
financial statement consisting of a balance sheet and profit and loss
statement, in form
6.
<PAGE>
satisfactory to Bank, and a Compliance Certificate in the form of Exhibit B
attached hereto and incorporated herein by this reference, certified by an
officer of Borrower;
E. As soon as it is available, but not later than ninety (90) days
after the end of Borrower's fiscal year, deliver to Bank unqualified copies of
Borrower's consolidated financial statements together with changes in financial
position audited by an independent certified public accountant selected by
Borrower but acceptable to Bank;
F. So long as the Facility-A Commitment shall be outstanding or any
amounts remain outstanding and unpaid under the Facility-A Loan Account, as soon
as it is available, but not later than twenty (20) days after and as of the end
of each month, deliver to Bank, in such form and detail as Bank may require,
statements showing aging of the Accounts and Borrower's accounts payable,
together with a Borrowing Base Certificate in the form of Exhibit C attached
hereto and incorporated herein by this reference, certified by an officer of
Borrower. Notwithstanding the foregoing, as a condition to any request for a
Facility-A Loan, Borrower shall have delivered to Bank said aging statements as
well as a Borrowing Base Certificate covering the most recent month then ended
prior to the date of Borrower's request for an advance for a Facility-A Loan;
G. Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial exhibits and
information in form and substance satisfactory to Bank; and
H. Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or reasonably
likely to result in, damages against Borrower in an amount in excess of
$100,000.00.
11. LOAN FEE. Borrower has paid, and Bank hereby acknowledges receipt of
in respect of the Commitments, a loan fee in the amount of Six Thousand Seven
Hundred Fifty Dollars ($6,750.00).
12. DEFAULT AND REMEDIES. The occurrence of any one or more of the
following shall constitute an Event of Default": (a) Default be made in the
payment of any obligation by Borrower under any Loan Document; (b) Except for
any failure to pay as described in clause (a) above, breach be made in any
warranty, statement, promise, term or condition, contained herein or in any
other Loan Document and the same shall not have been cured to the satisfaction
of Bank within fifteen (15) days after Borrower shall have become aware thereof,
whether by written notice from Bank, or otherwise, (except that no cure period
shall exist for breaches in respect of Borrower's obligations under Section 8,
Subsection 9.A., 9.B., 9.C., 9.F., 9.G., 9.H. and 9.I., Subsections 10.A.,
10.B., 10.C., 10.D., 10.E. and 10.F. of this Loan Agreement and sections 1 and 2
of the General Security Agreement; (c) Any statement, warranty or representation
made by Borrower at any time proves false; (d) Borrower defaults in the
repayment of any principal of or the payment of any interest on any indebtedness
exceeding in the aggregate principal amount of $50,000.00 or breaches or
violates any term or provision of any promissory note, loan agreement,mortage,
indenture or other evidence of such indebtedness pursuant to which amounts
outstanding in the aggregate exceed $50,000,00 if the effect of such breaches is
to permit the acceleration of such indebtedness, whether or not waived by the
note holder or obligee, and such failure shall not have been cured to Bank's
satisfaction within fifteen (15) calendar days after Borrower shall become aware
thereof, whether by written notice from Bank or otherwise, or there has in fact
been an acceleration of such indebtedness; (e) Borrower becomes insolvent or
makes an assignment for the benefit of creditors; (f) Any proceeding be
commenced by Borrower under any bankruptcy, reorganization, arrangement,
readjustment of debt or moratorium law or statute or, any such a proceeding is
commenced against Borrower and is not dismissed or stayed within ten (10) days
(provided that no Loans will be made prior to the dismissal of such proceeding);
(g) Any money judgment, writ of attachment, garnishment, execution or other
legal process be entered against Borrower or issued against any material
property of Borrower which is not fully covered by insurance (subject to
reasonable deductibles) and remains unvacated, unbonded, unstayed or unpaid or
undischarged for more than fifteen (15) days (whether or not consecutive) or in
any event later than five (5) days prior to the date of any proposed sale
thereunder, or if any assessment for taxes against Borrower other than against
any of its real property, is made by the Federal or State government or any
department thereof; or (h) Any change in Borrower's financial condition,
prospects or operations which has a Material Adverse Effect. Upon the occurrence
and during the continuance of an event of Default, Bank may, at its option and
without demand first made and without notice to Borrower, do any one or more of
the following: (i) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (ii) Declare all sums secured hereby immediately
due and payable;
7.
<PAGE>
(iii) Immediately take possession of the Collateral wherever it may be found,
using all legally permissible means to do so, or require Borrower to assemble
the Collateral and make it available to Bank at a place designated by Bank which
is reasonably convenient to Borrower and Bank, and Borrower waives all claims
for damages due to or arising from or connected with any such taking; (iv)
Proceed in the foreclosure of Bank's security interest and sale of the
Collateral in any manner permitted by law, or provided for herein; (v) Sell,
lease or otherwise dispose of the Collateral at public or private sale, with or
without having the Collateral at the place of sale, and upon terms and in such
manner as Bank may determine, and Bank may purchase same at any such sale; (vi)
Retain the Collateral in full satisfaction of the obligations secured thereby to
the extent permitted under the Uniform Commercial Code; or (vii) Exercise any
remedies of a secured party under the Uniform Commercial Code. Prior to any such
disposition, Bank may, at its option, cause any of the Collateral to be repaired
or reconditioned in such manner and to such extent as Bank may deem advisable,
and any sums expended therefor by Bank shall be repaid by Borrower and secured
hereby. Bank shall have the right to enforce one or more remedies hereunder,
successively or concurrently, and any such action shall not estop or prevent
Bank from pursuing any further remedy which it may have hereunder or by law. If
a sufficient sum is not realized from any such disposition of the Collateral to
pay all obligations secured by this Loan Agreement, Borrower hereby promises and
agrees to pay Bank any deficiency.
13. RECORDS RETENTION. Borrower authorizes Bank to destroy all invoices,
delivery receipts, reports and other types of documents and records submitted to
Bank in connection with the transactions contemplated herein at any time
subsequent to four (4) months from the time such items are delivered to Bank.
14. ATTORNEYS' FEES. Borrower agrees to reimburse Bank for its reasonable
attorneys' fees and expenses incurred in connection with the negotiation,
preparation, execution and delivery of the Loan Documents.
15. GOVERNING LAW; JUDICIAL REFERENCE
A. GOVERNING LAW. This Agreement shall be deemed to have been made
in the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
B. JUDICIAL REFERENCE.
(1) Other than (a) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (b) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law)
each controversy, dispute or claim between the parties arising out of or
relating to this Loan Agreement or the other Loan Documents, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to this Loan
Agreement gives written notice to all other parties that a controversy, dispute
or claim exists), will be settled by a reference proceeding in California in
accordance with the provisions of Section 638 et seq. of the California Code of
Civil Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Loan Agreement, including whether such controversy, dispute or
claim is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County where
the real property, if any, is located or Santa Clara County, if none (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his/her representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP (S) 170.6. The referee shall (x) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (y) try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date. Any decision
rendered by the referee will be final, binding and conclusive and judgement
shall be entered pursuant to CCP (S) 644 in any court in the State of California
having jurisdiction. Any party may apply for a reference proceeding at any time
after thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by
8.
<PAGE>
filing a petition for a hearing and/or trial. All discovery permitted by this
Loan Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
(2) Except as expressly set forth in this Loan Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(3) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new proceeding or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(4) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the referee
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, (S) 1280 through (S) 1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
16. MISCELLANEOUS PROVISIONS.
A. Nothing herein shall in any way limit the effect of the
conditions set forth in any other security or other agreement executed by
Borrower, but each and every condition hereof shall be in addition thereto.
B. No failure or delay on the part of Bank, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof.
C. All rights and remedies existing under this Loan Agreement or any
other Loan Document are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
D. All headings and captions in this Loan Agreement and any related
documents are for convenience only and shall not have any substantive effect.
E. This Loan Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such Agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification that such
executed counterparts has been received by Borrower and Bank.
9.
<PAGE>
BANK: BORROWER:
IMPERIAL BANK TUT SYSTEMS, INC.,
A CALIFORNIA CORPORATION
BY: [SIGNATURE ILLEGIBLE] BY: /s/ Nelson B. Caldwell
------------------------------ ---------------------------------
NAME: [SIGNATURE ILLEGIBLE] NAME: Nelson B. Caldwell
---------------------------- ------------------------------
TITLE: ASSISTANT VICE PRESIDENT TITLE: CFO
---------------------------- ------------------------------
LIST OF EXHIBITS AND SCHEDULES
- ------------------------------
EXHIBIT A: DEFINITIONS
SCHEDULE 1 TO EXHIBIT A: LIST OF SPECIFIC PERMITTED INDEBTEDNESS
SCHEDULE 2 TO EXHIBIT A: LIST OF SPECIFIC PERMITTED LIENS
EXHIBIT B: COMPLIANCE CERTIFICATE
EXHIBIT C: BORROWING BASE CERTIFICATE
10.
<PAGE>
EXHIBIT A
DEFINITIONS
"ACCOUNTS" means any right to payment for goods sold or leased, or to be
sold or to be leased, or for services rendered or to be rendered no matter how
evidenced, including accounts receivable, contract rights, chattel paper,
instruments, purchase orders, notes, drafts, acceptances, general intangibles
and other forms of obligations and receivables.
"CAPITAL LEASE" means, as to any Person, any lease of any Property by such
Person as lessee that is, or should be in accordance with Financing Accounting
Standards Board Statement No. 13, classified and accounted for as a "capital
lease" on the balance sheet of such Person prepared in accordance with GAAP.
"CAPITAL LEASE OBLIGATION" means, with respect to any Capital Lease, the
amount of the obligation of the lessee thereunder that, in accordance with GAAP,
would appear on a balance sheet of such lessee in respect of such Capital Lease
or otherwise be disclosed in a note to such balance sheet.
"COLLATERAL" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest hereunder ("including, without
limitation, the Accounts), or pursuant to the terms of the General Security
Agreement, the Intellectual Property Security Agreement or otherwise.
"COMMITMENTS" means, collectively, the Facility-A Commitment, the Facility-
B Commitment and the Facility-C Commitment extended to Borrower pursuant to
Section 1.
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit the ordinary
course of business), co-made or discounted or sold with recourse by that Person,
or in respect of which that Person is otherwise directly or indirectly liable,
including, without limitation, any such obligation for which that Person is in
effect liable through any agreement (contingent or otherwise) to purchase,
repurchase or otherwise acquire such obligation or any security therefor, or to
provide funds for the payment or discharge of such obligation (whether in the
form of loans, advances, capital stock purchases, capital contributions or
otherwise), or to maintain the solvency of the obligor of such obligation, or
to make payment for any products, materials or supplies or for any
transportation, services or lease regardless of the non-delivery or non-
furnishing thereof, in any such case if the purpose or intent of such agreement
is to provide assurance that such obligation will be paid or discharged, or that
any agreements relating thereto will be complied with, or that the holders of
such obligation will be protected (in whole or in part) against loss in respect
thereof. The amount of any Contingent Obligation of any Person shall be deemed
to be an amount equal to the maximum amount of such Person's Liability with
respect to the stated or determinable amount of the primary obligation for which
such Contingent Obligation is incurred or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof (assuming such
Person is required to perform thereunder).
"ELIGIBLE ACCOUNTS" means such of Borrower's Accounts as Bank in its sole
reasonable discretion shall determine are eligible from time to time; provided,
however, that in no event shall Eligible Accounts include the following:
(1) all Accounts under which payment is not received within the
earlier Of (a) 90 days from the applicable invoice date and (b) 60 days
from the applicable payment due date;
(2) all Accounts against which the account debtor or any other Person
obligated to make payments thereon asserts any defense, offset,
counterclaim or other right to avoid or reduce the liability represented by
the Accounts;
Exhibit A
Page 1 of 5
<PAGE>
(3) any Accounts if the account debtor or any other Person liable in
connection therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or whose
credit standing is unacceptable to Bank and Bank has so notified Borrower;
(4) Accounts with respect to which the account debtor is an officer,
director, shareholder, employee or Subsidiary;
(5) Accounts due from an account debtor if more than twenty-five
percent (25.0%) of the aggregate amount of Accounts of such account debtor
have at that time remained unpaid for more than the earlier of (a) ninety
(90) days from the applicable invoice date and (b) sixty (60) days from the
applicable payment due date;
(6) Accounts with respect to international transactions unless either
(a) such Accounts are insured or covered by a letter of credit in a manner
and form acceptable to the Bank or (b) Bank shall have otherwise permitted
in writing in its sole and absolute direction;
(7) salesperson's accounts for promotional purposes;
(8) the amount by which the aggregate of all Accounts of an account
debtor exceeds twenty-five percent (25.0%) of the total accounts receivable
balance ("Concentration Limit"); provided, however, the Concentration
Limit for Accounts of one account debtor, selected by Borrower and approved
by Bank, shall be forty percent (40.0%);
(9) Accounts where the account debtor is a seller to borrower, to the
extent that a potential offer exists; and
(10) Accounts where the account debtor is a federal governmental
entity, federal agency or instrumentality thereof.
"Event of Default" has the meaning set forth in Section 12.
"Facility-A Maturity Date" has the meaning set forth in Section 1.A.
"Facility-B Maturity Date" has the meaning set forth in Section 1.B.
"Factuality-C Maturity Date" has the meaning set forth in Section 1.C.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other Person as may be approved by the significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"GENERAL SECURITY AGREEMENT" means that certain General Security Agreement
(Tangible and Intangible Personal Property) dated of even date herewith, made by
Borrower in favor of Bank.
"INDEBTEDNESS" means, as to any Person, without duplication, (a) all
indebtedness of such Person for borrowed money, including, without limitation,
all of such indebtedness outstanding under this Loan Agreement and any of the
other Loan Documents, (b) all Capital Lease Obligations of such Person, (c) to
the extent of the outstanding, indebtedness thereunder, any obligation of such
Person representing an extension of credit to such Person whether or not for
borrowed money, (d) any obligation of such Person for the deferred purchase
price of Property or services (other than (1) trade or other accounts payable in
the ordinary course of business in accordance with customary industry terms and
(ii) deferred franchise fees), (e) all Contingent Obligations, (f) any
obligation of such person of the nature described in clauses (a), (b), (c), (d),
(e) above, that is secured by a Lien on assets of such Person and which is non-
recourse to the credit of such Person, ^^ILLEGIBLE TEXT^^ but to the extent of
the fair market value of the assets so subject to the Lien, (g) obligations of
such Person arising under
Exhibit A
Page 2 of 5
<PAGE>
acceptance facilities or under facilities for the discount of accounts
receivable of such Person, (h) any obligation of such person to reimburse the
issuer of any letter of credit issued for the account of such Person upon which
a draw has been made, and (i) any lease having the effect of indebtedness
whether or not the same shall be treated as such on the balance sheet of
Borrower under GAAP.
"IP SECURITY AGREEMENT" means that certain Collateral Assignment, Patent
Mortgage and Security Agreement dated of even date herewith, made by Borrower in
favor of Bank.
"LIEN" means any mortgage, pledge, security interest, lien or other charge
or encumbrance, including the lien or retained security title of a conditional
vendor, upon or with respect to any property or assets.
"LOAN ACCOUNT OR LOAN ACCOUNTS" means individually and collectively, the
Facility-A Loan Account, the Facility-B Loan Account and the Facility-C Loan
Account.
"LOAN DOCUMENTS" means this Loan Agreement, the General Security Agreement
the IP Security Agreement and that certain Agreement to Provide Insurance (Real
or Personal Property) dated of even date herewith, each as executed by Borrower
in favor of Bank, together with all other documents entered into or delivered
pursuant to any of the foregoing, in each case as originally executed or as the
same may from time to time be supplied, modified or amended,
"LOANS" means individually and collectively, the Facility-A Loans, the
Facility-B Loans and the Facility-C Loans advanced pursuant to Section 1.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or events which
(a) has or could reasonably be expected to have any material adverse effect upon
the validity or enforceability of any material provision of any Loan Document,
(b) is or could reasonably be expected to be material and adverse to the
condition (financial or otherwise) or business operations Borrower, (c)
materially impairs or could reasonably be expected to materially impair the
ability of Borrower, to perform material Obligations, (d) materially impairs or
could reasonably be expected to materially impair the value or priority of mk's
security interest in any Collateral or (e) materially impairs or could
reasonably be expected to materially impair the ability of Bank to enforce any
of its legal remedies pursuant to the Loan Document.
"Permitted Indebtedness" means the following:
(1) indebtedness of Borrower or Indebtedness and Contingent
Obligations of its Subsidiaries in favor of Bank arising under this Loan
Agreement and the other Loan Document;
(2) the existing Indebtness and Contingent Obligations disclose on
Schedule 1 attached hereto and incorporated herein by this reference
provided that the principal amount thereof is not increased the terms
therefore are not modified to impose more burdensome terms upon Borrower or
any of its Subsidiaries;
(3) the Subordinated Debt;
(4) extensions, renewals or refinancings of Indebtedness permitted
under this Loan Agreement, other than clause (3) immediately above;
(5) accrued dividends on the preferred stock of Borrower;
(6) interest rate and currency hedging agreements;
(7) guaranties of any Subsidiary's suppliers in connection with the
purchase of supplies in the ordinary course of business;
(8) guaranties of lease obligations incurred in the ordinary course of
business and to the extent otherwise permitted hereunder;
Exhibit A
Page 3 of 5
<PAGE>
(9) Contingent Obligations constituting Permitted Liens; and
(10) the indebtedness referred to in clause (3)(a) of the definition
of Permitted Liens.
"Permitted Liens" means the following:
(1) liens and security interests existing as of this date and
disclosed in Schedule 2 attached hereto and incorporated herein by this
reference;
(2) liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by
appropriate proceedings;
(3) liens and security interests (a) upon or in any equipment acquired
or held by Borrower to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition
of such equipment and in an amount not greater than the purchase price
thereof or (b) existing on such equipment at the time of its acquisition,
provided that the lien and security interest is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;
(4) liens consisting of leases or subleases and licenses and
sublicenses granted to others in the ordinary course of Borrower's business
not interfering in any material respect with the business of Borrower and
any interest or title of a lessor or licensor under any lease or license,
as applicable;
(5) liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like persons or entities
imposed without action of such parties, provided that the payment thereof
is not yet required;
(6) liens incurred or deposits made in the ordinary course of
Borrower's business in connection with worker's compensation, unemployment
insurance, social security and other like laws;
(7) liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(8) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or
encumbrances affecting real property not interfering in any material
respect with the ordinary conduct of Borrower's business;
(9) liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(10) liens that are not prior to Bank's security interest which
constitute rights of set-off of a customary nature;
(11) any interest or title of a lessor in equipment subject to any
Capitalized Lease otherwise permitted hereunder, and
(12) any liens arising from the filing of any financing statements
relating to true leases otherwise permitted hereunder.
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, firm, joint stock
company, estate, or governmental agency.
Exhibit A
Page 4 of 5
<PAGE>
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, whether tangible intangible.
"SUBORDINATED DEBT" means indebtedness of Borrower, the repayment of
principal of which is fully subordinated in time and right of payment to the
Loans, and has been approved in Bank's sole and absolute discretion and in
writing.
Exhibit A
Page 5 of 5
<PAGE>
GENERAL SECURITY AGREEMENT
THIS GENERAL SECURITY AGREEMENT is executed on August 16, 1997 (this
"Security Agreement"), by TUT SYSTEMS, INC., a California corporation
(hereinafter called "Grantor"). In consideration of financial accommodations
given, to be given or continued, Grantor hereby grants to IMPERIAL BANK
(hereinafter called "Bank") a security interest in (a) all property (i)
delivered to Bank by Grantor, (ii) which shall be in Bank's possession or
control in any matter or for any purpose, (iii) described below or (iv) now
owned or hereafter acquired by Grantor of the type or class described below
and/or in any exhibit or supplementary schedule hereto, or in any financing
statement filed by Bank and executed by or on behalf of Grantor; and (b) the
proceeds, increase and products of such property, all accessions thereto, and
all property which Grantor may receive on account of such collateral
(collectively referred to as "Collateral") to secure payment and performance of
all of Grantor's present or future debts or obligations to Bank, whether
absolute or contingent (hereafter referred to as "Debt"). See Exhibit A attached
hereto and incorporated herein by this reference for a description of the
Collateral. The Collateral which is not in Bank's possession will be located at
the locations set forth on Exhibit B attached hereto and incorporated herein by
this reference. Unless otherwise defined herein, initially capitalized terms
used herein shall have the meanings given them in the California Uniform
Commercial Code, as defined in that certain Loan Agreement dated as of the date
hereof entered into by and among Grantor and Bank (the 'Loan Agreement") or as
defined in Exhibit A hereto.
Grantor hereby represents, warrants and agrees:
1. Grantor will immediately pay (a) any Debt when due, (b) Bank's costs
of collecting the Debt, of protecting, insuring or realizing on Collateral, and
any expenditure of Bank pursuant hereto, including attorneys' fees and expenses,
with interest at the rate of twenty-four percent (24%) per year, or the rate
applicable to the Debt, whichever is less, from the date of expenditure, and (c)
any deficiency after realization of Collateral.
2. Grantor will use the proceeds of any loan that becomes Debt hereunder
for the purpose indicated on the application therefor, and will promptly
contract to purchase and pay the purchase price of any property which becomes
Collateral hereunder from the proceeds of any loan made for that purpose.
3. As to all Collateral in Grantor's possession or the possession of its
contract manufacturers (unless specifically otherwise agreed to by Bank in
writing), Grantor will:
(a) Have or has possession of the Collateral at the location disclosed to
Bank and will not remove the Collateral from said location, except for sales in
the ordinary course of Borrower's business.
(b) Keep the Collateral separate and identifiable.
(c) Maintain the Collateral in good and saleable condition, repair it if
necessary and otherwise deal with the Collateral in all such ways as are
considered good practice by owners of like property, use it lawfully and only as
permitted by insurance policies, and permit Bank to inspect the Collateral at
any reasonable time in accordance with the terms of the Loan Agreement.
(d) Not sell, contract to sell, lease, encumber or transfer the Collateral
(other than the disposition of such inventory Collateral in the ordinary course
of Borrower's business and other assets which are obsolete or otherwise
considered surplus) until the Debt has been paid or performed in full, even
though Bank has a security interest in the proceeds of such Collateral.
1.
<PAGE>
4. As to Collateral which is inventory and accounts, Grantor:
(a) May, until notice from Bank after the occurrence and during the
continuance of an Event of Default, sell, lease or otherwise dispose of
inventory Collateral in the ordinary course of business only, and collect the
cash proceeds thereof.
(b) Will, upon notice from Bank after the occurrence and during the
continuance of an Event of Default, deposit all cash proceeds as received in a
demand deposit account with Bank, containing only such proceeds and deliver
statements identifying units of inventory disposed of, accounts which gave rise
to proceeds, and all acquisitions and returns of inventory as required by Bank.
(c) Will receive in trust after the occurrence and during the continuance
of an Event of Default, schedule on forms satisfactory to Bank and, upon notice
from Bank, deliver to Bank all non-cash proceeds other than inventory received
in trade.
(d) So long as there does not exist an Event of Default, may obtain
release of Bank's interest in individual units of inventory upon request
therefore, payment to Bank of the release price of such units shown on any
Collateral schedule supplementary hereto, and compliance herewith as to proceeds
thereof.
5. As to Collateral which are Accounts, Chattel Paper, General
Intangibles and Proceeds described in Section 4(c) above, Grantor warrants,
represents and agrees:
(a) All such Collateral is genuine, enforceable in accordance with its
terms and conditions precedent (except as disclosed to and accepted by Bank in
writing), and is supported by consecutively numbered invoices to, or rights
against the debtors thereon. Grantor will supply Bank with duplicate invoices or
other evidence of Grantor's rights on Bank's request.
(b) All persons appearing to be obligated on such Collateral have
authority and capacity to contract.
(c) All Chattel Paper is in compliance with applicable law as to form,
content and manner of preparation and execution and has been properly
registered, recorded, and/or filed to protect Grantor's interest thereunder.
(d) If an account debtor shall also be indebted to Grantor on another
obligation, any payment made by such account debtor not specifically designate
to be applied on any particular obligation shall be considered to be a payment
on the account in which Bank has a security interest. Should any remittance
include a payment not on an account, it shall be delivered to Bank and, if no
Event of Default has occurred, Bank shall pay Grantor the amount of such
payment.
(e) Grantor agrees that following the occurrence and during the
continuance of an Event of Default, Grantor shall not compromise, settle or
adjust any Account or renew or extend the time of payment thereof without Bank's
prior written consent.
(f) Until Bank exercises its rights to collect the Accounts pursuant to
Section I1 hereof, Grantor will collect with diligence all Grantor's Accounts.
Any collection of Accounts by Grantor, whether in the form of cash, checks,
notes, or other instruments for the payment of money (properly endorsed or
assigned where required to enable Bank to collect same), shall be in trust for
Bank. If an Event of Default has occurred and is continuing, Grantor shall keep
all such collections separate and apart from all other funds and property so as
to be capable of identification as the property of Bank and deliver said
collections daily to Bank in the identical form received. The proceed of such
collections when received by Bank may be applied by Bank directly to the payment
of the applicable Loan Account or to any other obligation same hereby. Any
credit given by Bank upon receipt of said proceeds shall be conditional credit
subject to collection. Returned items at Bank's option may be charged to
Grantor's deposit account with Bank. All collections of the Accounts shall be
set forth on an itemized schedule, showing the name of the account debtor, the
amount of each payment and such other information as Bank may request.
2.
<PAGE>
(g) Until Bank exercises its rights to collect the Accounts pursuant to
Section 11 hereof, Grantor may continue its present policies with respect to
returned merchandise and adjustments. However, Grantor shall immediately notify
Bank of all cases involving repossessions, and material loss or damage of or to
merchandise represented by the Accounts.
6. Grantor owns all of the Collateral absolutely and no other person has
or claims any interest in any of the Collateral, except for Permitted Liens and
as disclosed to and accepted by Bank in writing. Grantor will defend any
proceeding which may affect title to or Bank's security interest in any of the
Collateral, and will indemnify and hold Bank free and harmless from all costs
and expenses of Bank's defense.
7. Grantor will pay when due all existing or future charges, liens or
encumbrances on and all taxes and assessments (except for taxes not yet due and
payable or which are contested in good faith and for which Grantor has set aside
adequate reserves) now or hereafter imposed on or affecting the Collateral and,
if the Collateral is in Grantor's possession, the realty on which the Collateral
is located.
8. Grantor will insure the Collateral with Bank as loss payee in form and
amounts with companies, and against risks and liability satisfactory to Bank (to
the extent customarily maintained by businesses similar to Borrower's), and
hereby assigns such policies to Bank, agrees to deliver them to Bank at Banks
request, and authorizes Bank to make any claim thereunder, to cancel the
insurance upon Grantor's default, and to receive payment of and endorse any
instrument in payment of any loss or return premium. If Grantor should fail to
deliver the required insurance policy or policies to Bank, Bank may, at
Grantor's cost and expense, without any duty to do so, get and pay for insurance
naming as the insured, at Bank's option, either both Grantor and Bank, or only
Bank, and the cost thereof shall be secured by this Security Agreement, and
shall be repayable as provided in Section 1 above.
9. Grantor will give Bank any information it reasonably requires in
accordance with the terms of the Loan Documents. All information at any time
supplied to Bank by Grantor (including, but not limited to, the value and
condition of Collateral, financial statements, financing statements, and
statements made in documentary Collateral) is correct and complete, and Grantor
will notify Bank of any adverse change in such information. Grantor will
promptly notify Bank of any change of Grantor's residence, chief executive
office or mailing address.
10. At any time and from time to time, upon the written request of Bank,
and at the sole expense of Grantor, Grantor shall promptly and duly execute and
deliver any and all such further instruments and documents and take such further
action as Bank may reasonably deem desirable to obtain the full benefits of this
Security Agreement and of the rights and powers herein granted, including,
without limitation, (a) using its best efforts to secure all consents and
approvals necessity or appropriate for the grant of a security interest to Bank
in any Contract or License held by Grantor or in which Grantor has any rights
not heretofore assigned, (b) filing any financing or continuation statements
under the UCC with respect to the security interests granted hereby, (c) filing
or cooperating with Bank in filing any forms or other documents required to be
filed with the United States Patent and Trademark Office, United States
Copyright Office, or any filings in any foreign jurisdiction or under any
international treaty, required to secure or protect Bank's interest in the
Collateral, (d) transferring Collateral to Bank's possession (if a security
interest in such Collateral can be perfected by possession), (e) placing the
interest of Bank as lienholder on the certificate of title (or other evidence of
ownership) of any vehicle owned by Grantor or in or with respect to which
Grantor holds a beneficial interest and (f) using its best efforts to obtain
waivers of liens from landlords and mortgagees. Grantor also hereby authorizes
Bank to file any such financing or continuation statement without the signature
of Grantor. If any amount payable under or in connection with any of the
Collateral is or shall become evidenced by any Instrument, such Instrument,
other than checks and notes received in the ordinary course of business, shall
be duly endorsed in a manner satisfactory to Bank and delivered to Bank promptly
upon Grantor's receipt thereof.
11. Upon the occurrence and during the continuation of an Event of
Default Bank may, without prior notice to Grantor, collect the Collateral and
may give notice of assignment of Accounts to any and all account debtors and
Grantor does hereby make, constitute and appoint Bank its irrevocable, true and
lawful attorney-in-fact with power to do any act which Grantor is obligated
hereby to do, to exercise such rights as Grantor may exercise, to use such
equipment as Grantor might use, to enter Grantor's premises to give notice of
Bank's security interest, and to collect Collateral and proceeds and to execute
and file in Grantor's name any financing statements and amendments thereto
required to perfect Bank's security
3.
<PAGE>
interest hereunder, all to protect and preserve the Collateral and Bank's rights
hereunder. Without limiting the generality of the foregoing, after and during
the continuance of an Event of Default, Bank may:
(a) Endorse the name of Grantor, collect and receive delivery or payment
of Instruments and Documents constituting Collateral.
(b) Demand, sue for, give acquaintances for, make extension agreements
with respect to or affecting Collateral, exchange it for other Collateral,
release persons liable thereon or take security for the payment thereof, and
compromise, prosecute or defend any action, claim, proceeding or other disputes
in connection therewith.
(c) Use or operate Collateral for the purpose of preserving Collateral or
its value and for preserving or liquidating Collateral.
12. Discharge of Grantor except for full payment, or any extension,
forbearance, change of rate of interest, or acceptance, release or substitution
of Collateral or any impairment or suspension of Bank's rights against Grantor,
or any transfer of Grantor's interest to another shall not affect the liability
of Grantor hereunder. Until the Debt shall have been paid or performed in full,
Bank's rights shall continue even if the Debt is deemed unenforceable. Grantor
hereby waives: (a) any right to require Bank to proceed against Grantor before
any other, or to pursue any other remedy; (b) presentment, protest and notice of
protest, demand and notice of nonpayment, demand or performance, notice of sale,
and advertisement of sale; (c) any right to the benefit of or to direct the
application of any Collateral until the Debt shall have been paid or performed
in full; and (d) any right of subrogation to Bank until the Debt shall have been
paid or performed in full.
13. After and during the continuance of an Event of Default, at Bank's
option, without demand or notice, all or any part of the Debt shall immediately
become due and payable. Bank shall have all rights given by law, and may sell,
in one or more sales, Collateral in any county where Bank has an office. Bank
may purchase at such sale. Sales for cash or on credit to a wholesaler, retailer
or user of the Collateral, or at public or private auction, are all to be
considered commercially reasonable. Bank may require Grantor to assemble the
Collateral and make it available to Bank at the entrance to the location where
the Collateral is stored, or at a place designated by Bank.
14. Bank's acceptance of partial or delinquent payments or the failure of
Bank to exercise any right or remedy shall not waive any obligation of Grantor
or right of Bank to modify this Security Agreement, or waive any other similar
default.
15. Upon the transfer of all or any pan of the Debt, Bank may transfer
all or any part of the Collateral. Bank may deliver all or any pan of the
Collateral to any Grantor at any time. Any such transfer or delivery shall
discharge Bank from all liability and responsibility with respect to such
Collateral transferred or delivered. This Security Agreement benefits Bank's
successors and assigns and binds Grantor's heirs, legatees, personal
representatives, successors and assigns. Time is of the essence. This Security
Agreement, the other Loan Documents and the exhibit(s) attached hereto contain
the entire security agreement between Bank and Grantor. Grantor will execute any
additional agreements, assignments or documents reasonably required by Bank to
carry this Security Agreement into effect.
16. If one or more Grantor signs this Security Agreement, their liability
hereunder shall be joint and several. Any Grantor who is married hereby agrees
that recourse may be had against his or her separate property for the Debt.
17. This Security Agreement shall be governed by and construed in
accordance with the laws of the State of California, to the jurisdiction of
whose courts Grantor hereby agrees to submit. Grantor agrees that service of
process may be accomplished by any means authorized by California law. All words
used herein in the singular shall be considered to have been used in the plural
where the context and construction so require.
4.
<PAGE>
18. Grantor hereby acknowledges receiving a copy of this Security
Agreement and waives all rights to receive from Bank a copy of any financing
statement or financing change statement filed, or any verification statement
received, at any time in respect of this Security Agreement.
GRANTOR
Tut Systems, Inc.
a California corporation
By: /s/ Nelson B. Caldwell
----------------------
Printed Name: Nelson B. Caldwell
----------------------
Title: CFO
------------------------------
5.
<PAGE>
EXHIBIT A
DESCRIPTION OF COLLATERAL
A. Collateral. This Exhibit A covers all right, title and interest of
Grantor in, to and under all of the following, wherever located and whether now
owned or hereafter owned or acquired (collectively, the "Collateral"):
(a) All Accounts of Grantor;
(b) All Chattel Paper of Grantor;
(c) All Contracts of Grantor;
(d) All Deposit Accounts of Grantor;
(e) All Documents of Grantor;
(f) All Equipment of Grantor;
(g) All Fixtures of Grantor;
(h) All General Intangibles of Grantor;
(i) All Instruments of Grantor;
(j) All Inventory of Grantor;
(k) All Investment Property of Grantor;
(l) All Licenses of Grantor;
(m) All property of Grantor held by Bank or any other party for whom
Bank is acting as agent hereunder, including, without limitation, all property
of every description now or hereafter in the possession or custody of or in
transit to Bank or such other party for any purpose, including, without
limitation, safekeeping, collection or pledge, for the account of Grantor, or as
to which Grantor may have any right or power;
(n) All other goods and personal property of Grantor whether tangible
or intangible and whether now or hereafter owned or existing, leased, consigned
by or to, or acquired by, Grantor and wherever located; and
(o) To the extent not otherwise included, all Proceeds of each of the
foregoing and all accessions to, substitutions and replacements for, and rents,
profits and products of each of the foregoing.
B. Defined Terms. Unless otherwise defined herein, the following terms
shall have the following meanings (such meanings being equally applicable to
both the singular and plural forms of the terms defined):
"Accounts" means any "account," as such term is defined in Section 9106 of
the UCC, now owned or hereafter ire by Grantor and, in any event, shall include,
without limitation, all accounts receivable, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper,
Documents or Instruments ) now owned or hereafter received or quire by or
belonging or owing to Grantor (including, without limitation, under say trade
name, style or division thereof) whether arising out of goods sold or services
rendered by Grantor or from any other transaction, whether or not the same
involves the sale of goods or services by Grantor (including, without
limitation, any such obligation which may be characterized as an account or
contract right under the UCC) and all of Grantor's rights in, to and under all
EXHIBIT A
PAGE 1 OF 4
<PAGE>
purchase orders or receipts now owned or hereafter acquired by it for goods or
services, and all of Grantor's rights to any goods represented by any of the
foregoing (including, without limitation, unpaid seller's rights of rescission,
replevin, reclamation and stoppage in transit and rights to returned, reclaimed
or repossessed goods), and all monies due or to become due to Grantor under all
purchase orders and contracts for the sale of goods or the performance of
services or both by Grantor (whether or not yet earned by performance on the pan
of Grantor or in connection with any other transaction), now in existence or
hereafter occurring, including, without limitation, the right to receive the
proceeds of said purchase orders and contracts, and all collateral security and
guarantees of any kind given by any Person with respect to any of the foregoing.
"Chattel Paper" means any "chattel paper," as such term is defined in
Section 9105(1)(b) of the UCC, now owned or hereafter acquired by Grantor.
"Contracts" means all contracts, undertakings, franchise agreements or
other agreements (other than rights evidenced by Chattel paper, Documents or
Instruments) in or under which Grantor may now or hereafter have any right,
title or interest, including, without limitation, with respect to an Account,
any agreement relating to the terms of payment or the terms of performance
thereof.
"Copyright License" means all of the following now owned or hereafter
acquired by Grantor: any agreement granting any right in or to any Copyright or
Copyright registration (whether Grantor is the license or the licensor
thereunder) including, without limitation, licenses pursuant to which Grantor
has obtained the exclusive right to use a copyright owned by a third party.
"Copyrights" means all of the following in which Grantor now holds or
hereafter acquires any interest: (i) all copyrights, whether registered or
unregistered, held pursuant to the laws of the United States, any State thereof
or of any other country; (ii) registrations, applications and recordings in the
United States Copyright Office or in any similar office or agency of the United
States, any state thereof or any other country or political subdivision thereof;
(iii) any continuations, renewals or extensions thereof; (iv) any registrations
to be issued in any pending applications; (v) prior versions of works covered by
copyright and all works based upon, derived from, or incorporating such works;
(vi) income, royalties, damages, claims, and payments now and hereafter due and
payable with respect to copyrights including, without limitation, damages and
payments for past, present, or future infringement; (vii) rights to sue for
past, present and future infringements of copyright; and (viii) any other rights
corresponding to any of the foregoing rights throughout the world.
"Deposit Account" means any "deposit account" as such term is defined in
Section 9105(e) of the UCC, and should include, without limitation, any demand,
time, savings passbook or like account, now or hereafter maintained by or for
the benefit of Grantor, or in which Grantor now holds or hereafter acquires any
interest, with a bank, savings and loan association, credit union or like
organization (including Bank) and all funds and amounts therein, whether or not
restricted or designated for a particular purpose.
"Documents" means any "documents," as such term is defined in Section
9105(1)(f) of the UCC, now owned or hereafter acquired by Grantor.
"Equipment" means any "equipment," as such term is defined in Section
9109(2) of the UCC, now or hereafter owned or acquired by Grantor and, in any
event, shall include, without limitation, all machinery, equipment, furnishings,
vehicle, computers and other electronic data-processing and any other office
equipment of any nature whatsoever, any and all additions, substitutions and
replacements of any of the foregoing, wherever located, together with all
attachments, installed thereto except for equipment under permitted items.
"Fixtures" means "fixtures," as such term is defined in Section 9313(I)(a)
of the UCC, now or hereafter owned or acquired by Grantor and, in any event,
shall include, without limitation, regardless of where located, all of the
fixtures, systems, machinery, apparatus, equipment and fittings of every kind
and nature whatsoever and all appurtenances and additions thereto and
substitutions or replacements thereof, now or hereafter attached or affixed to
or constituting a part of, or located in or upon, real property wherever
located, including, without limitation, nil heating, electrical, mechanical,
lighting, lifting, plumbing, ventilating, air-conditioning and air cooling,
refrigerating, food preparation, incinerating and power, loading and unloading,
signs, escalators, elevators, boilers, communication, switchboards, sprinkler
and other fire
EXHIBIT A
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<PAGE>
prevention and extinguishing fixtures, systems, machinery, apparatus and
equipment, and all engines, motors, dynamos, machinery, pipes, pumps, tanks,
conduits and ducts constituting a part of any of the foregoing, together with
all right, title and interest of Grantor in and to all extensions, improvements,
betterments, renewals, substitutes, and replacements of, and all additions and
appurtenances to any of the foregoing property, and all conversions of the
security constituted thereby, immediately upon any acquisition or release
thereof or any such conversion, as the case may be.
"General Intangibles" means any "general intangibles," as such term is
defined in Section 9106 of the UCC, now owned or hereafter acquired by Grantor
and, in any event, shall include, without limitation, all right, title and
interest which Grantor may now or hereafter have in or under any Contract, all
customer lists, Copyrights, Trademarks, Patents, rights or Intellectual
Property, interests in partnerships, joint ventures and other business
associations, Licenses, permits, copyrights, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, recipes, experience, processes, models, drawings,
materials and records, goodwill (including, without limitation, the goodwill
associated with any Trademark, Trademark registration or Trademark licensed
under any Trademark License), claims in or under insurance policies, including
unearned premiums, uncertificated securities, deposit accounts, rights to
receive tax refunds and other payments and rights of indemnification.
"Instruments" means any "instrument," as such term is defined in Section
9105(1)0) of the UCC now owned or hereafter acquired by Grantor, including,
without limitation, all notes, certificated securities, and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
"Intellectual Property" means all Copyrights, Patents, Trademarks, trade
secrets, customer lists, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, software, data bases, data, skill, expertise,
recipes, experience, processes, models, drawings, materials and records.
"Inventory" means any "inventory," as such term is defined in Section
9109(4) of the UCC, wherever located, now or hereafter owned or acquired by,
Grantor and, in any event, shall include, without limitation, all inventory,
merchandise, goods and Other personal property which are held by or on behalf of
Grantor for sale or lease or are furnished or are to be furnished under a
contract of service or which constitute raw materials, work in process or
materials used or consumed or to be used or consumed in Grantor's business, or
the processing, packaging, promotion, delivery or shipping of the same, and all
furnished goods whether or not such inventory is listed on any schedules,
assignments or reports furnished to Bank from time to time and whether or not
the same is in transit Or in the constructive, actual or exclusive occupancy or
possession of Grantor or is held by Grantor or by others for Grantor's account,
including, without limitation, all goods covered by purchase orders and
contracts with suppliers and all goods billed and held by suppliers and all
inventory which may be located on premises of Grantor or of any carriers,
forwarding agents, truckers, warehousemen, vendors, selling agents or other
persons.
"Investment Property" means any "investment property," as such term is
defined in Section 9115(I)(f)of the UCC, now owned or hereafter acquired by
Grantor, including, without limitation, a security, whether certificated or
uncertificated, a Security entitlement, a securities account, a commodity
contract or a commodity account.
"License" means any Copyright License, Patent License, Trademark License or
other license of rights or interests now held or hereafter acquired by Grantor.
"Patent License" means any of the following now owned or hereafter acquired
by Grantor: any written agreement granting any right with respect to any
invention on which a Patent is in existence.
"Patents" means all of the following in which Grantor now holds or
hereafter acquire any interest: (a) letters patent of the United States or any
other county, all registrations and recordings thereof, and all applications for
letters patent of the United States or any other country, including, without
limitation, registrations, recordings and applications in the United States
Patent and Trademark Office or in any similar office or agency of the United
States, any State thereof or any other
EXHIBIT A
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<PAGE>
country or any political subdivision thereof; (b) all reissues, continuations,
continuations-in-part or extensions thereof; (c) all petty patents, divisionals,
and patents of addition; and (d) all patents to issue in any such applications.
"Proceeds" means "proceeds," as such term is defined in Section 9-306(1) of
the UCC and, in any event, shall include, without limitation, (a) any and all
Accounts, Chattel Paper, Instruments, cash or other proceeds payable to Grantor
from time to time in respect of the Collateral, (b) any and all proceeds of any
insurance,, indemnity, warranty or guaranty payable to Grantor from time to time
with respect to any of the Collateral, (c) any and all payments (in any form
whatsoever) made or due and payable to Grantor from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of all
or any pan of the Collateral above by any governmental body, authority, bureau
or agency (or any person acting under color of governmental authority), (d) any
claim of Grantor against third parties (i) for past, present or future
infringement of any Patent or Patent License, (ii) for past, present or future
infringement of any Copyright or Copyright License, (iii) for past, present or
future infringement or dilution of any Trademark or Trademark License or for
injury to the goodwill associated with any Trademark, Trademark registration or
Trademark licensed under any Trademark License, (e) all certificates, dividends,
cash, Instruments and other property received or distributed in respect of or in
exchange for any Investment Property and (f) any and all other amounts from time
to time paid or payable under or in connection with any of the Collateral or any
Contract.
"Trademark License" means any written agreement granting any right in and
to any Trademark or Trademark registration (whether Grantor is the license or
the licensor thereunder).
"Trademarks" means any of the following now owned or hereafter acquire by
Grantor: (a) any and all trademarks, trade names, corporate names, company
names, business names, trade styles, service marks, logos, other source or
business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and general intangibles of like nature, now existing
or hereafter adopted or acquired, all registrations and recordings thereof, and
any applications in connection therewith, including, without limitation,
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof (the
"Marks"), (b) any reissues, extensions or renewals thereof, (c) the goodwill of
the business symbolized by or associated with Marks, (d) income, royalties,
damages and payments now and hereafter due and/or payable with respect to Marks,
including, without limitation, damages, claims and recoveries for past, present
or future infringement, misappropriation, or dilution, and (e) rights to sue for
past, present and future infringements of Marks.
"UCC" means the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of California; provided, however, in the event
-------- -------
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Bank's security interest in any collateral is governed
by the Uniform Commercial Code as in effect in a jurisdiction other than the
State of California, the term "UCC" shall mean the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof relating
to such attachment, perfection of priority and for purposes of definitions
related to such provisions.
EXHIBIT A
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<PAGE>
EXHIBIT B
LOCATION OF COLLATERAL NOT IN BANK'S POSSESSION
1. 2495 Estand Way, Pleasant Hill, CA 94523.
2. Please add other address locations, if any. If none, please indicate "None"
below:
(See attached list from (FP Insurance Brokers)
EXHIBIT I
PAGE 1 OF 1
<PAGE>
COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
THIS COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT is made
as of August 16, 1997 ("Assignment"), by and between TUT SYSTEM, INC., a
California corporation ("Assignor"), and IMPERIAL BANK ("Assignee").
RECITALS
A. Assignee has agreed to lend to Assignor certain funds (the "Loan"),
and Assignor desires to borrow such funds from Assignee pursuant to the terms of
a Loan Agreement dated of even date. herewith (as the
same may be modified, amended, supplemented or restated from time to time, the
"Loan Agreement").
B. In order to induce Assignee to make the Loan, Assignor has agreed to
assign certain intangible property to Assignee for purposes of securing the
obligations of Assignor to Assignee.
Now, THEREFORE, the parties hereto agree as follows:
1. ASSIGNMENT, PATENT MORTGAGE AND GRANT OF SECURITY INTEREST. As
collateral as security for the prompt and complete payment and performance of
all of Assignor's present or future indebtedness, obligations and liabilities to
Assignee, including, without limitation, such indebtedness, obligations and
liabilities under the Loan Agreement and the other documents executed in
connection therewith (as the same may be modified, amended, supplemented or
restated from time to time, collectively, the "Loan Documents"), Assignor hereby
assigns, transfers, conveys and grants a security interest and mortgage to
Assignee, as security, in and to Assignor's entire right, title and interest in,
to and under the following, now or hereafter existing, created, acquired or held
by Assignor (all of which shall collectively be called the "Collateral"):
(a) Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether. or not the same also
constitutes a trade secret, including, without limitation, those set forth on
Exhibit A attached hereto and incorporated herein by this reference
(collectively, the "Copyrights").
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products;
(c) Any and all design rights which may be available to Assignor;
(d) All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-pan of the same, including, without limitation,
those set forth on Exhibit B attached hereto and incorporated herein by this
reference (collectively, the "Patents")
(e) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Assignor connected with and symbolized by
such trademarks, including, without limitation, those set forth on Exhibit C
attached hereto and incorporated herein by this reference (collectively, the
"Trademarks");
(f) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(g) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
1.
<PAGE>
(h) All amendments, renewals and extensions of any of the Copyrights,
Patents or Trademarks; and
(i) All proceeds and products of the foregoing, including, without
limitation, all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE
CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE ALL
OF ASSIGNOR'S PRESENT OR FUTURE INDEBTEDNESS, OBLIGATIONS AND LIABILITIES TO
ASSIGNEE, INCLUDING, WITHOUT LIMITATION, SUCH INDEBTEDNESS, OBLIGATIONS AND
LIABILITIES UNDER THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS.
2. AUTHORIZATION AND REQUEST. Assignor authorizes and requests that the
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. COVENANTS AND WARRANTIES. Assignor represents, warrants, covenants and
agrees as follows:
(a) Assignor is now the sole owner of the Collateral, except for non-
exclusive licenses granted by Assignor to its customers in the ordinary and
normal course of business as now conducted;
(b) Performance of this Assignment does not conflict with or result
in a breach of any agreement to which Assignor is party or by which Assignor is
bound, except to the extent that certain intellectual property agreements
prohibit the assignment of the rights thereunder to a third party without the
licensor's or other party's consent and this Assignment constitutes as
assignment;
(c) During the term of this Assignment, Assignor will not sell,
transfer, assign or otherwise encumber any interest in the Collateral, except
for (i) non-exclusive licenses granted by Assignor in the ordinary and normal
course of its business as now conducted or as set forth in this Assignment and
(ii) subject to Assignor's execution of appropriate documents, in form
acceptable to Assignee, to perfect or continue the perfection of Assignee's
interest in the Collateral, transfers to affiliates of Assignor,
(d) To its knowledge, each of the Patents is valid and enforceable,
and no part of the Collateral has been judged invalid or unenforceable, in whole
or in part, and no claim has been made that any part of the Collateral violates
the rights of any third party;
(e) Assignor shall promptly advise Assignee of any material changes
in the composition of the Collateral, including but not limited to any
subsequent ownership right of Assignor in or to any Copyright, Patent or
Trademark not specified in this Assignment;
(f) Assignor shall (i) protect, defend and maintain the validity and
enforceability of the Copyrights, Patents and Trademarks, (ii) use its best
efforts to detect infringements of the Copyrights, Patents and Trademarks and
promptly advise Assignee in writing of material infringements detected and iii)
not allow any Copyrights, Patents or Trademarks to be abandoned, forfeited or
dedicated to the public without the written consent of Assignee, which shall not
be unreasonably withheld, unless Assignor determines that reasonable business
practices suggest that abandonment is appropriate;
(g) Assignor shall promptly register the most recent version of
Assignor's material Copyrights, if not so already registered as Assignee may
reasonably request from time to time based on its review of the Quarterly Report
(as hereinafter defined) and shall, from time to time, execute and file such
other instruments, and take such further actions as Assignee may reasonably
request from time to time to perfect or continue the perfection of Assignee's
interest in the Collateral;
2.
<PAGE>
(h) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of all present or future indebtedness, obligations and
liabilities of Assignor to Assignee, including, without limitation, such
indebtedness, obligations and liabilities under the Loan Agreement and the other
Loan Documents, upon making the filings referred to in Section 3(i) below,
subject only to Permitted Liens (as defined in the Loan Agreement);
(i) To its knowledge, except for, and upon, the filings with, as
applicable, (1) the United States Patent and Trademark office with respect to
the Patents and Trademarks, (2) the Register of Copyrights with respect to the
Copyrights and (3) the UCC Division of the California Secretary of State,
necessary to perfect the security interests and assignment created hereunder,
and except as has been already made or obtained, no authorization, approval or
other action by, and no notice to or filing with, any United States governmental
authority or United States regulatory body is required either (a) for the grant
by Assignor of the security interest granted hereby or for the execution,
delivery or performance of this Assignment by Assignor in the United States or
(b) for the perfection in the United States or the exercise by Assignee of its
rights and remedies hereunder;
(j) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects;
(k) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent, which consent shall not be unreasonably withheld.
Assignor shall not permit the inclusion in any material contract to which it
becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Assignor's rights and interests in any
property included within the definition of the Collateral acquired under such
contracts, except that certain contracts may contain anti-assignment provisions
that could in effect prohibit the creation of a security interest in such
contracts; and
(l) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any Collateral, the ability of
Assignor to dispose of any Collateral or the rights and remedies of Assignee in
relation thereto, including the levy of any legal process against any of the
Collateral.
4. ASSIGNEE'S RIGHTS. Assignee shall have the right, but not the
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
(15) days' notice to Assignor. Assignor shall reimburse and indemnify Assignee
for all reasonable costs and reasonable expenses incurred in the reasonable
exercise of its rights under this Section 4.
5. INSPECTION RIGHTS. Assignor hereby grants to Assignee and its
employees, representatives and Meats the right to visit, during reasonable hours
upon prior reasonable written notice to Assignor, any of Assignor's plants and
facilities that manufacture, install or store products (or that have done so
during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested.
6. FURTHER ASSURANCES; ATTORNEY IN FACT
(a) On a quarterly basis, Assignor agrees to deliver to Assignee a
report, in form acceptable to Assignee and certified by an officer of Assignor,
which lists all Copyrights, Patents and Trademarks that are material to the
operation of Assignor's business on an on-going basis, and in which Assignee
does not already have a perfected security interest (the "Quarterly Report");
provided, however, Assignor may provide a general description of the Copyrights
by type. Based upon review of the Quarterly Report, Assignee shall, in its
reasonable discretion, identify which Copyrights, Patents and Trademarks it
deems material to the operation of Assignor's business on an on-going basis or
the value of the Collateral.
3.
<PAGE>
(b) On a continuing basis, Assignor will make, execute, acknowledge
and deliver, and file and record in the proper filing and recording places in
the United States, all such instruments, including appropriate financing and
continuation statements and collateral agreements and filings with the United
States Patent and Trademark Office and the Register of Copyrights, and take all
such action as may reasonably be necessary or advisable, or as reasonably
requested by Assignee, to perfect Assignee's security interest in all
Copyrights, Patents and Trademarks, which Assignee reasonably identifies
pursuant to Section 6(a) above as material to the operation of Assignor's
business on an on-going basis or the value of the Collateral, and otherwise to
carry out the intent and purposes of this Assignment, or for assuring and
confirming to Assignee the grant or perfection of a security interest in all
Collateral.
(c) Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and in
the name of Assignor, from time to time in Assignee's discretion, to take any
action and to execute any instrument which Assignee may reasonably deem
necessary or advisable to accomplish the purposes of this Assignment, including
(i) to modify, in its reasonable discretion, this Assignment without first
obtaining Assignor's approval of or signature to such modification by amending
Exhibit A, Exhibit B and Exhibit C thereof, as appropriate, to include reference
to any material right, title or interest in any Copyrights, Patents or
Trademarks acquired by Assignor after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents or
Trademarks in which Assignor no longer has or claims any right, title or
interest, (ii) to file, in its reasonable discretion, one or more financing-or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law and (iii)
after the occurrence and during the continuance of an Event of Default, to
transfer the Collateral into the name of Assignee or a third party to the extent
permitted under the California Uniform Commercial Code.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Assignment:
(a) An Event of Default occurs under the Loan Agreement or any of the
other Loan
Documents; or
(b) Assignor breaches any warranty or agreement in any material
respect made by Assignor in this Assignment and, as to any breach that is
capable of cure, Assignor fails to cure such breach within fifteen (15) days of
the occurrence of such breach if notice thereof has been given to Assignor.
8. REMEDIES. Upon the occurrence and during the continuance of an Event
of Default, Assignee shall have the right to exercise all the remedies of a
secured party under the California Uniform Commercial Code, Including, without
limitation, the right to require Assignor to assemble the Collateral and any
tangible property to which Assignee has a security interest and to make it
available to Assignee at a place designated by Assignee. Assignee shall have a
nonexclusive, royalty free license to use the Copyrights, Patents and Trademarks
to the extent reasonably necessary to permit Assignee to exercise its rights and
remedies upon the occurrence and during the continuance of an Event of Default.
Assignor will pay any expenses (including reasonable attorneys' fees) incurred
by Assignee in connection with the exercise of any of Assignee's rights
hereunder, including, without limitation, any expense Incurred in disposing of
the Collateral. All of Assignee's rights and remedies with respect to the
Collateral shall be cumulative.
9. INDEMNITY. Assignor agrees to defend, indemnify and hold harmless
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Assignment and (b) all
losses or expenses In any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including, without limitation, reasonable attorneys' fees and
reasonable expenses), except for losses arising from or out of Assignee's gross
negligence or willful misconduct.
4.
<PAGE>
10. REASSIGNMENT. At such time as Assignor shall completely satisfy all
of the obligations secured hereunder, Assignee shall execute and deliver to
Assignor all deeds, assignments and other instruments as may be necessary or
proper to revest in Assignor full title to the property assigned hereunder,
subject to any disposition thereof which may have been made by Assignee pursuant
hereto.
11. NO FAILURE OR DELAY. No failure or delay on the part of Assignee, in
the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof.
12. ATTORNEYS' FEES. If any action relating to this Assignment is brought
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements.
13. AMENDMENTS. This Assignment may be amended only by a written
instrument signed by both parties hereto.
14. COUNTERPARTS. This Assignment may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such Assignment shall become effective upon the execution of a counterpart
hereof or thereof by each of the panics hereto and telephonic notification that
such executed counterparts has been received by Assignor and Assignee.
15. GOVERNING LAW. This Assignment shall be governed by, and construed in
accordance With, the internal laws of the State of California, without regard to
principles of conflicts of law.
16. JUDICIAL REFERENCE. The terms and provisions of Section 15 of the
Loan Agreement are incorporated herein by this reference and made a part hereof.
17. CONFLICT. In the event of a conflict between any term and/or
provision contained in this Assignment with any term and/or provision contained
in the General Security Agreement (as defined in the Loan Agreement), the term
and/or provision of this Assignment shall govern.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the
day and year first above written.
<TABLE>
<S> <C>
ASSIGNEE ASSIGNOR
IMPERIAL BANK TUT SYSTEMS, INC.
A CALIFORNIA CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ Nelson B. Caldwell
--------------------------------- -------------------------------------
Printed Name: /s/ [SIGNATURE ILLEGIBLE] Printed Name: /s/ Nelson B. Caldwell
---------------------------- ---------------------------------------
Title: ASSISTANT VICE PRESIDENT Title: CFO
---------------------------- ---------------------------------
</TABLE>
Address of Assignee Address of Assignor
2460 Sand Hill Road, Suite 102 2495 Estand Way
Menlo Park, California 94025 Pleasant Hill, California 94523
Attention: Sunita Patel Attention: Nelson Caldwell
5.
<PAGE>
EXHIBIT 21.1
List of Subsidiaries of Registrant
None.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
reports dated March 16, 1998 except for Note 17, as to which the date is July
24, 1998, on our audits of the financial statements and financial statement
schedule of Tut Systems, Inc. We also consent to the references to our firm
under the captions "Experts" and "Selected Financial Data."
San Jose, California
July 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 3,805 5,395
<SECURITIES> 2,984 4,890
<RECEIVABLES> 3,142 1,626
<ALLOWANCES> 38 29
<INVENTORY> 1,770 1,424
<CURRENT-ASSETS> 11,990 13,667
<PP&E> 2,736 2,149
<DEPRECIATION> 1,676 804
<TOTAL-ASSETS> 13,894 15,168
<CURRENT-LIABILITIES> 2,552 2,601
<BONDS> 411 354
44,673 38,871
1,567 1,567
<COMMON> 0 0
<OTHER-SE> (35,904) (28,011)
<TOTAL-LIABILITY-AND-EQUITY> 13,894 15,168
<SALES> 4,095 6,221
<TOTAL-REVENUES> 4,513 6,221
<CGS> 2,382 3,228
<TOTAL-COSTS> 2,403 3,228
<OTHER-EXPENSES> 9,121 12,344
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 23 61
<INCOME-PRETAX> (6,800) (9,156)
<INCOME-TAX> 1 1
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,801) (9,157)
<EPS-PRIMARY> (36.65) (59.36)
<EPS-DILUTED> (36.65) (59.36)
</TABLE>
