<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
HYBRID NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 77-02520931
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of classification code number) identification
incorporation or organization) no.)
</TABLE>
--------------------------
10161 BUBB ROAD
CUPERTINO, CA 95014
(408) 725-3250
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------------------
CARL S. LEDBETTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
10161 BUBB ROAD
CUPERTINO, CA 95014
(408) 725-3250
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
DENNIS R. DEBROECK, ESQ. PATRICK J. SCHULTHEIS, ESQ.
ROBERT A. FREEDMAN, ESQ. ROBERT G. DAY, ESQ.
TYLER R. COZZENS, ESQ. MATTHEW MACKENZIE, ESQ.
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI,
TWO PALO ALTO SQUARE PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 94306 650 PAGE MILL ROAD
(650) 494-0600 PALO ALTO, CA 94304
(650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / / ______
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock,
par value $0.001 per share........... 3,105,000 shs. $14.00 $43,470,000 $13,173
</TABLE>
(1) Includes 405,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
amount of the registration fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE 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.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1997
2,700,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY HYBRID
NETWORKS, INC. ("HYBRID" 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 $12.00 AND
$14.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMPANY HAS
APPLIED TO HAVE ITS COMMON STOCK APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "HYBR."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------------
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 UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
PER SHARE.......................... $ $ $
TOTAL (3).......................... $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT
$850,000.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO 405,000 ADDITIONAL SHARES OF COMMON STOCK, SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ AND THE PROCEEDS TO COMPANY WILL TOTAL $ . SEE
"UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM, AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT , 1997.
-------------------
MONTGOMERY SECURITIES UBS SECURITIES
, 1997
<PAGE>
FRONT OF GATEFOLD
[Photo of Hybrid modem]
Modems
SERIES
2000
A FULLY INTEGRATED BROADBAND ACCESS SYSTEM
[PHOTO OF HYBRID HEADEND SYSTEM]
Headend System
INSIDE GATEFOLD
HIGH SPEED INTERNET AND INTRANET ACCESS OVER BROADBAND NETWORKS
[DIAGRAM OF CORPORATE CONFIGURATION OF HYBRID SERIES 2000 PRODUCT]
CORPORATE
- Secure high speed Internet and intranet access for corporate telecommuters
and remote offices
- Allows corporations to expand their intranet using broadband networks
- Multi-user modem supports up to 20 PCs in a networked environment
- Corporate MIS manages remote workers from behind the firewall for privacy
[PHOTO OF COMPUTER SCREEN, KEYBOARD AND HYBRID MODEM]
[DIAGRAM OF CABLE SYSTEM CONFIGURATION OF HYBRID SERIES 2000 PRODUCT]
CABLE
[DIAGRAM OF WIRELESS SYSTEM CONFIGURATION OF HYBRID SERIES 2000 PRODUCT]
WIRELESS
- DOWNSTREAM SPEEDS UP TO 10MBPS
- FLEXIBLE SYSTEM THAT OPERATES WELL WITH MOST CABLE, WIRELESS, AND
TELEPHONE NETWORKS
- PROPRIETARY MIXED-MEDIA TECHNOLOGY ENHANCES PERFORMANCE OF ASYMMETRIC
NETWORKS
- MODULAR ARCHITECTURE ALLOWS SEPARATE UPSTREAM AND DOWNSTREAM PATHS
- MULTI-USER MODEM SUPPORTS UP TO 20 PCS
- ENCRYPTION AVAILABLE
-------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
CyberManager-Registered Trademark- and CyberMaster-Registered Trademark- are
registered trademarks of the Company. Hybrid Networks-TM- and CyberCommuter-TM-
are trademarks of the Company. This Prospectus also includes trade names and
trademarks of other companies.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND
FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE
OUTCOME OF THE EVENTS DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS IS SUBJECT TO
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN SECTIONS ENTITLED
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.
THE COMPANY
Hybrid Networks, Inc. ("Hybrid" or the "Company") is a broadband access
equipment company that designs, develops, manufactures and markets cable and
wireless systems that provide high speed access to the Internet and corporate
intranets for both businesses and consumers. The Company's products remove the
bottleneck over the "last mile" connection to the end-user which causes slow
response time for those accessing bandwidth-intensive information over the
Internet or corporate intranets. Hybrid's Series 2000 product line consists of
secure headend routers, cable or wireless modems and management software for use
with either cable TV or wireless transmission facilities. The Series 2000 system
also features a router to provide corporate telecommuters and others in remote
locations secure access to their files on corporate intranets. The Series 2000
is capable of supporting a combination of speeds, media and protocols in a
single cable or wireless system, providing system operators with flexible,
scalable and upgradeable solutions that interoperate with a range of third party
networking products allowing system operators to offer cost-effective broadband
access to their subscribers.
The Internet has become an increasingly important source of information for
businesses and consumers. The Internet's importance results from a variety of
factors, including increased email usage, the emergence of the World Wide Web
and the proliferation of multimedia content, such as graphics, images, video and
audio, which can be accessed online. In particular, businesses are demanding
high speed access to the Internet and their corporate intranets for their
employees, including telecommuters. In 1997, an American Management Association
International and Tierney & Partners survey indicated that 27% of businesses
surveyed reported moderate to heavy Internet usage. This number is expected to
increase to 64% by 1999. In addition, the 1997 American Internet Users Survey,
conducted by FIND/SVP, estimated that the number of telecommuters in the United
States has grown to 11 million. According to a November 1996 Jupiter
Communications report, the consumer market is also growing rapidly. Jupiter
Communications projects the number of houses in the United States with Internet
access will grow from 14.7 million in 1996 to 36.0 million by 2000 (a compound
annual growth rate of 34.8%).
Demand for bandwidth-intensive content, combined with the inherent technical
difficulties of delivering large amounts of data over existing copper wire
telephone infrastructure, has resulted in slow response times and increasing
frustration for many Internet and corporate intranet users. While cable system
operators and broadband wireless system operators seek alternatives to provide
high speed, cost-effective broadband access, currently these operators do not
possess the enabling technology over the last mile to provide such access to
their end-users. In addition, Internet service providers ("ISPs"), which have
traditionally provided Internet access, will face increasing pressure to provide
improved broadband access to their subscribers.
Hybrid's objective is to be a leader in providing cost-effective, high speed
Internet and intranet access solutions to cable system operators, broadband
wireless system operators, ISPs and other businesses. Hybrid markets and sells
its products through its direct sales force and a network of original equipment
manufacturers ("OEMs"), value added resellers ("VARs") and distributors. The
Series 2000 product line allows cable and wireless operators to conserve scarce
bandwidth and to utilize a variety of data return paths, including the public
switched telephone network. The Series 2000 product line enables cable system
operators to offer Internet access via either one-way or two-way cable systems,
thus minimizing the operators' capital investment and time-to-market pressures.
The Series 2000 also facilitates the entrance of broadband wireless system
operators into the high speed Internet access market. The Series 2000 has been
designed to utilize an array of wireless frequencies, ranging from UHF to MMDS
frequencies, and to minimize commonly experienced interference problems.
Hybrid was incorporated in Delaware in June 1990. The Company's principal
executive offices are located at 10161 Bubb Road, Cupertino, California
95014-4167. The Company's telephone number is (408) 725-3250.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,700,000 shares
Common Stock to be outstanding after this
offering...................................... 9,928,127 shares(1)
Use of proceeds................................. For the repayment of approximately $6.9
million of debt, working capital and
other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.......... HYBR
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................................. $ 668 $ 630 $ 2,962 $ 758 $ 4,905
Loss from operations...................................... (2,826) (5,131) (8,744) (3,581) (7,229)
Net loss.................................................. (2,897) (5,269) (8,515) (3,550) (7,253)
Net loss per share(1)(2).................................. $ (1.00) $ (1.82) $ (2.66) $ (1.11) $ (2.25)
Shares used in per share calculation(1)(2)................ 2,894 2,891 3,202 3,209 3,218
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............... $ 3,836 $ 10,553 $ 34,464
Working capital................................................. 6,445 13,162 37,073
Total assets.................................................... 11,479 18,361 42,107
Long-term debt(3)............................................... 6,237 13,119 6,237
Total stockholders' equity...................................... 2,490 2,490 34,118
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of June 30, 1997. Does not include (i)
1,649,920 shares of Common Stock issuable upon exercise of stock options
outstanding as of June 30, 1997, at a weighted average exercise price of
$0.94 per share, (ii) 275,078 shares of Common Stock available for future
grant or issuance as of June 30, 1997 under the Company's 1993 Equity
Incentive Plan, 1996 Equity Incentive Plan and Executive Officer Incentive
Plan and an additional 270,000 shares reserved for issuance in July and
September 1997 under the Executive Officer Incentive Plan, (iii) 2,075,000
shares of Common Stock available for future grant or issuance under the
Company's 1997 Equity Incentive Plan, 1997 Directors Stock Option Plan and
1997 Employee Stock Purchase Plan, (iv) 908,177 shares of Common Stock
issuable upon the exercise of warrants outstanding as of June 30, 1997 at a
weighted average exercise price of $5.12 per share, (v) 513,423 shares of
Common Stock issuable as of June 30, 1997 upon the conversion of a debenture
with an outstanding aggregate principal amount of $5.5 million (the "$5.5
Million Debenture") or (vi) warrants to purchase an aggregate of 255,028
shares of Common Stock at an exercise price of $10.91 per share to be issued
in September 1997 in connection with an agreement to issue approximately
$6.9 million in subordinated notes (the "Subordinated Notes") and the
commitment of a credit facility for $4.0 million (the "Credit Facility").
See "Capitalization," "Management--Director Compensation,"
"Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 5, 9 and 15 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net loss per share.
(3) Includes the $5.5 Million Debenture, which is convertible into an aggregate
of 513,423 shares of Common Stock at the option of the holder at any time
and which automatically converts if (i) the gross proceeds to the Company
from this offering are at least $15.0 million, (ii) the public offering
price per share is at least $166.5 million divided by the number of fully
diluted shares of capital stock of the Company (as determined pursuant to
the terms of the $5.5 Million Debenture) prior to this offering (the
"Minimum Price") and (iii) the closing price of the Common Stock after this
offering is equal to or greater than the Minimum Price for any 90
consecutive calendar day period after this offering. See Note 5 of Notes to
Financial Statements.
(4) Reflects the estimated net proceeds from the issuance of the Subordinated
Notes in September 1997.
(5) Adjusted to reflect (i) the sale and issuance of the 2,700,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share and after deducting the estimated underwriting discount and
offering expenses and the application of the estimated proceeds therefrom
and (ii) the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this offering. See "Use of Proceeds" and
"Capitalization."
------------------------------
EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I)
REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF THE
COMPANY INTO SHARES OF COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING, (II)
REFLECTS A 1-FOR-2.7 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK, (III) ASSUMES
THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND (IV)
ASSUMES REPAYMENT OF THE SUBORDINATED NOTES IMMEDIATELY FOLLOWING THE CLOSING OF
THIS OFFERING AND THE ISSUANCE OF WARRANTS FOR THE PURCHASE OF 289,039 SHARES OF
COMMON STOCK.
4
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING ANY OF THE SHARES OF COMMON STOCK OF THE COMPANY. THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL
AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company was organized in 1990 and has experienced operating losses each
year since that time. As of June 30, 1997, the Company had an accumulated
deficit of approximately $24.6 million. Because the Company and the market for
broadband access through cable modems is still in an emerging stage, there can
be no assurance that the Company will ever achieve profitability on a quarterly
or an annual basis or will sustain profitability once achieved. The Company
began shipment of its first products, the Series 1000 product line in 1994 and
sold only minimal quantities before replacing them with its Series 2000 product
line, which was first shipped in October 1996. The revenue and profit potential
of the Company's business and the industry is unproven, and the Company's
limited operating history makes its future operating results difficult to
predict. The Company believes that its growth and future success will be
substantially dependent upon cable system operators, broadband wireless system
operators and ISPs adopting its technologies, purchasing its products and
selling its client modems to cable, wireless and ISP subscribers. The Company
has had limited experience selling its products to cable system operators,
broadband wireless system operators, ISPs and other businesses, and there are
many impediments to its being able to do so. See "--Inexperience in Emerging
Market." The market for the Company's products has only recently begun to
develop, is rapidly changing and is characterized by an increasing number of
competitors and competing technologies. Certain competitors of the Company
currently offer more price competitive products. In the event that the Company's
current or future competitors release new products or technologies with more
advanced features, better performance or lower prices than the Company's current
and future products, demand for the Company's products would decline. See
"--Competition." Failure of the Company's products to achieve market acceptance
could have a material adverse effect on the Company's business, operating
results and financial condition. Although the Company has experienced
significant growth in net sales in recent periods, the Company does not believe
that this growth rate is sustainable or indicative of future operating results.
In addition, the Company has had negative gross margins in past periods, and
there can be no assurance that any continued growth in net sales will result in
positive gross profits or operating profits. Future operating results will
depend on many factors, including the growth of the cable and wireless modem
system markets, demand for the Series 2000 and future product lines, purchasing
decisions by cable and wireless companies and their subscribers, the level of
product and price competition, market acceptance of competing technologies to
deliver high speed Internet access, evolving industry standards, the ability of
the Company to develop and market new products and control costs, general
economic conditions and other factors. The Company believes that it will
continue to experience net losses for the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS; ABSENCE OF SIGNIFICANT BACKLOG; CONTINUING
DECLINE OF AVERAGE SELLING PRICES
The Company has experienced, and expects to continue to experience,
significant fluctuations in its results of operations on a quarterly and an
annual basis. Historically, the Company's quarterly net sales
5
<PAGE>
have been unpredictable due to a number of factors. Factors that have influenced
and will continue to influence the Company's results of operations in a
particular period include: the size and timing of customer orders and subsequent
shipments, particularly with respect to the Company's headend equipment;
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 cable, wireless
and telecommunications industries; competitive pricing pressures; the effects of
promotional pricing, service, marketing or other terms offered to customers;
accuracy of customer forecasts of end-user demand; changes in the Company's
operating expenses; personnel changes; quality control of products sold;
regulatory changes; customer's capital spending; delays of orders or payments by
customers; and general economic conditions. In addition, the inability to obtain
components from suppliers or manufacturers has adversely affected the Company's
operating results in the past and may materially adversely affect the Company's
operating results in the future. For example, in the second quarter of 1997, the
Company did not receive the full shipment of modems anticipated from Sharp
Corporation, its primary modem manufacturer, because of technical delays in
product integration. As a result, the Company was unable to fill all customer
orders for that quarter. While such problems have since been resolved, there can
be no assurance that the Company will not experience similar supply problems in
the future with respect to Sharp or any other supplier or manufacturer.
The timing and volume of customer orders are difficult to forecast because
cable and wireless companies typically require delivery of products within 30
days, thus a substantial majority of the Company's net sales are booked and
shipped in the same quarter. Accordingly, the Company has a limited backlog of
orders, and net sales for any future quarter are difficult to predict. Further,
sales are generally made pursuant to purchase orders, which can be rescheduled,
reduced or cancelled with little or no penalty. Historically, a substantial
majority of the Company's net sales in a given quarter have been recorded in the
third month of the quarter, with a concentration of such net sales in the last
two weeks of the quarter. Because of the relatively large dollar size of the
Company's typical transaction, any delay in the closing of a transaction can
have a significant impact on the Company's operating results for a particular
period. See "--Lengthy Sales Cycle."
Historically, average selling prices ("ASPs") in the cable and wireless
systems industry have decreased over the life of individual products and
technologies. In the past, the Company has experienced decreases in unit ASPs of
each of its products. The Company anticipates that unit ASPs of its products
will continue to decrease, which would cause continuing downward pressure on the
gross margins for these products. The Company's gross margins are also impacted
by the sales mix of points of presence headend equipment ("PoPs" or "headends")
and modems. The Company's single-user modems generally have lower margins than
its multi-user modems, both of which have lower margins than the Company's
headends. The Company anticipates that in the foreseeable future, the sales mix
of modems will be heavily weighted toward single-user modems. See "--Need to
Reduce Cost of Client Modems" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LENGTHY SALES CYCLE
The sale of the Company's products typically involves a significant
technical evaluation and commitment of capital and other resources, with the
delays frequently associated with customers' internal procedures to approve
large capital expenditures, to engineer deployment of new technologies within
their networks and to test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
Company's products is typically lengthy, generally lasting three to nine months
and is subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, that are beyond the Company's
control. Because of the lengthy sales cycle and the large size of customers'
orders, if orders forecasted for a specific customer for a particular quarter
are not realized in that quarter, the Company's operating results for that
quarter could be materially adversely affected. See "--Fluctuations in Quarterly
Operating Results; Absence of Significant Backlog; Continuing
6
<PAGE>
Decline of Average Selling Prices" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE
The market for high speed Internet access products is characterized by
rapidly changing technologies and short product life cycles. Prior to October
1996, substantially all of the Company's product sales were attributable to its
Series 1000 product line. In October 1996, the Company introduced its Series
2000 product line (which replaced the Series 1000 product lines). To date,
substantially all products sold have been for telephone return based systems and
have involved single-user modems. Since the Series 2000 products have been
subject to only limited single-user testing, the reliability, performance and
market acceptance of the Company's products are uncertain, and there is
increased risk that the products will be affected by problems beyond those that
are generally associated with new products. The failure of the current
generation of products to perform acceptably in certain beta test situations has
caused the Company to make engineering changes to such products, and the Company
continues to modify the designs of its products in an attempt to increase their
reliability and performance. There can be no assurance that the Company's
engineering and product design efforts will be successful. The Company's future
success will depend in part upon its ability to develop, introduce and market
new products or enhancements to existing products in a timely manner and to
respond to competitive pressures, changing industry standards or technological
advances. For example, the Company is currently developing products for two-way
cable transmission using QPSK technology which the Company believes its
customers will require. In addition, the Company is developing products for
two-way broadband wireless transmission. There can be no assurance that the
Company will successfully develop or introduce new products, or that any new
products will achieve market acceptance. Any failure to release new products or
to fix, upgrade or redesign existing products on a timely basis could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Products, Technology and Services" and
"Business--Research."
INEXPERIENCE IN EMERGING MARKET
Cable system operators, broadband wireless system operators, distributors
and other customers may prefer to purchase products from larger, more
established manufacturing companies, including certain of the Company's
competitors, that can demonstrate the capability to supply large volumes of
products on short notice. In addition, many cable system operators, broadband
wireless system operators and other customers may be reluctant to adopt
technologies that have not gained wide acceptance among their industry peers.
Certain competitors of the Company have already established relationships in the
market, further limiting the Company's ability to sell products to such
potential customers. While the Company has sold products to certain cable system
operators, broadband wireless system operators and other customers, most of
these sales are not based on long-term contracts and such customers may
terminate their relationships with the Company at any time. Further, the
Company's contracts generally do not contain significant minimum purchase
requirements. In addition, in order to address the needs and competitive factors
facing the broadband access market sales the Company has and in the future may
need to offer pricing, service, marketing or other promotional terms which could
have a material adverse effect on the Company's business, operating results and
financial condition. If the Company is unable to market and sell its products to
a significant number of cable system operators, broadband wireless system
operators and other customers, or if such entities should cease doing business
with the Company, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business-- Customers."
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LIMITED PENETRATION OF TWO-WAY CABLE; DEPENDENCE ON CABLE OPERATOR INSTALLATIONS
Although wired cable systems pass a significant percentage of U.S.
households, very few of those households are currently served by cable plants
that support two-way data access. Further, a limited number of businesses, a
major target market for the Company, currently have cable access. To support
upstream data on existing hybrid fiber coax ("HFC") cable plants, a cable
operator must install two-way amplifiers in the cable network to use the portion
of the cable spectrum allocated for upstream use. There can be no assurance that
cable system operators will choose to upgrade existing cable systems or provide
new cable systems with two-way capability. In particular, certain large cable
system operators have announced their intention to slow or halt plans to upgrade
existing cable systems. Adding upstream capabilities to new or existing cable
systems is expensive and generally requires portions of existing systems to be
unavailable during the installation process. Cable system operators may decide
to wait for the next generation of wired infrastructure, such as optical fiber,
before deciding whether to provide two-way communication. The Federal
Communications Commission ("FCC") has required cable system operators to
dedicate the frequency spectrum from 5 MHz to 42 MHz for upstream transmissions,
but because this portion of spectrum is small in comparison to the downstream
portion, it is more susceptible to ingress noise and other impairments and it
can support a more limited bandwidth. Due to a scarcity of channels, cable
system operators have been and may continue to be reluctant to dedicate a
portion of their frequency spectrum to new uses such as those for which the
Company's products are designed. Consequently, the Company expects that upstream
data traffic on cable systems will be limited to narrow or congested parts of
the spectrum, thus limiting the number of potential simultaneous users. If cable
system operators do not install two-way capability on their cable systems in a
timely fashion or if such operators do not dedicate sufficient frequency
spectrum for upstream traffic, the use of cable for upstream data traffic will
be limited. Any such limitation could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Industry Background" and "Business--Customers."
DEPENDENCE ON CABLE SYSTEM OPERATORS
The Company depends on cable system operators to purchase its cable modem
systems and to sell its client cable modems to end-users. Cable system operators
have a limited number of programming channels over which they can offer
services, and there can be no assurance that they will choose to provide
Internet access. Even if cable system operators choose to provide Internet
access, there can be no assurance that they would provide such access over
anything other than that portion of their cable system that has two-way cable
transmission capabilities. In addition, there can be no assurance that if such
cable system operators provide Internet access, they would use the Company's
products. The Company is currently developing a two-way cable transmission
solution utilizing the QPSK technology required by cable system operators, but
there can be no assurance that the Company will be successful in such efforts or
that once introduced such products will gain market acceptance. While many cable
system operators are in the process of upgrading, or have announced their
intention to upgrade, their HFC cable infrastructures to provide increased
quality and speed of transmission and, in certain cases, two-way transmission
capabilities, some cable operators have delayed their planned upgrades
indefinitely. Cable system operators have limited experience with these
upgrades, and investments in upgrades have placed a significant strain on the
financial, managerial, operational and other resources of the cable system
operators, most of which are already highly leveraged and facing intense
competition from telephone companies ("telcos"), satellite TV and broadband
wireless system operators. Because of the substantial capital cost of upgrading
cable systems for higher quality and two-way data transmission, it is uncertain
whether such cable upgrades and additional services, such as Internet access,
will be offered in the near term, or at all. For example, to increase television
programming capacity to compete with other modes of multichannel entertainment
delivery systems, cable system operators may choose to roll out digital set-top
boxes, which do not support high speed Internet access. Cable system operators
may not have the capital required to upgrade their infrastructure or to offer
new services that require substantial start-up costs. In addition, the Company
is highly dependent on cable system operators to continue to maintain their
cable infrastructure in such a
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manner that the Company will be able to provide consistently high performance
and reliable service. Therefore, the success and future growth of the Company's
business is subject to economic and other factors affecting the cable television
industry generally, particularly the industry's ability to finance substantial
capital expenditures. See "Business--Industry Background" and
"Business--Customers."
DEPENDENCE ON BROADBAND WIRELESS SYSTEM OPERATORS
The Company depends on broadband wireless system operators to purchase its
wireless modem products and to sell its client wireless modems to end-users.
Many broadband wireless system companies are in the early stage of development
or are in need of capital to upgrade and expand their services in order to
compete effectively with cable system operators, satellite TV and telcos.
Accordingly, to address the needs of and competitive factors facing these
customers, the Company on occasion has sold its products to certain broadband
wireless system operators and other customers under extended payment,
promotional pricing or other terms which could have a material adverse effect on
the Company's business, operating results and financial condition. The principal
disadvantage of wireless cable is that it requires a direct line of sight
between the wireless cable system operator's antenna and the customer's
location. Therefore, despite a typical range of up to 35 miles, a number of
factors, such as buildings, trees or uneven terrain, can interfere with
reception, thus limiting broadband wireless system operators' customer bases. It
is estimated that there are only approximately 1.0 million wireless cable
customers in the United States today. In addition, current technical and
legislative restrictions have limited the number of analog channels that
wireless cable companies can offer to 33. In order to better compete with cable
system operators, satellite TV and telcos, broadband wireless system operators
have begun to examine the implementation of both digital TV and Internet access
to create new revenue streams. To the extent that such operators choose to
invest in digital TV, such decision will limit the amount of capital available
for investment in deploying other services, such as Internet access. Broadband
wireless system operators will require substantial capital to introduce and
market Internet access products. There can be no assurance that broadband
wireless system operators will have the capital to supply Internet services in a
competitive environment. In addition, there can be no assurance that the
broadband wireless system operators' current customer bases have significant
interest in high speed Internet connectivity at a price greater than that
offered by telcos or that broadband wireless system operators can attract
customers, particularly in the business community, which have not traditionally
subscribed to wireless cable services. While broadband wireless system operators
are currently utilizing telephone return for upstream data transmission, the
Company believes that wireless operators will demand two-way wireless
transmission as more of these entities obtain licenses for additional
frequencies. Currently, the Company is developing its products to satisfy the
two-way transmission needs of the broadband wireless system operators. There can
be no assurance that the Company will be successful in such development efforts.
The failure of the Company's products to gain market acceptance could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition."
CUSTOMER CONCENTRATION
To date, a small number of customers has accounted for a substantial portion
of the Company's net sales. The Company expects that net sales from the sale of
its Series 2000 products to a small number of customers will continue to account
for a substantial portion of its net sales for the foreseeable future. The
Company expects that its largest customers in future periods could be different
from its largest customers in prior periods due to a variety of factors,
including customers' deployment schedules and budget considerations. As a
result, the Company has experienced, and expects to continue to experience,
significant fluctuations in its results of operations on a quarterly and annual
basis. Because limited numbers of cable system operators and broadband wireless
system operators account for a majority of capital equipment purchases in their
respective markets, the Company's future success will depend upon its ability to
establish and maintain relationships with these companies. The loss of any one
of the Company's major customers could have a material adverse effect on the
Company's business, financial
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condition and results of operations. Further, the Company's customers include
companies in the early stage of development or in need of capital to upgrade or
expand their services. Accordingly, in order to address the needs of and
competitive factors facing the emerging broadband access markets, the Company on
occasion has sold its products to customers under extended payment, promotional
pricing or other terms which could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
headend equipment does not operate with other companies' modems and,
accordingly, the Company is typically a sole source provider to its customers.
As a result, the Company's operating results could be materially and adversely
affected if a major customer were to implement other technologies that impact
the future utilization of the Company's products. The Company's future success
will depend in significant part upon the decision of the Company's current and
prospective customers to continue to purchase products from the Company. There
can be no assurance that the Company's current customers will continue to place
orders with the Company or that the Company will be able to obtain orders from
new customers. If orders from current customers are cancelled, decreased or
delayed, or the Company fails to obtain significant orders from new customers,
the Company's business, operating results and financial condition could be
materially adversely affected. See "Business--Customers."
COMPETITION
The market for high speed network connectivity products and services is
intensely competitive. The principal competitive factors in this market include
product performance and features (including speed of transmission and upstream
transmission capabilities), reliability, price, size and stability of
operations, breadth of product line, sales and distribution capability,
technical support and service, relationships with cable and broadband wireless
system operators and ISPs, standards compliance and general industry and
economic conditions. Certain of these factors are outside of the Company's
control. The existing conditions in the high speed network connectivity market
could change rapidly and significantly as a result of technological changes, and
the development and market acceptance of alternative technologies could decrease
the demand for the Company's products or render them obsolete. Similarly, the
continued emergence or evolution of industry standards or specifications may put
the Company at a disadvantage in relation to its competitors.
The Company's current and potential competitors include providers of
asymmetric cable modems, other types of cable modems and other broadband access
products. Most of the Company's competitors are substantially larger and have
greater financial, technical, marketing, distribution, customer support and
other resources, as well as greater name recognition and access to customers
than the Company. In addition, many of the Company's competitors are in a better
position to withstand any significant reduction in capital spending by cable or
broadband wireless system operators. Certain of the Company's competitors have
established relationships with cable system operators and telcos and, based on
these relationships, may have more direct access to the decision-makers of such
cable system operators and telcos. There can be no assurance that the Company
will be able to compete effectively in its target markets.
The principal competitors in the cable modem market include Bay Networks,
Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other
cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer
Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics,
as well as a number of smaller, more specialized companies. Certain competitors
have entered into partnerships with computer networking companies that may give
such competitors greater visibility in this market. Certain of the Company's
competitors have already introduced or announced high speed connectivity
products that are priced lower than the Company's, and certain other competitors
are more focused on and experienced in selling and marketing two-way cable
transmission products. There can be no assurance that additional competitors
will not introduce new products that will be priced lower, provide superior
performance or achieve greater market acceptance than the Company's products.
The Company's principal competitors in the wireless modem market, Bay Networks,
Harmonic Lightwaves through its proposed acquisition of New Media
Communications, Motorola, NextLevel Systems and
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Stanford Telecommunications, are providing wireless Internet connectivity over
wireless cable and LMDS frequencies.
To be successful, the Company's Series 2000 products must achieve market
acceptance and the Company must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. The Company must continue
to develop products with improved performance over two-way cable transmission
facilities and with the ability to perform over two-way wireless transmission
facilities. There can be no assurance that the Company will meet these
challenges, that it will be able to compete successfully against current or
future competitors, or that the competitive pressures faced by the Company will
not materially and adversely affect the Company's business, operating results
and financial condition. Further, as a strategic response to changes in the
competitive environment, the Company may make certain promotional pricing,
service, marketing or other decisions or enter into acquisitions or new ventures
that could have a material adverse effect on the Company's business, operating
results or financial condition.
Cable and broadband wireless system operators face competition from
providers of alternative high speed connectivity systems. In the wireless high
speed access market, broadband wireless system operators compete with satellite
TV providers. In telephony networks, Digital Subscriber Line ("xDSL") technology
enables digitally compressed video signals to be transmitted through existing
telephone lines to the home. In the event that any competing architecture or
technology were to limit or halt the deployment of coaxial or HFC systems, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Business--Competition."
COMPETING TECHNOLOGIES AND EVOLVING INDUSTRY STANDARDS
The market for high speed Internet access products is characterized by
competing technologies, evolving industry standards and frequent new product
introductions. Market acceptance of alternative wired technologies, such as
Integrated Services Digital Network ("ISDN") or xDSL, or wireless technologies,
such as DBS, could decrease the demand for the Company's products or render such
products obsolete if such alternatives are viewed as providing faster access,
greater reliability or improved cost-effectiveness. In particular, it is
possible that the perceived high speed access advantage provided by cable and
broadband wireless systems may be undermined by the need to share bandwidth,
which results in the reduction in individual throughput speeds. In addition, the
emergence or evolution of industry standards, through either adoption by
official standards committees or widespread use by cable system operators,
broadband wireless system operators or telcos, could require the Company to
redesign its products, resulting in delays in the introduction of such products.
For instance, the Company's products are not in full compliance with the DAVIC
specifications that are supported in Europe or the recently announced
preliminary versions of the MCNS specifications or IEEE standards. If such
standards do become widespread and the Company's products are not in compliance,
the Company's customers and potential customers may refuse to purchase the
Company's products, materially adversely affecting its business, operating
results and financial condition. Further, the Company's products are not
compatible with headend equipment and modems of other suppliers of broadband
Internet access products. As a result, potential customers who wish to purchase
broadband Internet access products from multiple suppliers may be reluctant to
purchase the Company's products. The rapid development of new competing
technologies and standards increases the risk that current or new competitors
could develop products that would reduce the competitiveness of the Company's
products. Market acceptance of new technologies or 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 the Company's business,
operating results and financial condition. See "Business--Industry Background"
and "Business--Competition."
NEED TO REDUCE COST OF CLIENT MODEMS
The list prices for the Series 2000 client modems currently range from
approximately $450 to $900, depending upon features and volume. Customers
wishing to purchase client modems generally must also purchase an Ethernet
adapter for their computer. These prices make the Company's products relatively
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expensive for the consumer electronics and the small office or home office
markets. Market acceptance of the Company's products, and the Company's future
success, will depend in significant part on reductions in the unit cost of the
Company's client modems. Certain of the Company's competitors currently offer
products at prices lower than those for the Company's modems. While the Company
has initiated cost reduction programs to offset pricing pressures on its
products, there can be no assurance that these cost reduction efforts will
continue to keep pace with competitive pricing pressures or lead to improved
gross margins. If the Company is unable to continue to obtain cost reductions,
its gross margins and profitability will be adversely affected. To address
continuing competitive and pricing pressures, the Company expects that it will
have to continue to reduce the cost of manufacturing client modems significantly
through design and engineering changes. Such changes may involve redesigning the
Company's products to utilize more highly integrated components and more
automated manufacturing techniques. The Company has entered into high-volume
purchase and supply agreements with Sharp and Itochu Corporation ("Itochu") and
may evaluate the use of low-cost third party suppliers and manufacturers to
further reduce costs. There can be no assurance that the Company will be
successful in redesigning its products or using more automated manufacturing
techniques, that a redesign can be made on a timely basis and without
introducing significant errors and product defects or that a redesign will
result in sufficient cost reductions to allow the Company to reduce the list
price of its client modems. Moreover, there can be no assurance that additional
volume purchase or manufacturing agreements will be available to the Company on
terms that the Company considers acceptable. To the extent that the Company
enters into a high-volume or long-term purchase or supply agreement and then
decides that it cannot use the products or services provided for in the
agreement, the Company's business, operating results and financial condition
could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Manufacturing."
LIMITED MANUFACTURING EXPERIENCE; SOLE SOURCE MANUFACTURING
The Company's future success will depend, in significant part, on its
ability to manufacture, or have others manufacture, its products successfully,
cost-effectively and in sufficient volumes. The Company maintains a limited
in-house manufacturing capability at its headquarters in Cupertino for
performing system integration and testing on all headend products and for
manufacturing small quantities of modems. The Company entered into an agreement
pursuant to which Sharp to date has been the exclusive OEM supplier through
Itochu of certain of the Company's client modems, including the substantial
majority of those utilized in the Series 2000. In the second quarter of 1997,
the Company did not receive the full shipment of modems anticipated from Sharp
because of technical delays in product integration. While these problems have
since been resolved, there can be no assurance that the Company will not
experience similar supply problems in the future from Sharp or any other
manufacturer. The Company is exploring the possibility of entering into supply
arrangements with other manufacturers to provide additional or alternative
sources of supply for certain of the Company's products, although there can be
no assurance that such arrangements will be entered into or that they will
provide for the prompt manufacture of products or subassemblies in quantities or
on terms required to meet the needs of the Company's customers. The Company has
had only limited experience manufacturing its products to date, and there can be
no assurance that the Company or Sharp or any other manufacturer of the
Company's products will be successful in increasing the volume of its
manufacturing efforts. The Company may need to procure additional manufacturing
facilities and equipment, adopt new inventory controls and procedures,
substantially increase its personnel and revise its quality assurance and
testing practices, and there can be no assurance that any of these efforts will
be successful. See "Business--Manufacturing."
DEPENDENCE ON COMPONENT AVAILABILITY AND KEY SUPPLIERS
The Company is dependent upon certain key suppliers for a number of the
components for its products. For example, the Company currently only has one
vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are
used in the Company's server and client modem products, and in past periods
these semiconductors have been in short supply. Recently, BroadCom announced a
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program whereby certain of its technological and product enhancements may be
made available to certain of the Company's competitors before making them
available to the Company. This could have the effect of putting the Company at a
competitive disadvantage with regard to time to market or cause the Company to
have to redesign its products if competitors influence changes in BroadCom's
products. Hitachi is the sole supplier of the processors used in certain of the
Company's modems. In addition, certain other components for products that the
Company has under development are currently only available from a single source.
There can be no assurance that delays in key components or product deliveries
will not occur in the future due to shortages resulting from a limited number of
suppliers, the financial or other difficulties of such suppliers or the possible
limitation in component product capacities due to significant worldwide demand
for such components. Any significant interruption or delay in the supply of
components for the Company's products or significant increase in the price of
components due to short supply or otherwise could have a material adverse effect
on the Company's ability to manufacture its products and, therefore, could have
a material adverse effect on its business, operating results and financial
condition. See "Business--Manufacturing."
DEPENDENCE ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT
The commercial market for products designed for the Internet and the TCP/IP
networking protocol has only recently begun to develop, and the Company's
success will depend in large part on increased use of the Internet. Critical
issues concerning the commercial use of the 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.
The adoption of the Internet for commerce and communications, particularly by
enterprises that have historically relied upon alternative means of commerce and
communications, generally requires the acceptance of a new way of conducting
business and exchanging information. In addition, the Company is dependent on
the growth of the use of the Internet by businesses, particularly for
applications that utilize multimedia content and thus require high bandwidth. If
the Internet as a commercial or business medium fails to develop or develops
more slowly than expected, the Company's business, operating results and
financial condition could be materially adversely affected. The recent growth in
the use of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers, telecommunications links and other components
forming the infrastructure of the Internet by ISPs and other organizations with
links to the Internet. Any perceived degradation in the performance of the
Internet as a whole could undermine the benefits of the Company's products.
Potentially increased performance provided by the products of the Company and
others is ultimately limited by and reliant upon the speed and reliability of
the Internet backbone itself. Consequently, the emergence and growth of the
market for the Company's products is dependent on improvements being made to the
entire Internet infrastructure to alleviate overloading and congestion. See
"Business-- Industry Background."
DEPENDENCE ON ACCEPTANCE OF ASYMMETRIC NETWORKING
The Company's products are designed to transmit data from the Internet in
the downstream direction (i.e., to the end-user) much more quickly than data is
transmitted in the upstream direction (i.e., from the end-user). This
"asymmetric" architecture has not been widely used and is relatively unproven in
computer networking. Certain networking protocols and standards, including the
TCP/IP protocol, were designed with the expectation that the network would be
symmetric, and the Company has spent considerable engineering resources to
enable its products to work with such protocols. There can be no assurance that
the Company's current or future products will be compatible with symmetric
standards or that errors will not occur in connecting the symmetric protocols
with the Company's asymmetric design. Because of this asymmetric design, certain
applications do not benefit from the connection to a high bandwidth cable
system. Computer applications that need to transmit data as quickly to the
Internet as from the Internet will not exhibit the performance improvements that
are only available to downstream data traffic, particularly if the upstream
traffic is sent via Plain Old Telephone Service ("POTS"). Certain applications
will not run fast enough in the upstream direction to be acceptable for some
users. As a result, some end-
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users may not perceive a significant benefit from the greater downstream
performance of the Company's products. There can be no assurance that potential
customers will consider the downstream performance benefits sufficient to
justify the purchase and installation costs of the Company's asymmetric
products. Failure of asymmetric networking to gain market acceptance, or any
delay in such acceptance, could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Industry
Background."
POSSIBLE NEED FOR ADDITIONAL FINANCING
In the past, the Company has required substantial amounts of capital to
design, develop, market and manufacture its products. The Company's future
capital requirements will depend on many factors, including, but not limited to,
the evolution of the market for broadband access systems, the market acceptance
of the Company's products, competitive pressure on the price of the Company's
products, the levels at which the Company maintains inventory, the levels of
promotion and marketing required to launch such products and attain a
competitive position in the marketplace, the extent to which the Company invests
in new technology and improvements on its existing technology, and the response
of competitors to the Company's products. While the Company believes that the
net proceeds of this offering, available bank borrowings, existing cash balances
and funds generated from operations, if any, will provide the Company with
sufficient funds to repay the Subordinated Notes and to finance its operations
for at least the next 12 months, to the extent that the funds generated by this
offering, together with existing resources, are insufficient to fund the
Company's activities over the long-term, the Company may need to raise
additional funds through public or private equity or debt financing or from
other sources. The sale of additional equity or convertible debt may result in
additional dilution to the Company's stockholders and such securities may have
rights, preferences or privileges senior to those of the Common Stock. To the
extent that the Company relies upon debt financing, the Company will incur the
obligation to repay the funds borrowed with interest and may become subject to
covenants and restrictions that restrict operating flexibility. No assurance can
be given that additional equity or debt financing will be available or that, if
available, it can be obtained on terms favorable to the Company or its
stockholders. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
RISKS OF PRODUCT DEFECTS, PRODUCT RETURNS AND PRODUCT LIABILITY
Products as complex as those offered by the Company frequently contain
undetected errors, defects or failures, especially when first introduced or when
new versions are released. In the past, such errors have occurred in the
Company's products and there can be no assurance that errors will not be found
in the Company's current and future products. The occurrence of such errors,
defects or failures could result in product returns and other losses to the
Company or its customers. Such occurrence could also result in the loss of or
delay in market acceptance of the Company's products, which could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's products generally carry a one year warranty
which includes factory and on-site repair services as needed for replacement of
parts. Due to the relatively recent introduction of the Series 2000 products,
the Company has limited experience with the problems that could arise with this
generation of products. In addition, the Company's purchase agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's purchase
agreements may not be effective as a result of federal, state or local laws or
ordinances or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the sale and support of the
Company's products entails the risk of such claims. A successful product
liability claim brought against the Company could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business-- Manufacturing."
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DEPENDENCE ON KEY PERSONNEL
The Company's success depends in significant part upon the continued
services of its key technical, sales and senior management personnel, including
the Company's President and Chief Executive Officer, Carl S. Ledbetter. Other
than Mr. Ledbetter, none of the Company's officers is a party to an employment
agreement with the Company. See "Management--Employment Agreement." Any officer
or employee of the Company can terminate his or her relationship with the
Company at any time. The Company's future success will also depend on its
ability to attract, train, retain and motivate highly qualified technical,
marketing, sales and management personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to attract
and retain key personnel. The loss of the services of one or more of the
Company's executive officers or key employees or the Company's failure to
attract additional qualified personnel could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business--Employees" and "Management."
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of rapid growth in net sales.
This growth has placed, and if it continues is expected to continue to place, a
significant strain on the Company's financial, management, operational and other
resources. There can be no assurance that the Company's management, personnel,
systems, procedures and controls will be adequate to support the Company's
existing and future operations. The Company's ability to manage its growth
effectively will require it to continue to expand its operating, manufacturing
and financial procedures and controls, to replace or upgrade its operational,
financial and management information systems and to attract, train, motivate,
manage and retain key employees. The Company has hired many key employees and
officers only recently, including its Chief Financial Officer, Vice President,
Engineering and Controller, and as a result, the Company's entire management
team has worked together for only a brief time. If the Company's executives are
unable to manage growth effectively, the Company's business, operating results
and financial condition could be materially adversely affected. See
"Management."
REGULATION OF THE COMMUNICATIONS INDUSTRY
The Company and its customers are subject to varying degrees of federal,
state and local regulation. For instance, the jurisdiction of the Federal
Communications Commission (the "FCC") extends to high speed Internet access
products such as those of the Company. The FCC has promulgated regulations that,
among other things, set installation and equipment standards for communications
systems. 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 cable, wireless and telco
services, and other terms on which cable, wireless and telco companies conduct
their business, may impede the Company's penetration of certain markets. Changes
in current or future laws or regulations which negatively impact the Company's
products and technologies, in the United States or elsewhere, could materially
and adversely affect the Company's business, operating results and financial
condition.
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products. The Company currently has two patents issued in the
United States, as well as pending patent applications in the United States,
Europe and Japan that relate to its network and modem technology and the
communication processes implemented in those devices. In the future, the Company
intends to seek additional United States and foreign patents on its technology.
There can be no assurance any of these patents will issue from any of the
Company's pending applications or applications in preparation or that any claims
allowed will be of sufficient scope or strength, or issue in sufficient
countries where the Company's products can be sold, to
15
<PAGE>
provide meaningful protection or any commercial advantage to the Company.
Moreover, any patents that have been or may be issued might be challenged. Any
such challenge could result in time consuming and costly litigation and result
in the Company's patents being held invalid or unenforceable. Furthermore, even
if the patents are not challenged or are upheld, third parties might be able to
develop other technologies or products without infringing any such patents.
The Company has entered into confidentiality and invention assignment
agreements with its employees, and non-disclosure agreements with certain of its
suppliers, distributors and customers in order to limit access to and disclosure
of its proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by the Company to protect its intellectual
property will prove sufficient to prevent misappropriation of the Company's
technology or to deter independent third-party development of similar
technologies. The laws of certain foreign countries may not protect the
Company's products or intellectual property rights to the same extent as do the
laws of the United States.
In the past, the Company has received, and in the future may receive,
notices from third parties claiming that the Company's products or proprietary
rights infringe the proprietary rights of third parties. The Company expects
that developers of cable and wireless modems will be increasingly subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows. Any such claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements might not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The Company has and in the future may license its patents or proprietary
rights for commercial or other reasons, to parties who are or may become
competitors of the Company. Further the Company may also elect to initiate
claims or litigation against third parties for infringement of the Company's
patents or proprietary rights or to establish the validity of the Company's
patents or proprietary right. The Company has sent notices to certain third
parties offering to license the Company's patents for products that may be
infringing the Company's patent rights. The Company has not yet determined if it
will assert any claims against these parties or others. There can be no
assurance that such notifications will not lead to potential litigation
initiated by the Company or related countersuits by third parties seeking to
challenge the Company's patents or asserting infringement by the Company. Such
litigation could be time consuming and costly and have a material adverse effect
on the Company's business, operating results and financial condition.
RISKS OF INTERNATIONAL SALES
To date, sales of the Company's products outside of the United States have
represented an insignificant portion of net sales. While the Company intends to
expand its operations in North America and Europe, this will require significant
management attention and financial resources. In order to gain market acceptance
internationally, the Company's products will have to be designed to meet
industry standards of foreign countries, such as the DAVIC specifications that
are supported in Europe. The Company has committed and continues to commit
resources to developing international sales and support channels. International
sales are subject to a number of risks, including longer payment cycles,
unexpected changes in regulatory requirements, import and export restrictions
and tariffs, the burden of complying with a variety of foreign laws, greater
difficulty in accounts receivable collection, potentially adverse tax
consequences, currency fluctuations and political and economic instability.
Additionally, the protection of intellectual property may be more difficult to
enforce outside of the United States. In the event the Company is successful in
expanding its international operations, the imposition of exchange or price
controls or other restrictions on foreign currencies could materially adversely
affect the Company's business, operating results and financial condition. If the
Company increases its international sales, its net
16
<PAGE>
sales may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
Upon completion of this offering, the Company's executive officers,
directors and greater than 5% stockholders (and their affiliates) will, in the
aggregate, beneficially own approximately 56.5% of the Company's outstanding
Common Stock (54.6% if the Underwriters' over-allotment option is exercised in
full). As a result, such persons, acting together, will have the ability to
control all matters submitted to stockholders of the Company for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and to control the
management and affairs of the Company. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company, impede a merger, consolidation, takeover or other
business combination involving the Company or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of the
Company, which in turn could have an adverse effect on the market price of the
Company's Common Stock. See "Management" and "Principal Stockholders."
RESTRICTIVE DEBT COVENANTS
Under the terms of the outstanding $5.5 Million Debenture, the Company is
subject to certain restrictive covenants which could adversely affect the
Company's operations. Under the $5.5 Million Debenture the Company is subject to
limitations on the amount of capital expenditures it may incur in any 12 month
period and may not declare dividends, retire any subordinated debt other than in
accordance with its terms, or distribute its assets to any stockholder as long
as the $5.5 Million Debenture remains outstanding. The $5.5 Million Debenture is
collateralized by substantially all the Company's assets. See "Certain
Transactions," "Description of Capital Stock--Convertible $5.5 Million
Debenture" and Note 5 to Notes to Financial Statements.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options and warrants and upon the
conversion of the $5.5 Million Debenture) in the public market after this
offering could adversely affect the market price of the Common Stock prevailing
from time to time and could impair the Company's ability to raise capital
through the sale of equity or debt securities. In addition to the 2,700,000
shares of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option), as of the date of this Prospectus, there will be
7,228,127 shares of Common Stock outstanding, all of which are restricted shares
("Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). As of such date, no Restricted Shares will be eligible for
sale in the public market. The 7,228,127 Restricted Shares will be available for
sale in the public market following the expiration of 180-day lock-up agreements
with the representatives of the Underwriters. In addition, under certain
circumstances, the $5.5 Million Debenture could automatically convert into
513,423 shares of Common Stock and the holders of warrants for 1,163,205 shares
of Common Stock can exercise such warrants at any time, but such shares could
not be sold until the expiration of the 180-day lock-up period following the
date of the Prospectus. See "Description of Capital Stock-- Convertible $5.5
Million Debenture" and "Description of Capital Stock--Warrants." Montgomery
Securities also may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, beginning six months after the date of this Prospectus the holders of
6,257,827 Restricted Shares, the holders of warrants for 1,148,937 shares of
Common Stock and the holder of the $5.5 Million Debenture are entitled to
certain rights with respect to registration of such shares for sale in the
public market. If such holders sell in the public market, such sales could have
a material adverse effect on the market price of the Company's Common Stock.
17
<PAGE>
Immediately after this offering, the Company intends to file a registration
statement covering shares of Common Stock subject to outstanding options under
the Company's Executive Officer Incentive Plan (the "Executive Officer Plan"),
1993 Equity Incentive Plan (the "1993 Plan") and 1996 Equity Incentive Plan (the
"1996 Plan") and reserved for issuance under the Company's 1997 Equity Incentive
Plan (the "1997 Plan") , the 1997 Directors Stock Option Plan (the "Directors
Plan") and the 1997 Employee Stock Purchase Plan (the "Purchase Plan"). Based on
the number of shares subject to outstanding options at June 30, 1997 and
currently reserved for issuance under all such plans, such registration would
cover approximately 4,244,935 shares. Such registration statement will
automatically become effective upon filing, but optionholders are subject to
180-day lock-up agreements. See "Shares Eligible for Future Sale."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $13.00 per share,
after deducting the estimated underwriting discount and offering expenses, are
estimated to be approximately $31,793,000. The primary purposes of this offering
are to repay the approximately $6.9 million principal amount of the Subordinated
Notes, obtain additional capital, create a public market for the Common Stock
and facilitate future access to public markets. Other than repayment of the
Subordinated Notes, the Company expects to use the net proceeds primarily for
working capital and other general corporate purposes. A portion of the net
proceeds also may be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. Accordingly,
the Company's management will retain broad discretion as to the allocation of
the proceeds of this offering. The failure of management to apply such funds
effectively could have a material adverse effect on the Company's business,
operating results and financial condition. See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS
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
stockholders. 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 acquisitions and 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 is also subject to certain provisions of Delaware law which could
have the effect of delaying, deterring or preventing a change in control of the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Company's certificate of incorporation and bylaws contain certain provisions
that, together with the ownership position of the officers, directors and their
affiliates, could discourage potential takeover attempts and make more difficult
attempts by stockholders to change management, which could adversely affect the
market price of the Company's Common Stock. See "Description of Capital Stock."
The Company's Board of Directors is classified into three classes of directors
serving staggered, three-year terms and has the authority, without action by the
Company's stockholders, to fix the rights and preferences and issue shares of
the Preferred Stock, and to impose various procedural and other requirements
that could make it more difficult for stockholders to effect certain corporate
actions. Any vacancy on the board of directors may be filled only by vote of the
majority of directors then in office.
18
<PAGE>
NO PRIOR MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering or that investors will be able to
sell the Common Stock should they desire to do so. The initial public offering
price will be determined by negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the price at
which the Common Stock will trade upon completion of this offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations, new products introduced by the
Company or its competitors, developments with respect to patents, copyrights or
proprietary rights, changes in financial estimates by securities analysts,
conditions and trends in the Internet and modem systems industries, general
market conditions and other factors. Further, the stock markets, and in
particular the Nasdaq National Market, have experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price earnings ratios substantially above historical levels. There can
be no assurance that these trading prices and price earnings ratios will be
sustained. These broad market factors may adversely affect the market price of
the Company's Common Stock. These market fluctuations, as well as general
economic, political and market conditions such as recessions, interest rates or
international currency fluctuations, may adversely affect the market price of
the Common Stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such company. Such litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's business,
operating results and financial condition.
NO DIVIDENDS
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future. The terms of the $5.5 Million Debenture prevent the Company
from paying any cash dividends for so long as the $5.5 Million Debenture remains
outstanding. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock in this offering will suffer immediate and
substantial dilution of $9.60 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised or that the $5.5 Million Debenture is converted into Common Stock,
there may be further dilution. See "Dilution."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered hereby are estimated to be $31,793,000 at an assumed
initial public offering price of $13.00 per share and after deducting the
estimated underwriting discount and offering expenses ($36,689,000 if the over-
allotment option is exercised in full). The primary purposes of this offering
are to repay the approximately $6.9 million principal amount of the Subordinated
Notes, obtain additional capital, create a public market for the Common Stock
and facilitate future access to public markets. Other than repayment of the
Subordinated Notes the Company expects to use the net proceeds primarily for
working capital and other general corporate purposes. See "Risk Factors--Broad
Management Discretion in Allocation of Proceeds." A portion of the proceeds may
also be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. In the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any acquisition of businesses,
products or technologies. Pending use of the net proceeds for the above
purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future. The terms of the $5.5 Million Debenture prevent the Company
from paying any cash dividends for so long as the $5.5 Million Debenture remains
outstanding.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1997, (ii) the pro forma capitalization as adjusted to give
effect to the item set forth in footnote (1) below and (iii) as adjusted to
reflect the sale and issuance of the 2,700,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $13.00 per share after
deducting the estimated underwriting discount and offering expenses, the
application of the estimated proceeds therefrom and the automatic conversion of
all outstanding shares of Preferred Stock into Common Stock upon closing of this
offering.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt(2).................................................... $ 6,237 $ 13,119 $ 6,237
------------- ------------- -------------
Stockholders' equity(3):
Convertible Preferred Stock, $0.001 par value per share: 18,000,000
shares authorized, actual and pro forma; 5,000,000 shares
authorized, as adjusted; 12,562,868 shares issued and
outstanding, actual and pro forma; no shares issued or
outstanding, as adjusted......................................... 13 13 --
Common Stock, $0.001 par value per share:
29,000,000 shares authorized, actual; 34,000,000 shares
authorized, pro forma; 100,000,000 shares authorized, as
adjusted; 2,574,542 shares issued and outstanding, actual and pro
forma; 9,928,127 shares issued and outstanding, as adjusted...... 2 2 18
Additional paid-in capital......................................... 27,070 27,070 58,860
Accumulated deficit................................................ (24,595) (24,595) (24,595)
------------- ------------- -------------
Total stockholders' equity....................................... 2,490 2,490 34,118
------------- ------------- -------------
Total capitalization........................................... $ 8,727 $ 15,609 $ 40,355
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Reflects the estimated net proceeds from the issuance of the Subordinated
Notes in September 1997.
(2) Includes the $5.5 Million Debenture, which is convertible into an aggregate
of 513,423 shares of Common Stock at the option of the holder at any time
and which automatically converts if (i) the gross proceeds to the Company
from this offering are at least $15.0 million, (ii) the public offering
price per share is at least equal to the Minimum Price and (iii) the closing
price of the Common Stock after this offering is equal to or greater than
the Minimum Price for any 90 consecutive calendar day period after this
offering. See Note 5 of Notes to Financial Statements.
(3) Does not include (i) 1,649,920 shares of Common Stock issuable upon exercise
of stock options outstanding as of June 30, 1997 at a weighted average
exercise price of $0.94 per share, (ii) 275,078 shares of Common Stock
available for future grant or issuance as of June 30, 1997 under the
Company's 1993 Equity Incentive Plan, 1996 Equity Incentive Plan and
Executive Officer Incentive Plan and an additional 270,000 shares reserved
for issuance in July and September 1997 under the Executive Officer
Incentive Plan, (iii) 2,075,000 shares of Common Stock available for future
grant or issuance under the Company's 1997 Equity Incentive Plan, 1997
Directors Stock Option Plan and 1997 Employee Stock Purchase Plan, (iv)
908,177 shares of Common Stock issuable upon the exercise of warrants
outstanding as of June 30, 1997 at a weighted average exercise price of
$5.12 per share, (v) 513,423 shares of Common Stock issuable as of June 30,
1997 upon the conversion of the $5.5 Million Debenture or (vi) warrants to
purchase an aggregate of 255,028 shares of Common Stock at an exercise price
of $10.91 per share to be issued in September 1997 in connection with an
agreement to issue the Subordinated Notes and the commitment of the Credit
Facility. See "Management--Director Compensation," "Management--Employee
Benefit Plans," "Description of Capital Stock" and Notes 5, 9 and 15 of
Notes to Financial Statements.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997,
assuming the conversion of all outstanding shares of Preferred Stock into shares
of Common Stock, was $1,990,000, or $0.28 per share of Common Stock. "Pro forma
net tangible book value per share" is determined by dividing the number of
outstanding shares of Common Stock into the net tangible book value of the
Company (total tangible assets less total liabilities). After giving effect to
the sale by the Company of the 2,700,000 shares of Common Stock offered hereby
(based upon an assumed initial public offering price of $13.00 per share and
after deducting the estimated underwriting discount and offering expenses), the
pro forma net tangible book value of the Company as of June 30, 1997 would have
been approximately $33,783,000, or $3.40 per share. This represents an immediate
increase in pro forma net tangible book value of $3.12 per share to existing
stockholders and an immediate dilution of $9.60 per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 13.00
Pro forma net tangible book value per share as of June 30,
1997..................................................... $ 0.28
Increase per share attributable to new investors........... 3.12
---------
Pro forma net tangible book value per share after offering... 3.40
---------
Dilution per share to new investors.......................... $ 9.60
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders and by the investors purchasing shares of Common Stock in
this offering, based upon an assumed initial public offering price of $13.00 per
share (before deducting the estimated underwriting discount and offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 7,228,127 72.8% $ 27,085,000 43.6% $ 3.75
New investors...................... 2,700,000 27.2 35,100,000 56.4 13.00
---------- ----- ------------- -----
Total............................ 9,928,127 100.0% $ 62,185,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
As of June 30, 1997, there were options outstanding to purchase a total of
1,649,920 shares of Common Stock at a weighted average exercise price of $0.94
per share, warrants outstanding to purchase a total of 908,177 shares of Common
Stock at a weighted average exercise price of $5.12 per share and 513,423 shares
of Common Stock issuable upon the conversion of the $5.5 Million Debenture. In
addition, in September 1997 the Company agreed to issue warrants to purchase an
aggregate of 255,028 shares of Common Stock at an exercise price of $10.91 per
share in connection with an agreement to issue the Subordinated Notes and the
commitment of the Credit Facility. To the extent that any of these options or
warrants is exercised or the $5.5 Million Debenture is converted, there will be
further dilution to new investors. See "Capitalization," "Description of Capital
Stock" and Notes 5, 9 and 15 of Notes to Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for each
of the three years in the period ended December 31, 1996 and the balance sheet
data as of December 31, 1995 and 1996 are derived from financial statements of
the Company that have been audited by Coopers & Lybrand LLP, independent
accountants, and are included elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1992 and 1993 and the balance
sheet data as of December 31, 1992, 1993 and 1994 are derived from unaudited
financial statements not included herein. The statement of operations data for
the six months ended June 30, 1996 and 1997 and the balance sheet data as of
June 30, 1997 are derived from unaudited financial statements of the Company
that include all adjustments, consisting of normal recurring accruals, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997 or any future period. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
STATEMENTS OF OPERATIONS DATA: 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................................ $ 436 $ 1,010 $ 668 $ 630 $ 2,962 $ 758 $ 4,905
Cost of sales.................................... 294 746 1,362 761 3,130 936 4,689
--------- --------- --------- --------- --------- --------- ---------
Gross profit (loss).......................... 142 264 (694) (131) (168) (178) 216
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development....................... 5 271 1,251 3,862 5,076 2,269 3,379
Sales and marketing............................ 67 133 348 390 1,786 389 2,264
General and administrative..................... 154 250 533 748 1,714 745 1,802
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses..................... 226 654 2,132 5,000 8,576 3,403 7,445
--------- --------- --------- --------- --------- --------- ---------
Loss from operations....................... (84) (390) (2,826) (5,131) (8,744) (3,581) (7,229)
Interest income and other expense, net........... 3 5 30 166 257 53 135
Interest expense................................. -- -- (101) (304) (28) (22) (159)
--------- --------- --------- --------- --------- --------- ---------
Net loss................................... $ (81) $ (385) $ (2,897) $ (5,269) $ (8,515) $ (3,550) $ (7,253)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per share(1)............................ $ (0.04) $ (0.14) $ (1.00) $ (1.82) $ (2.66) $ (1.11) $ (2.25)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share calculation(1).......... 1,900 2,762 2,894 2,891 3,202 3,209 3,218
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
BALANCE SHEET DATA: 1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments.................................... $ 545 $ 1,031 $ 1,426 $ 3,353 $ 6,886 $ 3,836
Working capital.................................. 361 484 1,129 3,149 6,944 6,445
Total assets..................................... 677 1,353 1,892 4,586 10,539 11,479
Long-term debt................................... -- 604 2,108 228 472 6,237
Total stockholders' equity (deficit)............. 369 1 (708) 3,661 7,709 2,490
</TABLE>
- ------------------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net loss per share.
23
<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 RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
OVERVIEW
Hybrid is a broadband access equipment company that designs, develops,
manufactures and markets cable and wireless systems that provide high speed
access to the Internet and corporate intranets for both businesses and
consumers. The Company's products remove the bottleneck over the "last mile"
connection to the end-user which causes slow response time for those accessing
bandwidth-intensive information over the Internet or corporate intranets.
Hybrid's Series 2000 product line consists of secure headend routers, cable and
wireless modems and management software for use with either cable TV or wireless
transmission facilities.
From its inception in June 1990 until September 1996, the Company focused on
the design, development, manufacturing and market introduction of the first two
generations of Hybrid's Series 1000 ("Series 1000") product line. These product
generations offered 5 and 10 Mbps access speeds for downstream data. In October
1996, the Company introduced its third generation product line, the Series 2000,
which provides 30 Mbps downstream access speeds. During the three years ended
December 31, 1996 and six months ended June 30, 1997, the Company sold a limited
number of PoPs and cable modems from both product series, which generated an
aggregate of $9,165,000 in net sales. The Company expects to generate
substantially all of its future sales from its Series 2000 products,
enhancements to these products, new products and related support and networking
services. The Company recognizes revenue upon shipment of products and accrues
for warranty costs at the time of shipment. To date, net sales include
principally product sales and, to a lesser extent, support and networking
services.
The Company sells its products primarily in the United States, and markets
its products to a variety of customers, including cable system operators,
broadband wireless system operators, ISPs and certain communications equipment
resellers. Historically, a small number of customers has accounted for a
substantial portion of the Company's net sales. Although the Company has
expanded its customer base, the Company expects that a limited number of
customers will continue to account for a substantial portion of the Company's
net sales for the foreseeable future. As a result, the Company has experienced,
and expects to continue to experience, significant fluctuations in its results
of operations on a quarterly and an annual basis. If orders from significant
customers are delayed, cancelled or otherwise fail to materialize in any
particular period, the Company could experience significant operating losses in
such period. Further, the Company's customers include companies in the early
stage of development or in need of capital to upgrade or expand their services.
Accordingly, in order to address the needs and competitive factors facing the
emerging broadband access market, the Company on occasion has sold its products
to customers under extended payment, promotional pricing, or other terms which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Customer Concentration,"
"Risk Factors--Inexperience in Emerging Market," "Risk Factors--Dependence on
Broadband Wireless System Operators" and "Risk Factors--Competition."
The market for high speed network connectivity products and services is
intensely competitive and is characterized by rapid technological change, new
product development and product obsolescence, evolving industry standards and
significant price erosion over the life of a product, and the Company has
experienced and expects to continue to experience pressure on its unit average
selling prices ("ASPs"). While the Company has initiated cost reduction programs
to offset pricing pressures on its products, there
24
<PAGE>
can be no assurance that these cost reduction efforts will continue to keep pace
with competitive price pressures or lead to improved gross margins. If the
Company is unable to continue to reduce costs, its gross margins and
profitability will be adversely affected. The Company's gross margins are also
impacted by the sales mix of PoPs and modems. The Company's single-user modems
generally have lower margins than its multi-user modems, both of which have
lower margins than the Company's headends. The Company anticipates that, in the
near term, the sales mix of modems will be heavily weighted towards single-user
modems. As a result, gross margins could be adversely affected in the near term.
See "Risk Factors--Need to Reduce Cost of Client Modems," "Risk
Factors--Competition" and "Risk Factors--Limited Manufacturing Experience; Sole
Source Manufacturing."
The Company incurred net losses for the years ended December 31, 1994, 1995
and 1996 and the first six months of 1997 of $2,897,000, $5,269,000, $8,515,000
and $7,253,000, respectively. As a result, the Company had an accumulated
deficit of $24,595,000 as of June 30, 1997. The Company expects to increase its
capital expenditures, as well as its research and development and other
operating expenses, in order to support and expand the Company's operations. As
a result, the Company expects to incur losses for the foreseeable future. See
"Risk Factors--Limited Operating History; History of Losses," "Risk Factors--
Fluctuations in Operating Results; Absence of Significant Backlog; Continuing
Decline of Average Selling Prices" and "Risk Factors--Lengthy Sales Cycle."
As of December 31, 1996, the Company had approximately $8,516,000 in gross
deferred tax assets comprised primarily of net operating loss carryforward and
research and development tax credits. The Company believes that, based on a
number of factors, there is sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through 1997
and accordingly, will not realize any portion of its deferred tax assets through
1997. In addition, the utilization of net operating loss carry forwards may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The Company will continue to assess the realizability of the deferred tax assets
based on actual and forecasted operating results. See Note 10 of Notes to
Financial Statements.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
the items in the Company's statements of operations for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................. 203.9 120.8 105.7 123.5 95.6
--------- --------- --------- --------- ---------
Gross margin.............................................. (103.9) (20.8) (5.7) (23.5) 4.4
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................................... 187.3 613.0 171.4 299.3 68.9
Sales and marketing......................................... 52.1 61.9 60.3 51.3 46.2
General and administrative.................................. 79.8 118.7 57.8 98.3 36.7
--------- --------- --------- --------- ---------
Total operating expenses.................................. 319.2 793.6 289.5 448.9 151.8
--------- --------- --------- --------- ---------
Loss from operations.................................... (423.1) (814.4) (295.2) (472.4) (147.4)
Interest income and other expense, net...................... 4.5 26.3 8.7 7.0 2.7
Interest expense............................................ (15.1) (48.2) (1.0) (2.9) (3.2)
--------- --------- --------- --------- ---------
Net loss................................................ (433.7)% (836.3)% (287.5)% (468.3)% (147.9)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET SALES. Net sales increased to $4,905,000 for the first six months of
1997, compared to net sales of $758,000 for the same period in 1996. The
significant growth in net sales was primarily due to the introduction of the
Series 2000 product line in October 1996. For the first six months of 1997,
broadband wireless system operators accounted for 52.6% of net sales, ISPs
accounted for 25.1% of net sales and cable system operators accounted for 22.3%
of net sales. International sales accounted for 9.2% and 5.4% of net sales for
the first six months of 1997 and 1996, respectively. The Company had two
customers that accounted for 21.2% and 11.2%, respectively, of net sales during
the first six months of 1997. The Company had three customers that accounted for
55.7%, 17.9% and 10.3%, respectively, of net sales during the first six months
of 1996.
GROSS PROFIT. Gross margin was 4.4% and negative 23.5%, for the first six
months of 1997 and 1996, respectively. The improvement in gross margin was
primarily due to the shift in sales mix from the lower margin Series 1000
products to the higher margin Series 2000 products, lower per unit manufacturing
costs and greater absorption of overhead.
RESEARCH AND DEVELOPMENT. Research and development expenses include ongoing
headend, software and cable modem development expenses, as well as design
expenditures associated with product cost reduction programs and improving the
ability to manufacture its existing products. Research and development expenses
were $3,379,000 and $2,269,000 during the first six months of 1997 and 1996,
respectively, representing 68.9% and 299.3% of net sales, respectively. Research
and development expenses grew in absolute dollars as a result of increased
staffing and associated engineering costs related to new and existing product
development. The Company intends to continue to increase its investment in
research and development programs in future periods, focusing on cost
improvement, software enhancements and wireless technologies.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related payroll costs of sales and marketing personnel,
commissions, advertising, promotions and travel. Sales and
26
<PAGE>
marketing expenses were $2,264,000 and $389,000 during the first six months of
1997 and 1996, respectively, representing 46.2% and 51.3% of net sales,
respectively. The increase in sales and marketing expenses in absolute dollars
was principally due to increased headcount and related payroll costs, increased
commissions as a result of higher net sales and increased costs for marketing
and promoting the Company's Series 2000 product line. The Company expects sales
and marketing expenses to increase in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of executive personnel salaries, travel expenses, legal fees and costs
of outside services. General and administrative expenses were $1,802,000 and
$745,000 during the first six months of 1997 and 1996, respectively,
representing 36.7% and 98.3% of net sales, respectively. The increase in
absolute dollars was due to increased headcount and related payroll costs.
INTEREST INCOME (EXPENSE). The Company incurred net interest expense during
the first six months of 1997 of $24,000 and earned interest income of $31,000
during the first six months of 1996. Net interest expense incurred during the
first six months of 1997 was the result of the Company's use of capital lease
financing to fund a majority of its capital expenditures, as well as loans
obtained to support working capital requirements. Net interest income earned
during the first six months of 1996 was primarily due to higher cash balances as
a result of the issuance of Preferred Stock in December 1995 and June 1996,
offset in part by the interest expense incurred on outstanding capital lease
obligations.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales were $2,962,000 and $630,000 in 1996 and 1995,
respectively. The increase in net sales was due primarily to the introduction of
the Series 2000 product line in October 1996.
GROSS PROFIT. Gross margin improved to negative 5.7% in 1996 compared to
negative 20.8% in 1995. The improvement in gross margin was primarily
attributable to the introduction of the Series 2000 product line, which
generally has higher gross margins than the Series 1000 product line, and to the
increase in net sales, which allowed for greater absorption of overhead.
RESEARCH AND DEVELOPMENT. Research and development expenses were $5,076,000
and $3,862,000 for 1996 and 1995, respectively, representing 171.4% and 613.0%
of net sales, respectively. The increase in research and development expenses in
absolute dollars during 1996 was due to increased headcount and related labor
costs, increased cost of development material to support product development and
depreciation expenses associated with capital purchases for product testing.
SALES AND MARKETING. Sales and marketing expenses were $1,786,000 and
$390,000 for 1996 and 1995, respectively, representing 60.3% and 61.9% of net
sales, respectively. The increase in sales and marketing expenses in absolute
dollars during 1996 was principally due to increased headcount for staff level
positions, the hiring of the Company's vice presidents of sales and marketing,
increased commissions as a result of higher net sales and increased costs for
marketing and promoting the Company's products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,714,000 and $748,000 for 1996 and 1995, respectively, representing 57.8% and
118.7% of net sales, respectively. The increase in general and administrative
expenses in absolute dollars during 1996 was due to increased allowances for
doubtful accounts, higher legal costs to prosecute patents, and increased
headcount and related personnel costs.
INTEREST INCOME (EXPENSE). During 1996, the Company had net interest income
of $229,000 compared to net interest expense of $138,000 in 1995. The increase
in 1996 compared to 1995 was primarily due to higher cash balances as a result
of the issuance of Preferred Stock in June 1996. The interest income earned
during 1996 was offset in part by interest expense incurred on outstanding
capital lease obligations.
27
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES. Net sales decreased slightly to $630,000 for 1995 as compared to
$668,000 for 1994. Sales in both years consisted principally of sales of the
Series 1000 products. The Company's customers initially deployed these products
in trials in order to assess the Company's technology for use in cable or
wireless applications.
GROSS PROFIT. Gross margin improved to negative 20.8% in 1995 compared to
negative 103.9% in 1994. The improvement in gross margin was primarily
attributable to increased units sold which allowed for greater absorption of
overhead.
RESEARCH AND DEVELOPMENT. Research and development expenses were $3,862,000
and $1,251,000 in 1995 and 1994, respectively, representing 613.0% and 187.3% of
net sales, respectively. The increase in research and development expenses in
absolute dollars was primarily due to increased personnel costs and materials
costs related to the acceleration of the design and development of the Series
2000 products.
SALES AND MARKETING. Sales and marketing expenses were $390,000 and
$348,000 in 1995 and 1994, respectively, representing 61.9% and 52.1% of net
sales, respectively. The increase in sales and marketing expenses in absolute
dollars was principally due to increased commissions as a result of higher
sales, and increased headcount.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$748,000 and $533,000 in 1995 and 1994, respectively, representing 118.7% and
79.8% of net sales, respectively. The increase in general and administrative
expenses was primarily due to increased use of outside consultants, higher legal
expenses to prosecute patents and higher payroll costs related to increased
staffing.
INTEREST INCOME (EXPENSE). The Company incurred interest expenses in 1995
and 1994 of $138,000 and $71,000, respectively. The amounts incurred for both
periods were a result of the Company's use of capital lease financing to fund a
majority of it capital expenditures, as well as loans obtained to support
working capital requirements.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for the six quarters ended June 30, 1997, as well as such data
expressed as a percentage of net sales. The unaudited data has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
Prospectus, and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information for the
periods presented. Such statement of operations data should be read in
conjunction with the Financial Statements of the Company and related Notes
thereto appearing elsewhere in this Prospectus. The operating results for any
quarter are not indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. $ 303 $ 455 $ 495 $ 1,709 $ 1,852 $ 3,053
Cost of sales............................. 408 528 666 1,528 1,974 2,715
----------- --------- --------- --------- --------- ---------
Gross profit (loss)................... (105) (73) (171) 181 (122) 338
----------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development................ 1,102 1,167 1,488 1,319 1,726 1,653
Sales and marketing..................... 103 286 565 832 1,274 990
General and administrative.............. 308 437 451 518 1,233 569
----------- --------- --------- --------- --------- ---------
Total operating expenses.............. 1,513 1,890 2,504 2,669 4,233 3,212
----------- --------- --------- --------- --------- ---------
Loss from operations................ (1,618) (1,963) (2,675) (2,488) (4,355) (2,874)
Interest income and other expense, net.... 34 19 93 111 87 48
Interest expense.......................... (5) (17) -- (6) (12) (147)
----------- --------- --------- --------- --------- ---------
Net loss............................ $ (1,589) $ (1,961) $ (2,582) $ (2,383) $ (4,280) $ (2,973)
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Net loss per share(1)..................... $ (0.50) $ (0.61) $ (0.80) $ (0.75) $ (1.33) $ (0.92)
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Shares used in per share
calculations(1)......................... 3,196 3,223 3,205 3,186 3,198 3,239
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 134.7 116.0 134.5 89.4 106.6 88.9
----------- --------- --------- --------- --------- ---------
Gross margin............................ (34.7) (16.0) (34.5) 10.6 (6.6) 11.1
----------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development................ 363.7 256.5 300.6 77.2 93.2 54.2
Sales and marketing..................... 34.0 62.9 114.2 48.7 68.8 32.4
General and administrative.............. 101.6 96.0 91.1 30.3 66.6 18.6
----------- --------- --------- --------- --------- ---------
Total operating expenses.............. 499.3 415.4 505.9 156.2 228.6 105.2
----------- --------- --------- --------- --------- ---------
Loss from operations................ (534.0) (431.4) (540.4) (145.6) (235.2) (94.1)
Interest income and other expense, net.... 11.2 4.2 18.8 6.7 4.7 1.6
Interest expense.......................... (1.6) (3.8) -- (0.6) (0.7) (4.8)
----------- --------- --------- --------- --------- ---------
Net loss............................ (524.4)% (431.0)% (521.6)% (139.5)% (231.2)% (97.3)%
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net loss per share.
29
<PAGE>
The decrease in gross margin for the quarter ended March 31, 1997 compared
to the quarter ended December 31, 1996 was due to lower ASPs in the first
quarter of 1997 and increased allocation of service costs associated with
expanded sales of the Series 2000 products, to cost of sales to support sales of
Series 2000 products. The decrease in operating expenses for the quarter ended
June 30, 1997 as compared to the quarter ended March 31, 1997 was primarily due
to lower charges to the provision for doubtful accounts, decreased promotion
costs and lower engineering material costs.
The Company has experienced, and expects to continue to experience,
significant fluctuations in its results of operations on a quarterly and an
annual basis. Historically, the Company's quarterly net sales have been
unpredictable due to a number of factors. Factors that have influenced and may
continue to influence the Company's results of operations in a particular period
include the size and timing of customer orders and subsequent shipments,
particularly with respect to the Company's headend equipment, 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 cable, wireless and
telecommunications industries, competitive pricing pressures, accuracy of
customer forecasts of end-user demand, changes in the Company's operating
expenses, personnel changes, quality control of products sold, regulatory
changes, capital spending, delays of payments by customers and general economic
conditions. In addition, the inability to obtain components from suppliers or
manufacturers has adversely affected the Company's results in the past, and may
adversely affect the Company's results of operations in the future. For example,
in the second quarter of 1997, the Company did not receive the full shipment of
modems anticipated from Sharp, its primary modem manufacturer, because of
technical delays in product integration. As a result, the Company was unable to
fill all customer orders for that quarter. While such problems have since been
resolved, there can be no assurance that the Company will not experience similar
supply problems in the future with respect to Sharp or any other supplier or
manufacturer.
The timing and volume of customer orders are difficult to forecast because
cable and wireless companies typically require delivery of products within 30
days. A substantial majority of the Company's net sales are booked and shipped
in the same quarter. Accordingly, the Company has a limited backlog of orders
and net sales for any future quarter are difficult to predict. Further, sales
are generally made pursuant to standard purchase orders, which can be
rescheduled, reduced or cancelled with little or no penalty. Historically, a
substantial majority of the Company's net sales in a given quarter have been
recorded in the third month of the quarter, with a concentration of such net
sales in the last two weeks of the quarter. Because of the relatively large
dollar size of the Company's typical transaction, any delay in the closing of a
transaction can have a significant impact on the Company's operating results for
a particular period. See "Risk Factors--Lengthy Sales Cycle."
Historically, ASPs in the cable and broadband wireless systems industry have
decreased over the life of individual products and technologies. In the past,
the Company has experienced decreases in unit ASPs of each of its products. The
Company anticipates that ASPs of its products will continue to decrease, which
will cause continuing downward pressure on the gross margins for these products.
The Company currently believes that it is likely to experience net losses for
the foreseeable future. The Company's gross margins are also impacted by the
sales mix of PoPs and modems. Sales of the Company's single-user modems
generally have lower margins than the multi-user modems, both of which are lower
than margins on the Company's PoPs. The Company anticipates that in the near
term, the sales mix of modems will be heavily weighted towards single-user
modems. See "Risk Factors--Need to Reduce Cost of Client Modems."
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations primarily through a
combination of private debt and equity and equipment lease financing. As of June
30, 1997, the Company had working capital of $6,445,000, including $3,836,000 in
cash and cash equivalents, as compared to working capital of $6,944,000 and
$6,886,000 in cash and cash equivalents as of December 31, 1996. The decrease in
cash and cash
30
<PAGE>
equivalents during the first six months of 1997 was primarily due to support for
the growth in accounts receivable and increased operating expenditures.
The Company has had significantly negative cash flows from operating
activities in each quarterly period to date. Cash used in operating activities
during 1994, 1995 and 1996 and the first six months of 1997 was $2,642,000,
$3,339,000, $8,577,000 and $9,673,000, respectively. Cash used in operating
activities during 1994, 1995 and 1996 was primarily the result of net losses.
For the first six months of 1997, cash used in operating activities was the
result of operating losses of $7,253,000, the increase in accounts receivable of
$2,548,000 as a result of higher net sales made late in the quarter and extended
payment terms given to customers and the increase in prepaid expenses of
$231,000 primarily due to the Company issuing a letter of credit to fund modem
orders placed with Sharp.
Cash used in investing activities during 1994 and 1995 and the first six
months of 1997 was $417,000, $608,000 and $284,000, respectively. Cash used in
investing activities during 1994 and 1995 and the first six months of 1997 was a
result of purchases of short term investments and purchases of property and
equipment. Cash provided by investing activities during 1996 was $143,000 and
was primarily due to proceeds from short-term investments offset in part by
purchases of equipment. Aggregate capital expenditures for property and
equipment during 1994, 1995 and 1996 and the first six months of 1997 were
$218,000, $295,000, $321,000 and $269,000, respectively. The Company has funded
and expects to continue to fund a substantial portion of its property and
equipment expenditures from a variety of sources including direct vendor leasing
programs and third party commercial leasing arrangements.
Cash provided by financing activities during 1994, 1995 and 1996 and the
first six months of 1997 was $3,255,000, $5,583,000, $12,457,000 and $6,907,000,
respectively. During 1994 and 1996, cash provided by investing activities
resulted principally from net proceeds from the issuance of notes payable and
the sale of Preferred Stock. Cash provided by financing activities during 1995
resulted principally from net proceeds from the sale of Preferred Stock. During
the first six months of 1997, cash provided by financing activities resulted
primarily from net proceeds from the sale of Preferred Stock and the $5.5
Million Debenture.
The Company's principal source of liquidity at June 30, 1997 was cash and
cash equivalents of $3,836,000. To provide additional working capital, in
September 1997 the Company entered into an agreement to obtain approximately
$7.9 million in financing through the sale of the Subordinated Notes, which are
to be repaid with the proceeds of this offering. In September 1997, the Company
also entered into a commitment for a $4.0 million Credit Facility. The Credit
Facility, which expires in September 1998, will bear interest at the prime rate
and will be collateralized by substantially all of the Company's assets. The
Company believes that the net proceeds of this offering, available bank
borrowings, existing cash balances and funds generated from operations, if any,
will provide the Company with sufficient funds to repay the Subordinated Notes
and to finance its operations for at least the next 12 months. However, the
Company may require additional funds to support its working capital requirements
or for other purposes, and may seek to raise such additional funds through the
sale of public or private equity or debt financing or from other sources. The
sale of additional equity or convertible debt securities may result in
additional dilution to the Company's stockholders. No assurance can be given
that additional financing will be available or that, if available, such
financing can be obtained on terms favorable to the Company or its stockholders.
See "Risk Factors--Possible Need for Additional Financing."
31
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
THE COMPANY
Hybrid Networks, Inc. is a broadband access equipment company that designs,
develops, manufactures and markets cable and wireless systems that provide high
speed access to the Internet and corporate intranets for both businesses and
consumers. The Company's products remove the bottleneck over the "last mile"
connection to the end-user which causes slow response time for those accessing
bandwidth-intensive information over the Internet or corporate intranets. The
Company's customers consist primarily of cable system operators, broadband
wireless system operators, ISPs and other companies that provide broadband
networking systems or services to business and residential users. Hybrid's
Series 2000 product line consists of secure headend routers, cable or wireless
modems and management software for use with either cable TV or wireless
transmission facilities. Because the substantial majority of cable and wireless
transmission facilities are not capable of two-way transmissions, the Series
2000 has been designed to utilize a variety of return paths, including the
public switched telephone network. The Series 2000 system also features a router
to provide corporate telecommuters and others in remote locations secure access
to their files on the corporate intranet. The Series 2000 is capable of
supporting a combination of speeds, media and protocols in a single cable or
wireless system, providing system operators with flexible, scalable and
upgradeable solutions that allow them to offer cost-effective broadband access
to their subscribers.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND INTRANETS AND DEMAND FOR HIGHER SPEED ACCESS
The Internet has become an increasingly important source of information for
businesses and consumers. The Internet's importance results from a variety of
factors, including increased email usage, the emergence of the World Wide Web
and the proliferation of multimedia content, such as graphics, images, video and
audio, that can be accessed online. Demand for bandwidth-intensive content,
combined with the inherent technical difficulties of delivering large amounts of
data over existing copper wire telephone infrastructure, has resulted in slow
response times and increasing frustration for many users of the Internet. Demand
for higher bandwidth connections to the Internet is continuing to grow as the
Internet becomes a more attractive outlet for commercial applications utilizing
multimedia content and as the number of Internet users increases.
A rapidly growing segment of the Internet user market is the business
community. In a 1997 survey conducted by American Management Association
International and Tierney & Partners, 27% of businesses surveyed reported
moderate to heavy Internet usage. This number is expected to increase to 64% by
1999. Businesses of all sizes, including small offices/home offices ("SOHOs"),
are using the Internet and corporate intranets to communicate with co-workers
and customers via email, gather information, collaborate with others and provide
support. Larger companies are increasingly using the Internet and intranets to
provide telecommuters, traveling employees and employees in remote offices with
a means of improved communication and remote access to corporate networks. In
the 1997 American Internet Users Survey, FIND/SVP estimated that the number of
workers telecommuting has grown to 11 million in 1997. Despite this growth, many
companies do not provide Internet and intranet access as a business tool for
their employees because of concerns regarding speed, cost of broadband access
and security of the transmission and databases.
The consumer market also constitutes a large segment of potential individual
Internet end-users for broadband access providers. According to a report
released in November 1996 by Jupiter Communications, there were approximately
14.7 million households with Internet access in the United States in 1996, and
32
<PAGE>
this number is expected to increase to 36.0 million by 2000. While the consumer
market segment represents a potentially large number of subscribers for an
Internet access provider, this market is generally more price-sensitive than the
business community. However, an emerging segment of the consumer market is
comprised of technologically savvy consumers who desire high speed Internet
access and are willing to pay more than the typical residential end-user to
obtain these benefits.
ACCESS OVER TRADITIONAL TELEPHONE INFRASTRUCTURE
Telcos and ISPs have been delivering Internet and intranet access over the
existing copper telephone wire infrastructure for many years through symmetrical
technologies such as POTS, Integrated Services Digital Network ("ISDN") and T1.
Even though providers of Internet service have been improving the speed and
quality of their connections to the Internet, the "last mile" connection to the
end-user still predominantly consists of low speed analog transmissions.
Improvements in modem chip technology have to date driven the increase in the
rate at which data is transmitted over analog POTS copper wire. Currently, most
new computers contain pre-installed 28.8 or 33.6 Kbps modems. The new generation
of 56 Kbps modems, which was recently introduced, but has not yet been
standardized, does not perform consistently at 56 Kbps and remains insufficient
for rapid downloading of bandwidth-intensive multimedia content from the
Internet. ISDN service, which requires special equipment at both the user's
location and the telephone network, can achieve digital transmission at rates up
to 128 Kbps over copper wire. However, despite ISDN's introduction in the early
1980s, the complexity of installing ISDN has limited its deployment to date.
Historically, telcos have also deployed another digital service known as "T1"
which provides data rates of 1.5 Mbps. However, T1 connections can suffer from
distance limitations, are dependent on expensive conditioning of the copper
wire, carry costly monthly charges for the end-user and generally have been
limited to use by businesses.
The newest technologies introduced to increase bandwidth over copper wire
are grouped by the generic acronym "xDSL" (Digital Subscriber Line). In its
various forms, xDSL will be capable of data transmission speeds over copper wire
of 1.5 to 9 Mbps (excluding IDSL) downstream and 16 Kbps to 2 Mbps upstream
(excluding VDSL, which requires very short loop lengths). The downstream data
rate of xDSL is limited by the length of the copper wire (i.e. the distance
between a user and the telco central office) and the diameter of the copper
wire. xDSL is a point-to-point circuit technology, which currently limits its
scalability, and xDSL systems perform poorly on badly degraded copper wire or in
a noisy environment (because of crosstalk interference). xDSL is still expensive
for telcos to implement, and only limited deployments of xDSL service have been
made to date.
BROADBAND ACCESS
Broadband access technology enables cable system operators and broadband
wireless system operators to offer a cost-effective high speed Internet access
solution. Broadband access systems can deliver data at up to 30 Mbps through a
standard cable or wireless TV channel. Depending on the system design, a
subscriber shares access with others and typically receives data at speeds
ranging from 1.5 Mbps up to a maximum of 10 Mbps, depending upon the number and
activity level of concurrent users. In the last few years, certain cable system
operators and broadband wireless system operators have begun conducting limited
broadband modem trials, and commercial deployments are currently underway in
several markets. Paul Kagan Associates forecast that residential penetration of
cable modems will reach 200,000 subscribers in the United States by the end of
1997 and grow at a compounded annual growth rate of 120% to 4.7 million
subscribers by the end of 2001.
Wired cable systems in the United States pass by approximately 95% of
households and approximately 40% of businesses. At the end of 1996,
approximately 90% of these cable systems were built primarily utilizing coaxial
cable that can deliver only downstream transmission from the cable headend to
the end-user. In order for such one-way cable systems to provide broadband
Internet access, a separate return path, such as a telephone line, is required
to transmit data upstream to the Internet. Upgrading the existing one-
33
<PAGE>
way cable infrastructure to hybrid fiber coax ("HFC") to enable two-way data
transmission is possible but expensive. Although many large cable system
operators have communicated aggressive schedules to upgrade their systems to
enable two-way transmission, only 10% of wired cable systems in the United
States had been upgraded to two-way by the end of 1996. As a result, the
majority of cable networks require an alternative upstream path. The combination
of a fast downstream path and a slow upstream path, representing an asymmetric
network, conforms to the typical pattern for Internet usage, which involves
small amounts of data flowing from the user to the network (e.g., key strokes,
mouse clicks and packet acknowledgments) followed by much larger amounts of data
being delivered from the network to the user (e.g., web pages with graphics,
images, audio and video). Because asymmetric networks enable service providers
to optimize frequency usage, these networks are well suited for both telephone
and two-way cable configurations. To date, the principal cable modem
specifications or standards under development (MCNS, DAVIC and IEEE) are based
upon asymmetric systems.
Wireless cable system operators, operating in the MDS and MMDS frequencies,
historically have served rural and other areas where it is not economical to
install coaxial or HFC cable, although there are wireless cable system operators
licensed in metropolitan areas. These operators, who are in competition with
direct broadcast satellite ("DBS") and cable TV providers, are in search of new
revenue streams and have been investigating high speed Internet access as a
potential new area for business. Wireless cable systems, which require an
unimpeded line of sight from the transmitting antenna to the receiver, usually
comprise an omni-directional transmitting antenna placed on top of a tall
building or mountain. One advantage of wireless systems is that they are able to
reach a higher percentage of businesses than residences because businesses tend
to have taller buildings with fewer line of sight obstructions, such as foliage.
In addition to providing wireless cable television, wireless system operators
are moving towards becoming broadband Internet service providers. Educational
institutions with instructional TV fixed service ("ITFS") licenses, low power TV
("LPTV") broadcasters (UHF or VHF frequencies), licensees of the recently
auctioned Wireless Communications Services ("WCS") frequencies and future
potential licensees of LMDS are evaluating the possibility of using a portion of
their spectrum for high speed Internet access. As with wired cable, asymmetric
systems are well suited for wireless systems which currently are authorized to
transmit digital content only in the downstream direction.
As demand for Internet access over cable and broadband wireless systems
increases, ISPs are also seeking alternatives for providing broadband access, as
well as enhancing their product offerings and additional revenue streams.
Traditional ISPs face competition from new high speed service ISPs, such as At
Home Corporation. To address this competition, many ISPs are seeking to offer
high speed, cost-effective Internet access service to business and residential
users through strategic relationships with cable and wireless system operators.
Further, businesses are increasingly demanding high speed broadband access in
order to facilitate access to their corporate intranets and networks by
telecommuters and employees in remote offices.
The following table provides a comparison of the minimum time for
downloading typical web content over various types of technology currently
available (See Note 1).
<TABLE>
<CAPTION>
CABLE
POTS ISDN T1 XDSL MODEMS
CONTENT FILE SIZE 28.8 KBPS 128 KBPS 1.5 MBPS 1.5-9MBPS 10MBPS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Typical Web Page 64 Kbytes 17.8 sec 4.0 sec 0.3 sec 0.1-0.3 sec 0.1 sec
Audio Clip 1.0 Mbytes 4.6 min 1.0 min 5.3 sec 0.9-5.3 sec 0.8 sec
Video Clip 3.2 Mbytes 14.8 min 3.3 min 17.1 sec 2.8-17.1 sec 2.6 sec
Full Screen Video 11.0 Mbytes 50.9 min 11.5 min 58.7 sec 9.8-58.7 sec 8.8 sec
</TABLE>
(1) All of the download calculations were determined assuming the entire
bandwidth is available for data and does not include overhead. Actual
download times will vary.
34
<PAGE>
Internet and intranet access services currently provided by telephone
companies are generally slow, expensive or not widely available. Further, due to
increased competition, cable and wireless system operators are seeking new
revenue opportunities provided by broadband Internet access. Currently, ISPs,
cable operators and broadband wireless operators possess the basic
infrastructure but lack the enabling technology necessary to provide
cost-effective broadband access.
THE SOLUTION
Hybrid provides cost-effective, high speed Internet and intranet access
solutions to cable system operators, broadband wireless system operators, ISPs
and other businesses. The Company's products remove the bottleneck over the
"last mile" connection to the end-user which causes slow response time for those
accessing bandwidth-intensive information over the Internet or corporate
intranets. Hybrid's Series 2000 product line consists of hardware and software
components capable of supporting a combination of speeds, media and protocols in
a single cable or wireless system, and interoperates with a range of third party
networking products. The Series 2000 system also features a router to provide
telecommuters and others in remote locations secure access to their files on
corporate intranets. The Series 2000 provides cable and wireless system
operators and ISPs with a flexible, scalable, upgradeable solution that allows
them to offer cost-effective broadband access to their subscribers. By doing
this, the Company's products also allow cable and wireless operators to conserve
scarce bandwidth and utilize a variety of data return paths, including the
public switched telephone network. The Company's products enable cable system
operators to offer Internet access on either one-way or two-way cable systems,
thus minimizing the operators' capital investment and time-to-market pressures.
The Series 2000 also facilitates the entrance of broadband wireless system
operators into the high speed Internet access market. The Series 2000 has been
designed to utilize an array of wireless frequencies, ranging from UHF to MMDS
frequencies, and to minimize commonly experienced interference problems.
STRATEGY
The Company's objective is to be a leader in providing broadband access
products that are reliable, secure and scalable to cable system operators,
broadband wireless system operators, ISPs and other businesses. Key elements of
the Company's strategy include:
SATISFY BROADBAND ACCESS NEEDS OF GROWING BUSINESS MARKET. The Company's
products address the needs of business users that require cost-effective and
secure high speed broadband Internet and intranet access in order to obtain
bandwidth-intensive multimedia information and to communicate with customers,
suppliers, telecommuters and employees in remote locations. The Series 2000 line
of products provides secure, high speed access for telecommuters and remote
parties and enables multiple users to be linked to one modem, reducing costs for
operators and users. The Company will continue its efforts to increase the
scalability and performance of its current broadband systems for the growing
business market.
OFFER FLEXIBLE PRODUCTS FOR CABLE AND WIRELESS SYSTEM OPERATORS. The
Company currently provides, and intends to continue to provide, products that
operate with existing cable, wireless and telephony networks interchangeably and
interoperably, making use of the numerous types of transmission media available
to operators. The Series 2000 supports downstream options, including cable and
wireless systems, ranging from low power TV ("LPTV") to WCS frequencies. In the
upstream direction, the Series 2000 currently supports cable, POTS and router
return. The Series 2000 product line enables cable and wireless system operators
to offer broadband access service by utilizing their existing cable or wireless
infrastructure for the downstream path and the existing telephone network for
the upstream path. The Series 2000 allows migration to two-way cable systems
utilizing the same Series 2000 headend equipment. Two-way transmission over a
wireless system is currently under development.
ADDRESS THE NEEDS OF WIRELESS SYSTEM OPERATORS. The Company has focused,
and intends to continue to focus, on the needs of wireless system operators to
leverage their infrastructure, expand their customer
35
<PAGE>
base and enhance their revenues by providing high speed Internet access to
businesses and consumers. The Series 2000 has been tested and deployed in
wireless cable (MDS, MMDS, ITFS) and low power TV (LPTV) operations and is under
evaluation by WCS licensees. The Series 2000 addresses the product requirements
of broadband wireless system operators by providing support for business users,
utilizing 2 MHz sub-channels that fit into a variety of different sized
frequency blocks and providing better resistance to interference.
ENHANCE RELATIONSHIP WITH ISPS. The Company seeks to enhance its
relationship with ISPs by providing them with the enabling technology to offer a
broadband solution. Due to the competitive nature of the traditional ISP
marketplace and the emergence of newer, high speed services, many ISPs are
seeking a cost-effective solution for providing broadband access. The Series
2000 enables ISPs to offer broadband access services through strategic
relationships with either cable or broadband wireless system operators. Because
of its flexibility in supporting both cable and wireless transmission, the
Series 2000 enhances the partnering potential for an ISP. The Company intends to
continue to devote engineering and marketing efforts to support these
relationships.
LEVERAGE TECHNOLOGICAL ADVANTAGE. The Company's proprietary technology
allows it to create high quality, reliable products with an array of features.
The Company seeks to leverage its intellectual property position by capitalizing
on its proprietary asymmetric networking and media independent technologies, by
offering a range of broadband Internet access solutions to customers and, where
appropriate, by sharing its technology with other parties. The Company intends
to continue to devote significant resources to enhancing its existing
proprietary technologies and to developing new products.
PRODUCTS, TECHNOLOGY AND SERVICES
Hybrid's Series 2000 product line provides cable system operators, broadband
wireless system operators, ISPs and other businesses with a cost-effective, high
speed Internet and intranet access solution. The Company's products include
secure headend routers, cable and wireless modems and management software for
use with either cable TV transmission facilities or wireless transmission
facilities. The Company's headend products are used by cable system operators,
broadband wireless system operators and other customers to transmit and receive
data across networks and to manage networks and modems. Hybrid's client modems
and routers are used by subscribers of the Company's customers and can be used
as single-user devices or in multi-user local area networks ("LANs"). The
Company's products incorporate proprietary technology that enables the same
system to be deployed in either cable or broadband wireless systems and supports
both one-way downstream transmission accompanied by upstream transmission via
modem and router return or two-way cable transmission. See "Risk
Factors--Dependence on Recently Introduced Products and Products under
Development; Rapid Technological Change."
36
<PAGE>
The following diagram illustrates a typical deployment of the Company's
products for high speed Internet access:
HIGH SPEED INTERNET ACCESS
[SCHEMATIC DIAGRAM OF A TYPICAL DEPLOYMENT OF THE COMPANY'S PRODUCTS FOR CABLE
AND WIRELESS SYSTEMS]
37
<PAGE>
PRODUCTS
The following table outlines the primary components of the Company's Series
2000:
<TABLE>
<S> <C>
HEADEND EQUIPMENT(1)(2) PRODUCT DESCRIPTION
CyberManager 2000 (CMG-2000) Workstation with proprietary Hybrid
software that provides subscriber and
network management.
CyberMaster Downstream Router (CMD-2000) High speed downstream RF router that
supports up to 60 Mbps aggregate
throughput in 12 MHz of spectrum.
CyberMaster Upstream Router, Telephone Return Performs the functions of an analog
(CMU-2000-8T) modem bank and terminal server in a
telephone return configuration.
Supports up to 64 telephone modems.
FSK Demodulator and Terminal Server Upstream receiver and demodulator for
(OEX-020-7 and OLP-330) two-way cable configuration.
<CAPTION>
SINGLE-USER EQUIPMENT(1)(3)
<S> <C>
CyberCommuter 2000 Secure Router (CSM-2000) Workstation with proprietary Hybrid
software that provides subscriber
management to the corporate MIS
director in a secure telecommuting
configuration.
Multi-User Modem/Router (CCM-201) Client modem and router that can be
used in either cable or wireless
systems. Supports up to 20 users.
Single-User Modem/Router (N-201) Client modem that can be used in either
cable or wireless systems. Supports a
single user.
</TABLE>
(1) All products are available for use with cable or wireless systems, except
for the FSK Demodulator & Terminal Server, which is currently only available
for use with cable systems.
(2) Headend equipment typically ranges in price from $60,000 to $90,000 for a
single system.
(3) Modem list prices range from approximately $450 to $900 depending on
features.
HEADEND EQUIPMENT
CYBERMANAGER 2000. The CyberManager 2000 (CMG-2000) is a proprietary
subscriber and network management workstation built on a Sun Microsystems Sparc
5. Running proprietary Hybrid software, the CMG-2000 operates as the system
administrator interface to the upstream and downstream routers and other third
party headend equipment. The CMG-2000 has a 10BaseT interface to connect to a
fast Ethernet switch in the headend. Currently, the CMG-2000 supports up to
5,000 subscribers.
CYBERMASTER DOWNSTREAM ROUTER. The CyberMaster Downstream Router (CMD-2000)
is a rack-mounted, Pentium based, PCI/ISA bus industrial microcomputer. It
supports SIF and QAM cards, which are used for downstream routing and for 64QAM
downstream modulation. The CMD-2000 has a 100BaseT interface to connect to a
fast Ethernet switch within the headend. The CMD-2000 supports up to six
independent 10 Mbps downstream channels. Each 10 Mbps channel occupies 2 MHz of
either cable or wireless spectrum.
38
<PAGE>
CYBERMASTER UPSTREAM ROUTER, TELEPHONE RETURN. The CyberMaster Upstream
Router, Telephone Return (CMU-2000-8T) is a rack-mounted, Pentium based, PCI/ISA
bus industrial microcomputer. It houses up to 64 analog modems that can handle
speeds of up to 33.6 Kbps for the telephone return path. The CMU-2000-8T has a
10/100BaseT interface that connects to a fast Ethernet switch within the
headend. A typical installation supports multiple CMU-2000-8Ts.
FSK DEMODULATOR AND TERMINAL SERVER. The FSK Demodulator (OEX-020-7) and
Terminal Server (OLP-330) includes a rack-mounted FSK upstream demodulator that
supports up to seven upstream channels. The demodulator output connects to a
terminal server which converts the demodulated data stream into Ethernet
packets. A typical installation supports multiple FSK Demodulators and Terminal
Servers.
END-USER EQUIPMENT
CYBERCOMMUTER 2000 SECURE ROUTER. The CyberCommuter 2000 Secure Router
(CSM-2000) is a proprietary subscriber management workstation built on a Sun
Microsystems Sparc 5 with a special encryption board. This optional component is
used to provide secure, high speed telecommuting and remote access to
businesses. The CSM-2000 is placed at the location of a corporate MIS director
or LAN administrator and provides the ability to administer and manage secure
telecommuter access to the corporate intranet.
MULTI-USER MODEM/ROUTER. The Multi-User Modem/Router (CCM-201) supports 10
Mbps, 64QAM downstream data transmission on both cable and wireless systems and
upstream transmission via analog modem, router or cable return. Each CCM-201
includes routing capability to support up to 20 networked devices (PC, Macintosh
or workstation). The CCM-201 has a number of security features including system
authentication, user ID and password protection, public and private key
management and optional DES encryption.
SINGLE-USER MODEM. The Single-User Modem (N-201) supports 10 Mbps, 64QAM
downstream data transmission on both cable and wireless systems and upstream
transmission via analog modem, router, and cable return. Each N-201 supports one
client device which can be a PC, Macintosh or workstation.
TECHNOLOGY
The Series 2000 product line is an integrated broadband access system. The
Series 2000 is media independent, allowing the same system components to be
deployed in either cable or wireless systems. It utilizes proprietary asymmetric
networking technology that allows for optimal use of available frequencies. The
Series 2000 supports both asymmetric two-way transmission on a cable system and
asymmetric telephone- or router-return on either a cable or broadband wireless
system. The Company is currently developing asymmetric two-way transmission over
a broadband wireless system. The Series 2000 provides for downstream
transmission over wired cable in the interference prone "rolloff" channels that
are unsuitable for video broadcast, preserving scarce channels for the cable
system operator. The Company's proprietary sub-channelization technology splits
a standard 6 MHz channel into three 2 MHz slices for downstream transmission,
providing greater flexibility and minimizing multipath interference in wireless
systems. By providing 2 MHz sub-channelization, the Company's products are also
positioned to serve the newly auctioned WCS frequencies, which are only 5 MHz
wide. The Series 2000 is expandable from an entry-level system supporting up to
5,000 subscribers to serve more than 20,000 subscribers. The modular
architecture also accommodates changes to the transport medium, such as upgrades
from one-way coaxial cable plant to two-way HFC plant.
39
<PAGE>
SERVICES
The Company generally performs all consulting, systems engineering, systems
integration, installation, training and technical support for its products.
Network operations engineers, who combine radio frequency ("RF") and TCP/IP
networking expertise, provide network consulting to support the sales force,
assisting sales representatives and customers in defining the specifications for
the system to be installed. The Company's network operations group also works
with the customer during site preparation to aid in systems engineering, system
integration, installation and acceptance testing to ensure a successful system
start-up. Services are provided on a time and materials basis. Each customer is
required to enroll, for a fee, at least one person in the Company's one-week
training course; enrollment for multiple employees from the customer
organization is encouraged and supported with a discounted fee schedule. These
training courses are tailored to specific implementations of the Company's
products and cover the installation, operation and maintenance of the Company's
headend and client modem products in a network operating environment. The
Company typically provides a one-year warranty on its products that includes
factory and on-site repair service as needed. Customer support also includes
telephone support, maintenance releases and technical bulletins covering all of
the Company's software and firmware products that contain application code. The
Company intends to extend support after expiration of the warranty period as a
purchase option, including on-site field support.
CUSTOMERS
The Company's customers include cable system operators, broadband wireless
system operators, ISPs, resellers and other businesses. The following table sets
forth certain customers of the Company who have purchased at least $100,000 of
products from the Company in the last 18 months.
<TABLE>
<CAPTION>
BROADBAND WIRELESS
CABLE SYSTEM OPERATORS SYSTEM OPERATORS ISPS RESELLERS AND OTHERS
- ---------------------- ------------------------- ----------------------- -------------------------
<S> <C> <C> <C>
Comcast Cable CAI Wireless Systems, AT&T WorldNet Alcatel Telecom and
Communication, Inc. Inc. DirectNet, Inc. Alcatel Bell N.V.
C-Tec Cable Systems, CS Wireless Systems, Inc. InterjetNet, Inc. Itochu Corporation
Inc. Digital Scientific Inc. Internet Ventures, Inc. Lucent Technologies, Inc.
Jones Intercable, Inc. People's Choice TV Media City World, Inc. Network Systems
CableNet Corporation Corporation Warp Drive Networks LLC Technologies, Inc.
Sioux Valley Rural TV
World-wide Wireless, Inc.
</TABLE>
To date, a small number of customers has accounted for a substantial portion
of the Company's net sales. The Company expects that net sales from the sale of
its products to a limited number of customers will continue to account for a
high percentage of its net sales in the foreseeable future. The Company expects
that its largest customers in future periods could be different from its largest
customers in prior periods due to a variety of factors, including customers'
deployment schedules and budget considerations. A limited number of cable system
operators and broadband wireless system operators account for a majority of
capital equipment purchases in their respective markets, and the Company's
success will be dependent upon its ability to establish and maintain
relationships with these companies. In 1994, Intel Corporation ("Intel"), AT&T
Corporation ("AT&T") and Advanced Research Project Agency ("ARPA") accounted for
59.6%, 24.2% and 11.7%, respectively, of the Company's net sales; in 1995, Intel
and AT&T accounted for 51.6% and 28.2%, respectively, of the Company's net
sales; in 1996, AT&T and Intel accounted for 41.0% and 20.7%, respectively, of
the Company's net sales; and in the first six months of 1997, Internet Ventures,
Inc. and Network Systems Technologies, Inc. accounted for 21.8% and 11.5%,
respectively, of the Company's net sales. From 1994 to 1996, Intel manufactured
certain products based on the Company's design, and jointly marketed the
Company's products with its own. While Intel no longer purchases products from
the Company, it remains a stockholder of the Company, and maintains certain
licensing and manufacturing rights to certain Hybrid products. See "Risk
Factors--Inexperience in
40
<PAGE>
Emerging Market," "Risk Factors--Dependence on Cable System Operators," "Risk
Factors--Dependence on Broadband Wireless System Operators and "Risk
Factors--Customer Concentration."
The following examples illustrate how customers use Hybrid products to
deliver network access:
JONES INTERCABLE, INC. Jones Intercable, Inc. ("Jones Intercable"), one of
the 10 largest cable television operators in the United States, has purchased
the Series 2000 for its high speed Internet access service provided by Jones
Internet Channel-TM-. An affiliate of Jones Intercable, Jones Internet Channel
is an Internet programming network which offers high-speed connections to the
Internet via fiber and coaxial cable. The service features electronic mail, news
groups and World Wide Web access, as well as local information on government,
schools, restaurants and entertainment, among other topics. Jones Intercable
selected Hybrid through a careful evaluation process emphasizing technology,
pricing and vendor service and support.
Jones was particularly interested in a platform that would provide
high-speed Internet access for its customers, regardless of their individual
computing hardware and software choice. Jones is purchasing Series 2000
single-user modems and installing them in a telco-return configuration.
INTERNET VENTURES, INC. Internet Ventures, Inc. ("IVI") is offering high
speed cable Internet and intranet access in partnership with small to medium
sized cable operators in selected markets. IVI offers cable operators a way to
generate new revenue without having to invest heavily in plant upgrades or
equipment. IVI purchases and installs the Series 2000, brings Internet service
provider experience, markets the high speed service under its own PeRKInet
brand, and gives the cable operator a percentage of the resulting revenue. IVI
chose the Series 2000 because it was a third generation product that works with
existing cable infrastructure. Many of IVI's cable partners have not upgraded to
two-way cable and need a product that supports telephone return. The Series 2000
supports several telephone return options for consumer and business use. IVI's
PeRKInet made its commercial debut on Avenue TV Cable in Ventura, California in
March 1997. In June 1997, IVI announced it would make the high speed service
available in several of Sun Country Cable's 45 systems.
WARP DRIVE NETWORKS. Warp Drive Networks ("Warp Drive") launched a
commercial wireless Internet access service in the Silicon Valley in June 1997,
offering services from ISDN to fractional T3 speeds, using the Company's Series
2000 system on a low power UHF television system. Warp Drive is targeting the
business, SOHO and telecommuter markets with service for 128Kbps priced at
$150/month. Warp Drive has begun offering service in Seattle over MDS
frequencies. Warp Drive plans to open the San Francisco, Portland, Los Angeles
and San Diego markets by mid-1998.
SALES, MARKETING AND DISTRIBUTION
The Company markets and sells its products in the United States through its
domestic field sales force and sales support organization. The sales and
marketing organizations are comprised of 16 sales and marketing professionals
with experience in the cable, telephone and router markets. The Company also
sells its products through a network of OEMs, VARs and distributors. The
Company's sales and marketing, senior management and technical staff work
closely with existing and potential customers to help them develop the market
potential of high speed Internet access services and to help them develop
relationships with other companies that have the facilities and expertise
necessary to deliver Internet access services. Field sales offices are located
in San Francisco, Atlanta, Chicago and Tinton Falls, New Jersey.
41
<PAGE>
The sale of the Company's products typically involves a significant
technical evaluation and commitment of capital and other resources, with the
delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test and accept new technologies that affect
key operations. For these and other reasons, the sales cycle associated with the
Company's products is typically lengthy, generally lasting three to nine months,
and is subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, that are beyond the Company's
control. Because of the lengthy sales cycle and the large size of customers'
orders, if orders forecasted for a specific customer for a particular quarter
are not realized in that quarter, the Company's operating results for that
quarter could be materially adversely affected. In addition, the Company's
customers include companies in the early stage of development or in need of
capital to upgrade or expand their services. Accordingly, in order to address
the needs and competitive factors facing the emerging broadband access markets
serviced by the cable system operators, broadband wireless system operators and
ISPs, the Company on occasion has sold its products to customers under extended
payment, promotional pricing or other terms which could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Risk Factors--Fluctuations in Quarterly Operating Results; Absence of
Significant Backlog; Continuing Decline of Average Selling Prices," "Risk
Factors--Lengthy Sales Cycle," "Risk Factors--Inexperience in Emerging Markets,"
"Risk Factors-- Dependence on Broadband Wireless System Operators" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The timing and volume of customer orders are difficult to forecast because
cable and wireless companies typically require prompt delivery of products and a
substantial majority of the Company's sales are booked and shipped in the same
quarter. Accordingly, the Company has a limited backlog of orders. Further,
sales are generally made pursuant to standard purchase orders that can be
rescheduled, reduced or cancelled with little or no penalty. The Company
believes that its backlog at any given time is not a meaningful indicator of
future sales. See "Risk Factors--Fluctuations in Operating Results; Absence of
Significant Backlog; Continuing Decline of Average Selling Prices."
The Company's marketing efforts are targeted at cable system operators,
broadband wireless system operators and existing ISPs. The Company devotes
considerable time and effort to educating potential customers on the business
opportunity of providing high speed Internet and intranet access. It
accomplishes this through white papers, prototype customer business models,
industry speaking engagements and direct customer presentations. The Company
also attempts to facilitate introductions and strategic relationships between
ISPs and wireless or cable system operators. These strategic relationships bring
together the capabilities needed to offer high speed access service. The Company
maintains its industry presence by exhibiting at wireless and cable tradeshows
and speaking at conferences and seminars.
In order to market and sell the Company's products internationally, the
Company is seeking to enter into distribution relationships. Alcatel Standard
Electrica S.A. has worldwide nonexclusive distribution rights for the Company's
products and is the Company's main distributor in Europe. Itochu is a
stockholder in the Company and has nonexclusive worldwide distribution rights
for the Company's products.
MANUFACTURING
The Company's manufacturing strategy is to perform system integration,
testing and quality inspection internally and to outsource the manufacturing of
the product modules to multiple third parties where it is more cost-effective.
The Company's future success will depend, in significant part, on its ability to
successfully manufacture its products cost-effectively and in sufficient
volumes. The Company maintains a limited in-house manufacturing capability for
performing system integration and testing on all headend products and for
manufacturing small quantities of modems at its headquarters in Cupertino. The
Company's in-house manufacturing capability, however, is largely used for pilot
production of new modem designs and sample testing of products received from
volume modem manufacturers, as well as for developing the manufacturing process
and documentation for new products in preparation for outsourcing.
42
<PAGE>
The Company's future success will depend, in significant part, on its
ability to obtain high volume manufacturing at low costs. The Company entered
into an agreement pursuant to which Sharp has been the exclusive OEM supplier
through Itochu of certain of the Company's client modems, including the
substantial majority of those utilized in the Series 2000. In the second quarter
of 1997, the Company did not receive the full shipment of modems anticipated
from Sharp because of technical delays in product integration. While these
problems have since been resolved, there can be no assurance that the Company
will not experience similar supply problems in the future at Sharp or any other
manufacturer. The Company has had only limited experience manufacturing its
products to date, and there can be no assurance that the Company, Sharp or any
other manufacturer of the Company's products will be successful in increasing
the volume of its manufacturing efforts. The Company may need to procure
additional manufacturing facilities and equipment, adopt new inventory controls
and procedures, substantially increase its personnel and revise its quality
assurance and testing practices. There can be no assurance that any of these
efforts will be successful. The Company anticipates the need to reduce the
manufacturing costs of its cable modem and will continue to evaluate the use of
low cost third party suppliers and manufacturers. See "Risk Factors--Need to
Reduce Cost of Client Modems" and "Risk Factors--Limited Manufacturing
Experience; Sole Source Manufacturing."
Subcontractors supply both standard components and subassemblies
manufactured to the Company's specifications. Standard components include the
Sun Microsystems Sparc5 workstation and its Sun Operating System (OS); Intel's
Ethernet cards and Pentium-based PCI processor cards; and NextLevel Systems'
Upconverter. The CyberManager 2000 and CyberCommuter 2000 Secure Router are
built on the Sparc5/Sun OS platform by installing the Company's proprietary
network subscriber and network management software, HybridWare. The CyberMaster
Downstream Router (CMD) and CyberMaster Upstream Router, Telephone Return (CMU)
are built on Intel's Pentium-based PCI/ISA-based computer cards installed in
standard rack-mounted backplanes from Industrial Computer Source (ICS) that are
configured to the Company's specification. The Company's proprietary software,
Hybrid OS, is overlaid on a standard Berkeley Systems operating system for the
CMD and CMU.
The Company is dependent upon certain key suppliers for a number of the
components for its products. For example, the Company currently only has one
vendor, BroadCom Corporation, for the 64 QAM demodulator semiconductors that are
used in the Company's server and client modem products, and in past periods
these semiconductors have been in short supply. Recently, BroadCom announced a
program whereby certain of its technological and product enhancements may be
made available to certain of the Company's competitors before making them
available to the Company. This could have the effect of putting the Company at a
competitive disadvantage with regard to time to market or cause the Company to
have to redesign its products if competitors influence changes in BroadCom's
products. Hitachi is the sole supplier of the processors used in certain of the
Company's modems. In addition, certain other components for products that the
Company has under development are currently only available from a single source.
There can be no assurance that delays in key components or product deliveries
will not occur in the future due to shortages resulting from a limited number of
suppliers, the financial or other difficulties of such suppliers or the possible
limitation in component product capacities due to significant worldwide demand
for such components. Any significant interruption or delay in the supply of
components for the Company's products or significant increase in the price of
components due to short supply or otherwise could have a material adverse effect
on the Company's ability to manufacture its products and, therefore, could have
a material adverse effect on its business, operating results and financial
condition.
Products as complex as those offered by the Company frequently contain
undetected errors, defects or failures, especially when first introduced or when
new versions are released. Such errors have occurred in the past in the
Company's products, and there can be no assurance that, despite testing by the
Company and use by current and potential customers, errors will not be found in
the Company's current and future products. The occurrence of such errors,
defects or failures could result in product returns and other losses to the
Company or its customers. Such occurrence could also result in the loss of or
delay in market
43
<PAGE>
acceptance of the Company's products, which could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's products generally carry a one-year warranty for replacement of parts.
Due to the relatively recent introduction of the Series 2000 products, the
Company has limited experience with the problems that could arise with this
generation of products. The Company's purchase agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions. Although the Company has not experienced any
product liability claims to date, the sale and support of the Company's products
may entail the risk of such claims. A successful product liability claim brought
against the Company could have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--Risks of
Product Defects, Product Returns and Product Liability."
RESEARCH AND DEVELOPMENT
As of June 30, 1997, the Company's research and development staff consisted
of 28 full-time employees. The Company's total research and development expenses
for 1994, 1995 and 1996 and the first six months of 1997 were $1,251,000,
$3,862,000, $5,076,000 and $3,379,000, respectively. The Company will continue
its efforts to increase the scalability and performance of its current broadband
systems, to enhance the systems for broadband wireless system operators and to
migrate toward standards compliance. The Company expects to increase scalability
by developing an optional relational database that will handle subscriber bases
of up to 20,000 per system and new SNMP-based network management capabilities
that will allow operators to manage their network centrally. The Company is
optimizing its product's radio frequency (RF) tuners for the currently targeted
wireless-cable and WCS frequency bands, 2-3 GHz and LPTV (400-800 MHz), and
expects to add LMDS products to its offerings.
The Company is developing a new two-way product utilizing QPSK modulation in
place of the current FSK return product. This QPSK product will utilize
standards-compliant chipsets and a cost-effective channel sharing algorithm. It
will support both cable and wireless return. In addition, the Company is
developing a prototype system targeted for ISP customers consisting of a
broadband downstream router that can be installed in existing ISP networks and
will interoperate with standard ISP equipment and operational procedures. See
"Risk Factors--Competing Technologies and Evolving Industry Standards."
To address competitive and pricing pressures, the Company expects that it
will have to reduce the cost of manufacturing client modems significantly
through design and engineering changes. Such changes may involve redesigning the
Company's products to utilize more highly integrated components and more
automated manufacturing techniques. There can be no assurance that the Company
will be successful in these efforts, that a redesign can be made on a timely
basis and without introducing significant errors and product defects or that a
redesign will result in sufficient cost reductions to allow the Company to
reduce the list price of its client cable modems significantly. See "Risk
Factors--Need to Reduce Cost of Client Modems."
The market for high speed Internet access products is characterized by
rapidly changing and competing technologies, evolving industry standards and
frequent new product introductions leading to short product life cycles. As
standards evolve in the market, such as the recently announced MCNS
specifications, the Company will work toward complying with such standards.
There can be no assurance that the Company's engineering and product design
efforts will be successful or that the Company will be successful at developing
new products in the future. Any failure to release new products or to fix,
upgrade or redesign old products on a timely basis could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Risk Factors--Dependence on Recently Introduced Products and Products under
Development; Rapid Technological Change."
44
<PAGE>
COMPETITION
The market for high speed network connectivity products and services is
intensely competitive. The principal competitive factors in this market include
product performance and features (including speed of transmission and upstream
transmission capabilities), reliability, price, size and stability of
operations, breadth of product line, sales and distribution capability,
technical support and service, relationships with cable and broadband wireless
system operators and ISPs, standards compliance and general industry and
economic conditions. Certain of these factors are outside of the Company's
control. The existing conditions in the high speed network connectivity market
could change rapidly and significantly as a result of technological changes, and
the development and market acceptance of alternative technologies could decrease
the demand for the Company's products or render them obsolete. Similarly, the
continued emergence or evolution of industry standards or specifications may put
the Company at a disadvantage in relation to its competitors.
The Company's current and potential competitors include providers of
asymmetric cable modems, other types of cable modems and other broadband access
products. Most of the Company's competitors are substantially larger and have
greater financial, technical, marketing, distribution, customer support and
other resources, as well as greater name recognition and access to customers
than the Company. In addition, many of the Company's competitors are in a better
position to withstand any significant reduction in capital spending by cable or
broadband wireless system operators. Certain of the Company's competitors have
established relationships with cable system operators and telcos and, based on
these relationships, may have more direct access to the decision-makers of such
cable system operators and telcos. There can be no assurance that the Company
will be able to compete effectively in its target markets.
The principal competitors in the cable modem market include Bay Networks,
Motorola, NextLevel Systems and 3Com and its subsidiary U.S. Robotics. Other
cable modem competitors include Cisco Systems, Com21, Hayes Microcomputer
Products, Phasecom, Scientific-Atlanta, Terayon, Toshiba and Zenith Electronics,
as well as a number of smaller, more specialized companies. Certain competitors
have entered into partnerships with computer networking companies that may give
such competitors greater visibility in this market. Certain of the Company's
competitors have already introduced or announced high speed connectivity
products that are priced lower than the Company's, and certain other competitors
are more focused on and experienced in selling and marketing two-way cable
transmission products. There can be no assurance that additional competitors
will not introduce new products that will be priced lower, provide superior
performance or achieve greater market acceptance than the Company's products.
The Company's principal competitors in the wireless modem market, Bay Networks,
Harmonic Lightwaves through its proposed acquisition of New Media
Communications, Motorola, NextLevel Systems and Stanford Telecommunications, are
providing wireless Internet connectivity over wireless cable and LMDS
frequencies.
To be successful, the Company's Series 2000 products must achieve market
acceptance and the Company must respond promptly and effectively to the
challenges of new competitive products and tactics, alternate technologies,
technological changes and evolving industry standards. The Company must continue
to develop products with improved performance over two-way cable transmission
facilities and with the ability to perform over two-way wireless transmission
facilities. There can be no assurance that the Company will meet these
challenges, that it will be able to compete successfully against current or
future competitors, or that the competitive pressures faced by the Company will
not materially and adversely affect the Company's business, operating results
and financial conditions. Further, as a strategic response to changes in the
competitive environment, the Company may make certain pricing, service,
marketing or other promotional decisions or enter into acquisitions or new
ventures that could have a material adverse effect on the Company's business,
operating results or financial conditions.
Cable and broadband wireless system operators face competition from
providers of alternative high speed connectivity systems. In the wireless high
speed access market, broadband wireless system operators
45
<PAGE>
are in competition with satellite TV providers. In telephony networks, xDSL
technology enables digitally compressed video signals to be transmitted through
existing telephone lines to the home. In the event that any competing
architecture or technology were to limit or halt the deployment of coaxial or
HFC systems, the Company's business, operating results and financial condition
could be materially adversely affected.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products. The Company currently has two patents issued in the
United States as well as pending patent applications in the United States,
Europe and Japan that relate to its network and modem technology as well as
communication processes implemented in those devices. The Company's two issued
U.S. patents relate to the Company's basic client cable modem device and
methodology and asymmetric system architecture and methodology. The Company
initially obtained the U.S. Patent No. 5,347,304 in September 1994, and filed an
application for the reissuance of the patent with the U.S. Patent and Trademark
Office in November 1994, which was subsequently allowed for reissuance by the
U.S. Patent Office on August 19, 1997. In the future, the Company intends to
seek further United States and foreign patents on its technology. There can be
no assurance that any of these patents will be issued from any of the Company's
pending applications or applications in preparation or that any claims allowed
will be of sufficient scope or strength, or be issued in sufficient countries
where the Company's products can be sold, to provide meaningful protection or
any commercial advantage to the Company. Moreover, any patents that have been or
may be issued might be challenged. Any such challenge could result in time
consuming and costly litigation and result in the Company's patents being held
invalid or unenforceable. Furthermore, even if the patents are upheld or are not
challenged, third parties might be able to develop other technologies or
products without infringing any such patents.
The Company has entered into confidentiality and invention assignment
agreements with its employees and enters into non-disclosure agreements with
certain of its suppliers, distributors and customers in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by the Company to
protect its intellectual property will prove sufficient to prevent
misappropriation of the Company's technology or deter independent third-party
development of similar technologies. The laws of certain foreign countries may
not protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States.
In the past, the Company has received, and in the future may receive,
notices from third parties claiming that the Company's products or proprietary
rights infringe the proprietary rights of third parties. The Company expects
that developers of cable and wireless modems will be increasingly subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows. Any such claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements might not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The Company has and in the future may license its patents or proprietary
rights for commercial or other reasons to parties who are or may become
competitors of the Company. Further the Company may also elect to initiate
claims or litigation against third parties for infringement of the Company's
patents or proprietary rights or to establish the validity of the Company's
patents or proprietary right. The Company has sent notices to certain third
parties offering to license the Company's patents for products which may be
infringing the Company's patent rights. The Company has not yet determined if it
will assert any claims against these parties or others. There can be no
assurance that such notifications will not involve potential litigation
initiated by the Company or related countersuits by third parties seeking to
challenge the Company's patents or asserting infringement by the Company. Such
litigation could be time consuming
46
<PAGE>
and costly and therefore have a material adverse effect on the Company's
business, operating results and financial condition.
EMPLOYEES
As of June 30, 1997, the Company had 74 full-time employees of whom 28 were
primarily engaged in research and development, 25 in operations, 16 in sales and
marketing and 5 in administration and finance. None of the Company's employees
is represented by a collective bargaining unit with respect to his or her
employment with the Company, nor has the Company ever experienced an organized
work stoppage.
PROPERTIES
The Company leases approximately 14,900 square feet of office, research and
development and manufacturing space in Cupertino, California. The current lease
for the Cupertino facility expires in May 1998 and the Company has an option to
extend the lease for three additional years. The Company also subleases
approximately 10,200 square feet and 9,200 square feet in Cupertino under
sublease agreements expiring in May 1998 and September 1998, respectively. The
Company leases approximately 900 square feet of office space in Tinton Falls,
New Jersey, and approximately 2,400 square feet of office space in San
Francisco, California under leases expiring in September 1998 and March 2002,
respectively. The Company believes that its existing facilities are adequate to
meet its needs for the immediate future and that future growth can be
accommodated by leasing additional or alternative space near its current
facilities.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
47
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information regarding the executive
officers, directors and key personnel of the Company as of September 15, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- ----------- ------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Carl S. Ledbetter.......................... 48 President, Chief Executive Officer and Chairman of the Board
of Directors
Gustavo (Gus) Ezcurra...................... 41 Vice President, Sales
William H. Fry............................. 58 Vice President, Operations
Dan E. Steimle............................. 49 Vice President, Finance and Administration, Chief Financial
Officer and Secretary
KEY EMPLOYEES AND OTHER DIRECTORS
Frederick Enns............................. 46 Vice President and Chief Technology Officer
Vishwas R. (Victor) Godbole................ 51 Vice President, Engineering
Ernest P. Quinones......................... 37 Controller
Jane S. Zeletes............................ 42 Vice President, Marketing
James R. Flach(1)(2)....................... 50 Director
Stephen E. Halprin(2)...................... 59 Director
Gary M. Lauder............................. 35 Director
Douglas M. Leone(1)........................ 40 Director
Howard L. Strachman........................ 53 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
CARL S. LEDBETTER joined the Company in January 1996 as its President and
Chief Executive Officer, and in August 1996, he became Chairman of the Board.
Prior to joining the Company, he served in various positions at AT&T from April
1993 to January 1996, most recently as President of Consumer Products. From 1991
until April 1993, Mr. Ledbetter was Vice President of Sun Microsystems and
General Manager of SunSelect, Sun's PC networking business. He is also a
director of Software Spectrum, Inc., a software distributor. Mr. Ledbetter holds
a B.S. in Mathematics from University of Redlands, an M.A. in Mathematics from
Brandeis University and a Ph.D. in Mathematics from Clark University.
GUSTAVO (GUS) EZCURRA joined the Company in September 1996 as its Vice
President, Sales. From May 1994 to September 1996, Mr. Ezcurra was Vice
President of Worldwide Sales of the Digital Telephone Systems Division of Harris
Corporation, a broadcast equipment manufacturer. From November 1988 to May 1994,
he was Vice President of Worldwide Sales of the Broadcast Division of Harris
Corporation. Mr. Ezcurra holds a B.S. in Economics from the California
Polytechnic State University, San Luis Obispo.
WILLIAM H. FRY joined the Company in August 1995 as its interim Chief
Operating Officer and Acting Vice President, Operations, and in May 1996 he
became Vice President, Operations. From July 1994 to July 1995, Mr. Fry was a
consultant with Silicon Valley Associates. From 1991 to June 1994, he served as
President and CEO of Ion Systems, a manufacturer of semiconductor processing
equipment. Mr. Fry holds a B.S. in Industrial Management from LaSalle College.
DAN E. STEIMLE joined the Company in July 1997 as its Vice President,
Finance and Administration, Chief Financial Officer and Secretary. From January
1994 to June 1997, he served as Vice President and Chief Financial Officer of
Advanced Fibre Communications, Inc., a telecommunications equipment manufacturer
and from July 1997 to September 1997 he served part time as its Vice President,
Business
48
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Development. From September 1991 to December 1993, Mr. Steimle served as Senior
Vice President, Operations and Chief Financial Officer of The Santa Cruz
Operation, Inc., an operating system software company. Mr. Steimle serves as a
director of Mitek Systems, Inc., a software development company. Mr. Steimle
holds a B.S. in Accounting from Ohio State University and an M.B.A. from the
University of Cincinnati.
FREDERICK ENNS joined the Company in September 1994 as Senior Architect and
has been Vice President and Chief Technology Officer since August 1996. From
November 1992 to September 1994, he served as Director of Hardware Engineering
of Hughes LAN Systems, a networking equipment manufacturer. Mr. Enns received a
B.S. in Physics from the University of California, San Diego, an M.S. in Physics
from the University of Washington and an M.S. in Electrical Engineering from
Stanford University.
VISHWAS R. (VICTOR) GODBOLE joined the Company in May 1997 as its Vice
President, Engineering. From June 1992 to April 1997, he worked for Sierra
Semiconductor Corporation, a provider of networking and telecommunications
components, as Director, Systems Engineering and most recently as Vice
President, Strategic Planning and Systems Engineering. Mr. Godbole received a
Bachelor of Technology degree in Electrical Engineering from the Indian
Institute of Technology, Bombay, India and his M.S. in Electrical Engineering
from Oklahoma State University.
ERNEST P. QUINONES joined the Company in July 1997 as its Controller. From
June 1989 to March 1997, Mr. Quinones served in various positions at Genus,
Inc., a semiconductor equipment manufacturer, including Acting Chief Financial
Officer until his departure. Mr. Quinones received a B.S. in Accounting from
Santa Clara University and is a Certified Public Accountant in California.
JANE S. ZELETES joined the Company in March 1997 as its Director, Product
Management, and in September 1997 she was promoted to Vice President, Marketing.
Prior to joining the Company, she served as Director of Business Management of
USWest Wireless. From 1990 to January 1996, Ms. Zeletes served in various
positions at AT&T, most recently as Group Manager of Cordless Telephones, a
business unit of AT&T's Consumer Products Division. Ms. Zeletes holds a B.A. in
English from the University of Minnesota.
JAMES R. FLACH has been a director of the Company since May 1995, and he
served as acting Chief Executive Officer of the Company from November 1995 to
January 1996. Since September 1992, Mr. Flach has been a general partner of
Accel Partners, a venture capital firm. Since September 1992, he has also been
the President of Flach & Associates, a Management Services firm, and since March
1997, he has been the Chief Executive Officer of Redback Networks, a network
products company. From May 1990 to August 1992, Mr. Flach was Vice President of
Intel, serving as the General Manager of Intel's Personal Computer Enhancement
Division. He holds a B.S. in Physics from Rensselaer Polytechnic Institute and
an M.S. in Applied Mathematics from The Rochester Institute of Technology.
STEPHEN E. HALPRIN has been a director of the Company since September 1992.
He has been a general partner of OSCCO Management Partners, a venture capital
firm since 1984 and a general partner of OSCCO Management Partners III since
1989. He currently serves as a director of Landec Corporation, a materials
science company. He holds a B.S. in Industrial Management from the Massachusetts
Institute of Technology and an M.B.A. from the Stanford University Graduate
School of Business.
GARY M. LAUDER has been a director of the Company since October 1994. Since
1986 he has been the General Partner of Lauder Partners, a venture capital
partnership formed by Mr. Lauder that focuses on advanced technologies for the
cable TV marketplace. Since May 1995, Mr. Lauder has been Vice-Chairman of ICTV,
Inc., a developer of interactive cable television technology. Mr. Lauder holds a
B.A. in International Relations from the University of Pennsylvania, a B.S. in
Economics from the Wharton School and an M.B.A. from the Stanford University
Graduate School of Business.
DOUGLAS M. LEONE has been a director of the Company since May 1995. He has
been associated with Sequoia Capital, a venture capital firm, since June 1988
and has been a general partner of that firm since
49
<PAGE>
April 1993. He currently serves as a director of Infinity Financial Technology,
a client server software company, and International Network Services, a
networking services company. Mr. Leone holds a B.S. from Cornell University, an
M.S. from Columbia University and an M.S. in Management from the Massachusetts
Institute of Technology.
HOWARD L. STRACHMAN has been a director of the Company since co-founding the
Company in June 1990 and served as its Chief Executive Officer from June 1990
until July 1995. In January 1996 he founded Ultracom Communications, Inc., a
developer of advanced modulation products, where he serves as its Chief
Executive Officer. Mr. Strachman holds a B.S. in Electrical Engineering and an
M.S. in Electro-Physics from the Polytechnic University of New York.
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors (the "Board"). Upon the closing of the offering, the Company's
certificate of incorporation will provide for a classified Board of Directors
composed of seven directors. Accordingly, the terms of the office of the Board
of Directors will be divided into three classes. Class I will expire at the
annual meeting of the stockholders to be held in 1998; Class II will expire at
the annual meeting of the stockholders to be held in 1999; and Class III will
expire at the annual meeting of the stockholders to be held in 2000. At each
annual meeting of the stockholders, beginning with the 1997 annual meeting, the
successors to the 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 and until their successors have been duly elected and
qualified, or until their earlier resignation or removal, if any. Messrs.
Halprin and Leone will be designated as Class I directors; Messrs. Flach and
Strachman will be designated as Class II directors; and Messrs. Lauder and
Ledbetter will be designated as Class III directors. A seventh director will be
nominated as soon as practicable upon the closing of this offering. To the
extent that there is an increase in the number of directors, additional
directorships resulting therefrom will be distributed among the three classes so
that, as nearly as possible, each class will consist of an equal number of
directors.
BOARD COMMITTEES
The Audit Committee of the Board consists of Mr. Flach and Mr. Halprin. The
Audit Committee reviews the Company's financial statements and accounting
practices, makes recommendations to the Board regarding the selection of
independent auditors and reviews the results and scope of the audit and other
services provided by the Company's independent auditors. The Compensation
Committee of the Board consists of Mr. Flach and Mr. Leone. The Compensation
Committee makes recommendations to the Board concerning salaries and incentive
compensation for the Company's officers and employees and administers the
Company's employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board was, at any
time since the formation of the Company, an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving on the Company's Board or Compensation Committee.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. In October 1994, Mr. Lauder and Mr. Halpin were granted
options to acquire 18,519 and 7,408 shares of Common Stock, respectively, under
the 1993 Plan, at an exercise price of $0.27 and $0.54 per share, respectively.
In September 1997, the Board adopted the Directors Plan and reserved a total
of 100,000 shares of the Company's Common Stock for issuance thereunder. The
Company's stockholders are also expected to
50
<PAGE>
approve the Directors Plan in September 1997. Members of the Board who are not
employees of the Company, or any parent or subsidiary of the Company, are
eligible to participate in the Directors Plan. However, directors who are
representatives of venture capital funds or corporate investors are not eligible
to participate in the Directors Plan. Each eligible director who first becomes a
member of the Board on or after the public offering ("Effective Date") will
initially be granted an option for 15,000 shares (an "Initial Grant") on the
later of the Effective Date or the date such director first becomes a director.
At each annual meeting of stockholders thereafter, each eligible director will
automatically be granted an additional option to purchase 5,000 shares if such
director has served continuously as a member of the Board since the date of such
director's Initial Grant (or since the Effective Date if such director did not
receive an Initial Grant). All options issued under the Directors Plan will vest
as to 25% of the shares on each anniversary of the date of grant, provided the
optionee continues as a member of the Board or as a consultant to the Company.
The exercise price of all options granted under the Directors Plan will be the
fair market value of the Common Stock on the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the year
ended December 31, 1996 by (i) the Company's chief executive officer and (ii)
the three other most highly compensated executive officers other than the chief
executive officer who were serving as executive officers of the Company during
1996 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARD
ANNUAL COMPENSATION -------------
----------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS(#)
- ---------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Carl S. Ledbetter(1) ............................... 1996 $ 175,000 -- $ 61,299(2) 487,919
President and Chief Executive Officer
Eduardo Moura(3) ................................... 1996 133,516 -- -- --
Former Vice President, Network Systems
William H. Fry ..................................... 1996 70,000 -- -- 89,816
Vice President, Operations
Gustavo Ezcurra(4) ................................. 1996 17,625 $ 32,835(5) -- 77,876
Vice President, Sales
</TABLE>
- ------------------------
(1) From November 21, 1995 through January 15, 1996, James R. Flach, a director
of the Company, served as Acting Chief Executive Officer of the Company. In
December 1995, Mr. Flach was granted options to acquire 10,702 shares of
Common Stock at an exercise price of $1.08 per share for his services. Mr.
Ledbetter replaced Mr. Flach as Chief Executive Officer on January 15, 1996.
(2) Represents temporary living expenses paid by the Company.
(3) Mr. Moura resigned from his position at the Company in November 1996.
(4) Mr. Ezcurra joined the Company in September 1996.
(5) Represents commissions.
The current annual salary rates of the Company's officers are as follows:
Mr. Ledbetter--$200,000; Mr. Steimle--$150,000; Mr. Fry--$135,000; and Mr.
Ezcurra--$135,000.
The following table sets forth further information regarding option grants
pursuant to the Company's Executive Officer Plan and the 1993 Incentive Plan
during 1996 to each of the Named Executive Officers.
51
<PAGE>
In accordance with the rules of the Securities and Exchange Commission, the
table sets forth the hypothetical gains or "option spreads" that would exist for
the options at the end of their respective five year terms. These gains are
based on assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted to the end of the option term.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(1) 1996 PER SHARE DATE 5% 10%
- ------------------------------------ ----------- --------------- --------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Carl S. Ledbetter................... 353,104 45.2% $ 0.54 01/22/01 $ 52,680 $ 116,410
134,815 17.2 0.54 07/08/01 20,113 44,445
Eduardo Moura(3).................... -- -- -- -- -- --
William H. Fry...................... 1,852 0.2 0.54 02/27/01 276 611
69,445 8.9 0.54 05/29/01 10,361 22,894
18,519 2.4 0.54 07/08/01 2,763 6,105
Gustavo Ezcurra..................... 77,876 10.0 1.08 08/21/01 23,237 51,348
</TABLE>
- ------------------------
(1) Options granted pursuant to the Executive Officer Plan and the 1993 Plan in
1996 generally have been incentive stock options or non-qualified stock
options that were granted at fair market value and vest over a four-year
period so long as the individual is employed by the Company. Options granted
to executive officers generally expire five years from the date of grant.
(2) The 5% and 10% assumed annual rates of stock price appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future Common Stock prices.
(3) Mr. Moura resigned from the Company in November 1996.
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1996 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Executive
Officers as of December 31, 1996. Also reported are values of "in-the-money"
options, which represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of December 31, 1996 ($1.08) as determined by the Board.
AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carl S. Ledbetter............... -- -- 97,772 390,147 $ 52,797 $ 210,679
Eduardo Moura................... -- -- -- -- -- --
William H. Fry.................. 4,630 $ 2,500 18,230 69,734 9,844 37,656
Gustavo Ezcurra................. -- -- -- 77,876 -- --
</TABLE>
52
<PAGE>
EMPLOYMENT AGREEMENT
In January 1996, the Company entered into a two year employment agreement
with Mr. Ledbetter in which he agreed to serve as the Company's Chief Executive
Officer during that period. The agreement provides for Mr. Ledbetter to receive
a base salary of $175,000 per year and to be eligible for up to $75,000 in
bonuses during the first year, based on achieving certain milestones, as well as
regular employee benefits, relocation costs of up to $97,500 and five year
options to purchase up to 353,104 shares of the Company's Common Stock at $0.54
per share, vesting as to 12.5% six months after commencement of employment and
2.0833% per month for 42 months thereafter. The stock option grant provides for
accelerated vesting in the event of a "Change of Control Transaction" (as
defined in the Executive Officer Plan). The Company is prohibited from
terminating Mr. Ledbetter's employment except for "Cause" (as defined in the
employment agreement).
INCENTIVE BASED COMPENSATION PROGRAM
In July 1997, the Company adopted a bonus plan for the Company's officers
and certain managers with respect to the three quarters ending December 31,
1997. Under the bonus plan, the Compensation Committee has assigned a target
bonus for each participant, expressed as a percentage of the participant's
annual salary (10% to 40% for the 12-month period). The extent to which
participants receive their target bonuses for any quarter depends upon the
Company's net sales and operating income for the quarter as well as the
Company's results in a third category which varies from participant to
participant. Actual bonuses may be greater or less than the target amount,
depending on whether the Company's financial results exceed or fall short of
specified goals. Bonus awards under the bonus plan are to be paid 50% in cash
and 50% in stock for the two quarters ended June 30, 1997 and September 30, 1997
and entirely in cash for the quarter ended December 31, 1997. For the quarter
ended June 30, 1997, the Company made cash payments of $26,000 and issued 13,000
shares pursuant to the bonus plan.
EMPLOYEE BENEFIT PLANS
In October 1992, the Board adopted the 1992 Stock Issuance Plan (the "1992
Plan"). The 1992 Plan provided for the issuance of restricted stock awards.
Under the 1992 Plan, up to 555,556 shares of Common Stock were reserved for
issuance. The Company is no longer issuing restricted stock awards under the
1992 Plan. In October 1993, the Board adopted the 1993 Plan, which was amended
in April 1995, December 1995 and July 1996. The 1993 Plan provides for the
issuance of stock bonus awards and restricted stock awards as well as the grant
of both incentive stock options ("ISOs") that qualify under Section 422 of the
Internal Revenue Code and nonqualified stock options ("NQSOs"). Under the 1993
Plan, up to 1,186,035 shares of Common Stock were reserved for issuance. In
December 1996, the Board adopted the 1996 Plan, which was amended in May 1997.
The 1996 Plan provides for the grant of both ISOs and NQSOs. Under the 1996
Plan, up to 407,408 shares of Common Stock were reserved for issuance. As of
June 30, 1997, options to purchase 1,010,156 shares of Common Stock were
outstanding under the 1993 Plan and options to purchase 151,845 shares of Common
Stock were outstanding under the 1996 Plan. In December 1995, the Board adopted
the Executive Officer Plan, which was amended in July 1996. The Executive
Officer Plan provides for the grant of both ISOs and NQSOs. Under the Executive
Officer Plan, 500,000 shares of Common Stock were reserved for issuance, and in
July and September 1997, this amount was increased to 770,000. To date, Mr.
Ledbetter and Mr. Steimle have been granted options under the Executive Officer
Plan to purchase 657,919 and 111,112 shares of Common Stock, respectively.
Following the Effective Date, no additional options will be granted under the
1992 Plan, the 1993 Plan, the 1996 Plan or the Executive Officer Plan.
The Executive Officer Plan provides that, if the Company enters into a
Change of Control Transaction (as defined in the Executive Officer Plan) and a
participant's responsibilities and position with the Company are materially
diminished, such participant's option shall become exercisable on the date on
53
<PAGE>
which such transaction is consummated and shall continue to be exercisable for a
period of one year commencing on the date on which such transaction is
consummated.
1997 EQUITY INCENTIVE PLAN. In September 1997, the Board adopted the 1997
Incentive Plan. The Company's stockholders are also expected to approve the 1997
Incentive Plan in September 1997. The 1997 Incentive Plan will become effective
upon the Effective Date and will serve as the successor to the 1992 Plan, 1993
Plan and the 1996 Plan (the "Prior Plans"). Options granted under the Prior
Plans before their termination will remain outstanding in accordance with their
terms, but no further options will be granted under the Prior Plans after the
Effective Date. The Company has reserved 1,750,000 shares of Common Stock for
issuance under the 1997 Incentive Plan. Shares that (i) are issuable upon
exercise of an option granted pursuant to the 1997 Incentive Plan but cease to
be subject to such option for any reason other than exercise of such option,
(ii) are subject to an award granted under the 1997 Incentive Plan but are
forfeited or are repurchased by the Company at the original issue price or (iii)
are subject to an award granted pursuant to the 1997 Incentive Plan that
otherwise terminates without shares being issued, will again be available for
grant and issuance in connection with future awards under the 1997 Incentive
Plan. In addition, any shares remaining unissued under the Prior Plans on the
Effective Date and any shares issuable upon exercise of options granted pursuant
to the Prior Plans, that expire or become unexercisable for any reason without
having been exercised in full, will no longer be available for distribution
under the Prior Plans but will be available for grant and issuance under the
1997 Incentive Plan. The number of shares reserved for issuance under the 1997
Incentive Plan will be automatically increased each year by an amount equal to
5% of the outstanding shares of the Company as of the first day of the year.
The 1997 Incentive Plan provides for the grant of stock options and stock
bonuses and the issuance of restricted stock by the Company to its employees,
officers, directors, consultants, independent contractors and advisers. No
person will be eligible to receive more than 700,000 shares in any calendar year
pursuant to grants under the 1997 Incentive Plan, other than new employees of
the Company who will be eligible to receive up to a maximum of 1,000,000 shares
in the calendar year in which they commence employment with the Company. The
1997 Incentive Plan will be administered by the Compensation Committee of the
Board. The 1997 Incentive Plan permits the Compensation Committee to grant
options that are either incentive stock options (as defined in Section 422 of
the Code) or nonqualified stock options, on terms (including the exercise price,
which may not be less than 85% of the fair market value of the Company's Common
Stock, and the vesting schedule) determined by the Compensation Committee,
subject to certain statutory and other limitations in the 1997 Incentive Plan.
In addition to, or in tandem with, other awards under the 1997 Incentive Plan,
the Compensation Committee may grant participants restricted stock awards to
purchase the Company's Common Stock for not less than 85% of its fair market
value at the time of grant. The other terms of such restricted stock awards may
be determined by the Compensation Committee. The Compensation Committee may also
grant stock bonus awards of the Company's Common Stock either in addition to, or
in tandem with, other awards under the 1997 Incentive Plan, under such terms,
conditions and restrictions as the Compensation Committee may determine. Such
stock bonuses may be awarded for the satisfaction of performance goals
established in advance. The Compensation Committee may only grant restricted
stock awards and stock bonus awards for an aggregate of 300,000 shares over the
term of the 1997 Incentive Plan. The 1997 Incentive Plan will terminate ten
years from the Effective Date, unless terminated earlier in accordance with the
provisions of the 1997 Incentive Plan.
1997 EMPLOYEE STOCK PURCHASE PLAN. In September 1997, the Board the
Purchase Plan and reserved a total of 225,000 shares of the Company's Common
Stock for issuance thereunder. The Company's stockholders are also expected to
approve the Purchase Plan in September 1997. The Purchase Plan will become
effective on the first business day on which price quotations for the Company's
Common Stock are available on the Nasdaq National Market. The Purchase Plan
permits eligible employees to acquire shares of the Company's Common Stock
through payroll deductions. The Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code. Except for the
initial offering, each offering under the Purchase Plan will be for a period of
24 months (the "Offering Period") commencing on
54
<PAGE>
February 1 and August 1 of each year and ending on January 31 and July 31 of
each year. The first Offering Period will begin on the date on which price
quotations for the Company's Common Stock are first available on the Nasdaq
National Market and will end on July 31, 1999, unless otherwise determined by
the Board. Except for the first Offering Period, each Offering Period will
consist of four purchase periods, each six months in length ("Purchase Period").
The Board has the power to change the duration of Offering Periods or Purchase
Periods without stockholder approval, provided that the change is announced at
least 15 days prior to the scheduled beginning of the first Offering Period or
Purchasing Period to be affected. Eligible employees may select a rate of
payroll deduction between 2% and 15% of their compensation, subject to certain
limits set forth in the Purchase Plan. The purchase price for the Company's
Common Stock purchased under the Purchase Plan is 85% of the lesser of the fair
market value of the Company's Common Stock on the first day of the applicable
Offering Period or on the last day of the respective Purchase Period.
401(K) PLAN. The Company has adopted the Hybrid Networks, Inc. 401(k)
Profit Sharing Plan (the "401(k) Plan") for eligible employees ("Participants").
Participants may contribute up to 15% of their current compensation, up to a
statutorily prescribed annual limit, to the 401(k) Plan. Each Participant is
fully vested in his or her deferred salary contributions. Participant
contributions are held in trust and invested by the 401(k) Plan's trustees.
Individual Participants may direct the trustee to invest their accounts in
authorized investment alternatives. Pursuant to a Company resolution, the
Company may make discretionary contributions to the 401(k) Plan to be allocated
among Participants who meet certain service requirements. Discretionary
contributions are subject to a five-year vesting schedule. The Company may also
make qualified nonelective contributions on behalf of non-highly compensated
employees. Each Participant is fully vested in his or her qualified non-elective
contributions. The 401(k) Plan is intended to qualify under Section 401(a) of
the Internal Revenue Code so that contributions to the 401(k) Plan, and income
earned on such contributions, are not taxable to Participants until withdrawn or
distributed from the 401(k) Plan.
55
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of the Common Stock of the
Company had or will have a direct or indirect interest other than (i)
compensation arrangements, which are described where required under "Management"
and (ii) the transactions described below.
In November 1993, the Company entered into an exclusive, royalty-bearing
license agreement with Intel Corporation, a 5% stockholder of the Company, with
respect to the Company's client technology and entered into a loan and warrant
agreement (the "Loan Agreement") with Middlefield Ventures, Inc.
("Middlefield"), an affiliate of Intel, pursuant to which Middlefield loaned
$2,000,000 to the Company and the Company issued certain warrants to purchase
shares of the Company's capital stock. Middlefield assigned its rights under the
Loan Agreement and accompanying note and warrants to Intel. In December 1995,
(i) the Company and Intel entered into an Amended and Restated Technology
License Agreement (the "Amended License Agreement") pursuant to which, among
other things, Intel's exclusive license was converted into a nonexclusive
royalty-bearing license and the parties granted certain royalty-free,
nonexclusive cross licenses; (ii) in consideration for Intel's transfer of
certain technology to the Company pursuant to the Amended License Agreement, the
Company issued 262,222 shares of Common Stock to Intel; (iii) Intel converted
$1.5 million of prepaid royalties it had paid to the Company into shares of the
Company's Series F Preferred Stock convertible into 365,518 shares of Common
Stock and one-year warrants to purchase shares of the Company's Series B
Preferred Stock convertible into an aggregate of 169,260 shares of Common Stock
at an exercise price of $4.73 per share; and (iv) Intel, pursuant to the
warrants that the Company had granted under the Loan Agreement, exercised those
warrants and purchased from the Company, in consideration for the cancellation
of the Company's indebtedness to Middlefield in the amount of $2.0 million plus
accrued interest, shares of the Company's Series E Preferred Stock convertible
into 487,358 shares of Common Stock. In December 1996, Intel exercised its
warrants on a net basis for the Series B Preferred Stock for shares of Series B
Preferred Stock convertible into 91,922 shares of Common Stock.
In 1994, 1995, 1996 and the first six months of 1997, Intel purchased
products from the Company for approximately $397,800, $325,300, $613,200 and $0,
respectively. While Intel no longer purchases products from the Company, it
remains a stockholder of the Company and maintains certain licensing and
manufacturing rights to certain Hybrid products.
In October 1994, the Company sold shares of Series B Preferred Stock
convertible into 164,022 shares of Common Stock, at an aggregate purchase price
of $775,000, to Gary M. Lauder, a director of the Company. In November 1994,
pursuant to the exercise of rights of first refusal, the Company sold shares of
Series B Preferred Stock convertible into 26,825 shares of Common Stock at an
aggregate purchase price of $126,746 to OSCCO III, L.P. ("OSCCO"), a 5%
stockholder of the Company (of which Stephen E. Halprin, a director of the
Company, is a partner).
In May 1995, the Company sold shares of Series D Preferred Stock convertible
into a total of 1,058,202 shares of Common Stock at an aggregate purchase price
of $5,000,002 and issued warrants for shares of Series D Preferred Stock
convertible into 529,101 shares of Common Stock and shares of Series B Preferred
Stock convertible into 76,245 shares of Common Stock at an exercise price of
$4.73 per share. This included sales to (i) partnerships associated with Sequoia
Capital (the "Sequoia Partnerships"), a 5% stockholder of the Company (of which
Douglas M. Leone, a director of the Company, is a partner), of shares
convertible into 406,351 shares of Common Stock and one-year warrants to
purchase shares of Series D Preferred Stock convertible into 203,176 shares of
Common Stock, (ii) partnerships associated with Accel Partners (the "Accel
Partnerships"), a 5% stockholder of the Company (of which James R. Flach, a
director of the Company, is a partner), of shares convertible into 423,284
shares of Common Stock and one-year warrants to purchase shares of Series D
Preferred Stock convertible into 211,643 shares of
56
<PAGE>
Common Stock and (iii) AT&T Venture Co., L.P., later renamed Venture Fund I,
L.P. ("Venture Fund"), a 5% stockholder of the Company, of shares convertible
into 211,640 shares of Common Stock and one-year warrants to purchase shares of
Series D Preferred Stock convertible into 105,820 shares of Common Stock.
Pursuant to the exercise of rights of first refusal, Mr. Lauder received
one-year warrants to purchase shares of Series B Preferred Stock convertible
into 63,493 shares of Common Stock and OSCCO received one-year warrants to
purchase shares of Series B Preferred Stock convertible into 6,005 shares of
Common Stock in May 1995. In June 1995, pursuant to the exercise of rights of
first refusal, certain entities purchased additional shares of Series D
Preferred Stock convertible into 126,985 shares of Common Stock (for an
aggregate purchase price of $600,002) and received one-year warrants to purchase
shares of Series D Preferred Stock convertible into 63,493 shares of Common
Stock at an exercise price of $4.73 per share. As part of this transaction,
OSCCO purchased shares of Series D Preferred Stock convertible into 82,758
shares of Common Stock and a one-year warrant to purchase shares of Series D
Preferred convertible into 41,379 shares of Common Stock.
In June 1996, the Company obtained a $3.2 million Bridge Loan from Sequoia
Partnerships ($1.0 million), the Accel Partnerships ($1.0 million), Venture Fund
($500,000), Gary Lauder ($300,000), OSCCO ($223,886) and two other investors and
issued to such lenders convertible promissory notes due in December 1996 (the
"Bridge Notes"). The Bridge Notes were secured by security interests in
substantially all the Company's assets. In connection with obtaining the bridge
loan, the Company also (i) extended from June 1996 to June 2001 the expiration
dates of the outstanding warrants held by the Sequoia Partnerships, the Accel
Partnerships, Venture Fund, OSCCO and others to purchase shares of Series D
Preferred Stock and the outstanding warrants held by Gary Lauder, OSCCO Ventures
and another investor to purchase shares of Series B Preferred Stock and (ii)
issued to the holders of the Bridge Notes additional five-year warrants to
purchase shares of Series D Preferred Stock convertible into an aggregate of
167,038 shares of Common Stock at an exercise price of $4.73 per share,
including warrants for shares convertible into 50,742, 52,857, 26,428, 15,857
and 11,834 shares of Common Stock to the Sequoia Partnerships, the Accel
Partnerships, Venture Fund, Gary Lauder and OSCCO, respectively. In addition, in
consideration for the agreement of certain of the investors in the bridge loan
to reduce the preferences of the Series D Preferred Stock, two founders of the
Company, Howard L. Strachman and Eduardo J. Moura, sold an aggregate of 210,573
shares of Common Stock, including 199,702 shares to the following entities in
the following amounts at a purchase price of $0.54 per share: the Sequoia
Partnerships, 72,195 shares; the Accel Partnerships, 75,202 shares; Venture
Fund, 37,602 shares; and OSCCO, 14,703 shares.
In July 1996, the Company sold shares of Series G Preferred Stock
convertible into 974,952 shares of Common Stock at an aggregate purchase price
of $10,081,969. Upon the consummation of the Series G Preferred Stock financing,
the Bridge Notes were converted into shares of Series G Preferred. The Bridge
Notes held by the Sequoia Partnerships, the Accel Partnerships, Venture Fund,
Gary Lauder and OSCCO were converted into shares of Series G Preferred Stock
convertible into 92,836, 96,705, 48,352, 29,011 and 21,651 shares of Common
Stock, respectively.
In April 1997, London Pacific Life & Annuity Company ("London Pacific"), a
5% stockholder of the Company, and the Company entered into a senior secured
convertible debenture agreement pursuant to which London Pacific loaned $5.5
million to the Company in exchange for a senior secured convertible debenture
due 2002. In connection with the issuance of the $5.5 Million Debenture, the
Company paid a fee of $500,000 to London Pacific International Limited, an
affiliate of London Pacific. The loan accrues interest at a rate of 12% per
annum, payable quarterly, and its term ends in April 2002, at which time the
full principal amount is due. The loan is secured by substantially all of the
Company's assets, and the Company is subject to certain restrictive covenants
while the $5.5 Million Debenture is outstanding. In August 1997, the $5.5
Million Debenture was transferred to BG Services Limited, an affiliate of London
Pacific. The $5.5 Million Debenture is convertible into 513,423 shares of Common
Stock, assuming a conversion price of $10.71 per share, at the option of BG
Services Limited at any time and will automatically convert into that number of
shares if (i) the gross proceeds to the Company from this
57
<PAGE>
offering are at least $15.0 million, (ii) the public offering price per share is
at least $166.5 million divided by the number of fully diluted shares of capital
stock of the Company (as determined pursuant to the terms of the $5.5 Million
Debenture) prior to this offering (the "Minimum Price") and (iii) the closing
price of the Common Stock after this offering is equal to or greater than the
Minimum Price for any 90 consecutive calendar day period after this offering.
In 1994, 1995, 1996 and the first six months of 1997, the Company paid
$40,000, $40,000, $26,879 and $0, respectively, to Howard Strachman, a founder
of the Company, and $40,000, $40,000, $15,621 and $0, respectively, to Eduardo
J. Moura, a founder of the Company, in compensation for services rendered by
them during 1992 and 1993.
In September 1997, Dan Steimle, the Company's Vice President, Finance and
Administration and Chief Financial Officer and Sequoia Partnerships loaned the
Company $500,000 and $300,000, respectively, under a demand note exchangeable
for Subordinated Notes. In September 1997, the Company entered into an agreement
to issue the Subordinated Notes and related warrants to acquire shares of Common
Stock at a price of $10.91 per share. The following affiliates of the Company
participated in the Subordinated Notes and related warrant transaction:
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBORDINATED OF COMMON STOCK
NAME NOTES SUBJECT TO WARRANTS
- ----------------------------------------------------------- ------------ -------------------
<S> <C> <C>
Sequoia Partnerships....................................... $ 300,000 11,001
Accel Partnerships......................................... 250,000 9,167
OSCCO...................................................... 200,000 7,334
Gary Lauder................................................ 100,000 3,667
Dan Steimle................................................ 500,000 18,335(1)
</TABLE>
- ------------------------
(1) One-half of the warrants are issuable to Mr. Steimle's wife.
During the six months ended June 30, 1997, Network Systems Technologies,
Inc., of which Eduardo Moura is President, Chief Executive Officer and a major
stockholder, was a greater than 10% customer of the Company. During that period,
Network Systems Technologies, Inc. accounted for net sales of the Company of
$564,000.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of June 30,
1997 by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each director of the Company,
(iii) each of the Named Executive Officers and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY --------------------------------------
NAME OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ---------------------------------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
Intel Corporation(3)...................................... 1,207,020 16.7% 12.2%
Strachman Family Revocable Trust(4)....................... 916,710 12.7 9.2
James R. Flach
Accel Partners(5)....................................... 870,392 11.6 8.5
Douglas Leone
Sequoia Capital(6)...................................... 859,690 11.5 8.4
Eduardo J. Moura(7)....................................... 687,532 9.5 6.9
BG Services Limited(8).................................... 513,423 6.6 4.9
OSCCO III, L.P.(9)........................................ 483,824 6.6 4.8
Venture Fund I, L.P.(10).................................. 429,842 5.8 4.3
Gary M. Lauder(11)........................................ 290,901 4.0 2.9
Carl S. Ledbetter(12)..................................... 179,089 2.4 1.8
William H. Fry(13)........................................ 37,518 * *
Gustavo Ezcurra(14)....................................... 20,006 * *
Stephen E. Halprin(15).................................... 5,246 * *
All executive officers and directors as a group (9
persons)(16)............................................ 3,179,552 39.2% 29.4%
</TABLE>
- ------------------------
* Represents less than 1% of the Company's outstanding Common Stock.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of June 30, 1997 and the $5.5
Million Debenture, which is convertible immediately at the option of the
holder, are deemed to be outstanding and to be beneficially owned by the
person holding such options, warrants or the $5.5 Million Debenture for the
purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage ownership
of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
405,000 shares from the Company is not exercised.
(3) Includes 487,357 shares held by Middlefield Ventures, Inc., an affiliate of
Intel. Intel's address is 2200 Mission College Boulevard, Santa Clara, CA
95052.
(4) Mr. Strachman, a trustee of the Strachman Family Revocable Trust, was a
co-founder of the Company and served as its President and Chief Executive
Officer from June 1990 until his resignation in July 1995. He is currently a
director of the Company. Mr. Strachman's address is c/o Ultracom
Communications, Inc., 21580 Stevens Creek Blvd., Cupertino, CA 95014.
(5) Represents ownership by the following entities associated with Accel
Partners: 545,193 shares and 242,279 shares subject to warrants exercisable
immediately held by Accel IV, L.P., 25,594 shares and 11,374 shares subject
to warrants exercisable immediately held by Accel Investors '95 L.P.,
59
<PAGE>
13,095 shares and 5,820 shares subject to warrants exercisable immediately
held by Ellmore C. Patterson Partners, 11,309 shares and 5,027 shares
subject to warrants exercisable immediately held by Accel Keiretsu L.P. Also
includes 10,701 shares subject to options exercisable within 60 days of June
30, 1997 held by Mr. Flach granted in connection with services performed by
Mr. Flach for the Company. Mr. Flach, a director of the Company, is a
venture partner of Accel Partners and holds no voting or dispositive power
with respect to any of these shares. The address of Mr. Flach and the Accel
partnerships is .
(6) Represents 541,621 shares and 240,692 shares subject to warrants
exercisable immediately held by Sequoia Capital VI, 29,761 shares and 13,226
shares subject to warrants exercisable immediately held by Sequoia
Technology Partners VI, ("STP VI"), 16,932 shares held by Sequoia XXIV and
6,877 shares and 10,581 shares subject to warrants exercisable immediately
held by Sequoia 1995. Mr. Leone, a director of the Company, is a general
partner of STP VI and of the general partner of Sequoia Capital VI. The
address of Mr. Leone and the Sequoia funds is 3000 Sand Hill Road, Menlo
Park, CA 94025.
(7) Mr. Moura was a co-founder of the Company and served as its Vice President,
Network Systems from June 1990 until his resignation in November 1996 and as
a director until his resignation in January 1996. Mr. Moura's address is
3509 Mt. Davidson Court, San Jose, CA 95124.
(8) Represents shares issuable upon the conversion, at the option of the holder
at any time, of $5.5 million in principal amount of the $5.5 Million
Debenture. See "Certain Transactions." The address of BG Services Limited is
c/o Minden House, 6 Minden Place, St. Helier, Jersey, Channel Islands.
(9) Includes 59,218 shares subject to warrants exercisable immediately. The
address of OSCCO III, L.P. is 3000 Sand Hill Road, 1-290, Menlo Park, CA
94025.
(10) Includes 132,248 shares subject to warrants exercisable immediately. The
address of Venture Fund I, L.P., is 3000 Sand Hill Road, Menlo Park, CA
94025.
(11) Includes 79,350 shares subject to warrants exercisable immediately and
18,518 shares subject to options exercisable within 60 days of June 30,
1997. Mr. Lauder is a director of the Company.
(12) Represents shares subject to options exercisable within 60 days of June 30,
1997. Mr. Ledbetter is the President, Chief Executive Officer and Chairman
of the Board of Directors of the Company.
(13) Includes 32,889 shares subject to options exercisable within 60 days of
June 30, 1997. Mr. Fry is Vice President, Operations of the Company.
(14) Represents shares subject to options exercisable within 60 days of June 30,
1997. Mr. Ezcurra is Vice President, Sales of the Company.
(15) Represents shares subject to options exercisable within 60 days of June 30,
1997. Mr. Halprin is a director of the Company.
(16) Includes 597,768 shares subject to warrants exercisable immediately and
266,449 shares subject to options exercisable within 60 days of June 30,
1997 held by executive officers and directors of the Company.
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DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the authorized capital
stock of the Company will consist of 100,000,000 shares of Common Stock, $0.001
par value per share, and 5,000,000 shares of Preferred Stock, $0.001 par value
per share. As of June 30, 1997, and assuming the conversion of all outstanding
Preferred Stock into Common Stock immediately prior to the closing of this
offering, there were outstanding 7,228,127 shares of Common Stock held of record
by 140 stockholders, warrants to purchase 908,177 shares of Common Stock,
options to purchase 1,649,920 shares of Common Stock and a $5.5 Million
Debenture convertible into 513,423 shares of Common Stock.
COMMON STOCK
Subject to preferences that may apply to shares of Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Each stockholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in the Company's Certificate
of Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The Common Stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon a liquidation, dissolution or winding-up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock and any participating Preferred
Stock outstanding at that time after payment of liquidation preferences, if any,
on any outstanding Preferred Stock and payment of other claims of creditors.
Each outstanding share of Common Stock is, and all shares of Common Stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
(the "Convertible Preferred") will be converted into shares of Common Stock. See
Note 9 of Notes to Financial Statements for a description of the Convertible
Preferred. The Board of Directors is authorized, subject to limitations
prescribed by Delaware law, to provide for the issuance of additional shares of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the powers, designations,
preferences and rights of the shares of each wholly unissued series and
designate any qualifications, limitations or restrictions thereon and to
increase or decrease the number of shares of any such series (but not below the
number of shares of such series then outstanding) without any further vote or
action by the stockholders. The issuance of Preferred Stock with voting or
conversion rights could adversely affect the voting power or other rights of the
holders of Common Stock and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current plan
to issue any shares of Preferred Stock.
WARRANTS
As of June 30, 1997, the Company had outstanding exercisable warrants to
purchase 844,353 shares at $4.73 per share. Warrants to purchase 835,887 and
8,466 of such shares expire in June 2001 and August 2005, respectively. As of
June 30, 1997, the Company also had outstanding warrants to purchase 63,824
shares at $10.34 per share. Warrants to purchase 58,022 and 5,802 of such shares
expire in July 2001 and August 2006, respectively. In September 1997, the
Company committed to issue additional warrants to purchase an aggregate of
255,028 shares of Common Stock in connection with the issuance of the
Subordinated Notes and the commitment of the Credit Facility. Such warrants have
an exercise price of $10.91 per share and have a term of five years. The number
of shares subject to warrants issued in connection with the issuance of the
Subordinated Notes and the exercise price per share disclosed herein assume that
the Subordinated Notes and all accrued interest thereon are repayed in full with
the proceeds of this offering.
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CONVERTIBLE $5.5 MILLION DEBENTURE
The Company has outstanding a senior secured convertible debenture due 2002
in the principal amount of $5.5 million to London Pacific. The loan accrues
interest at a rate of 12% per annum, payable quarterly and its term ends in
April 2002, at which time the full principal amount is due. In August 1997, the
$5.5 Million Debenture was transferred to BG Services Limited. The $5.5 Million
Debenture is convertible into 513,423 shares of Common Stock, assuming a
conversion price of approximately $10.71 per share, at the option of the holder
at any time and will automatically convert into that number of shares if (i) the
gross proceeds to the Company from this offering are at least $15.0 million,
(ii) the public offering price per share is at least equal to the Minimum Price
and (iii) the closing price of the Common Stock after this offering is equal to
or greater than the Minimum Price for any 90 consecutive calendar day period
after this offering or, alternatively, upon the acquisition of the Company for
at least $166.5 million in cash or fair market value of freely tradeable
securities from the acquiring company. The $5.5 Million Debenture is
collateralized by substantially all of the Company's assets, and as long as the
$5.5 Million Debenture is outstanding the Company is subject to certain
restrictive covenants, including limitations on the amount of capital
expenditures it may incur in any 12 month period, and may not declare dividends,
retire any subordinated debt other than in accordance with its terms, or
distribute its assets to any stockholder. See Note 5 to Notes to Financial
Statements.
SUBORDINATED NOTES
In September 1997, the Company entered into an agreement to issue
subordinated notes in the principal amount of approximately $6.9 million. The
Subordinated Notes bear interest which must be paid quarterly at the rate of 10%
per annum until the earlier of March 30, 1998 or the date on which the principal
amount is paid in full, and if such principal amount is not repaid as of March
30, 1998, the Subordinated Notes will bear interest at the rate of 18% per annum
beginning after such date. The Subordinated Notes shall become due and payable
upon the closing of this offering. See Note 15 to Notes to Financial Statements.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Section 203 ("Section 203") of the Delaware General Corporation Law ("DGCL")
is applicable to corporate takeovers of Delaware corporations. Subject to
certain exceptions set forth therein, Section 203 provides that a corporation
shall not engage in any business combination with any "interested stockholder"
for a three-year period following the date that such stockholder becomes an
interested stockholder unless (a) 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, (b) 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 certain shares) or (c) on or subsequent to such date, the
business combination is approved by the board of directors of the corporation
and by the affirmative votes of at least two-thirds of the outstanding voting
stock which is not owned by the interested stockholder. Except as specified in
Section 203, an interested stockholder is generally defined to include any
person that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, or is
an affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation any time within three years
immediately prior to the relevant date, and the affiliates and associates of
such person. Under certain circumstances, Section 203 makes it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or bylaws, elect
not to be governed by this section, effective 12 months after adoption. The
Company's certificate of incorporation and the bylaws do not exclude the Company
from
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the restrictions imposed under Section 203. It is anticipated that the
provisions of Section 203 may encourage companies interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control of the Company, which could depress the market
price of the Common Stock and which could deprive the stockholders of
opportunities to realize a premium on shares of the Common Stock held by them.
CHARTER AND BYLAW PROVISIONS
The Company's certificate of incorporation and bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. The certificate of
incorporation and the bylaws provide for a classified Board of Directors and
permit the Board to create new directorships and to elect new directors to serve
for the full term of the class of director in which the new directorship was
created. The terms of the directors are staggered to provide for the election of
approximately one-third of the Board members each year, with each director
serving a three-year term. The Board (or its remaining members, even though less
than a quorum) is also empowered to fill vacancies on the Board occurring for
any reason for the remainder of the term of the class of directors in which the
vacancy occurred. Stockholders may remove a director or the entire Board, and
such removal requires the affirmative vote of a majority of the outstanding
voting stock. The Company's certificate of incorporation provides that
stockholders may not take action by written consent but only at a stockholders'
meeting, and that special meetings of the stockholders of the Company may only
be called by the Chairman of the Board or a majority of the Board.
REGISTRATION RIGHTS
Beginning six months after the date of this offering, the holders of
6,257,827 shares of Common Stock, the holders of warrants to purchase 1,185,607
shares of Common Stock and the holders of the $5.5 Million Debenture convertible
into 513,423 shares of Common Stock (collectively, the "Registrable Securities")
will have certain rights with respect to the registration of those shares under
the Securities Act. If the Company proposes to register any of its shares of
Common Stock under the Securities Act other than in connection with a Company
employee benefit plan or certain corporate acquisitions, mergers or
reorganizations, the holders of the Registrable Securities may require the
Company to include all or a portion of their shares in such registration,
subject to certain rights of the managing underwriter to limit the number of
shares in any such offering.
Further, holders of Registrable Securities holding at least 30% of the
outstanding shares of Registrable Securities may require the Company to register
all or any portion of their Registrable Securities on Form S-3 when such form
becomes available to the Company, subject to certain conditions and limitations.
The Company may be required to effect up to one such registration per year. In
addition holders of a majority of the warrants issued in connection with the
Subordinated Notes and shares of Common Stock exercisable thereunder may require
the Company to register one time all or any portion of the shares issuable upon
exercise of such warrants on Form S-3 commencing one year after the offering
and, subject to certain limitations, to keep the Registration effective for no
less than 180 days.
All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions) will be borne by the Company. The
registration rights expire six years after the closing of this offering. In
addition, no holder of Registrable Securities shall be entitled to registration
rights if and so long as such holder can sell the Registrable Securities in
compliance with Rule 144 of the Securities Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Boston
EquiServe.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company and there can be no assurance that a significant public market for the
Common Stock, will develop or be sustained after this offering. Future sales of
substantial amounts of Common Stock (including shares issued upon exercise of
outstanding options and warrants and upon conversion of the $5.5 Million
Debenture) in the public market after this offering could adversely affect
market prices prevailing from time to time and could impair the Company's
ability to raise capital through the sale of its equity or debt securities. As
described below, no shares currently outstanding will be available for sale
immediately after this offering due to certain contractual restrictions on
resale. Sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of this offering, the Company will have outstanding
9,928,127 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option, no exercise of outstanding options or warrants and no
conversion of the $5.5 Million Debenture. Of these shares, the 2,700,000 shares
sold in this offering will be freely tradable without restriction under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining 7,228,127 shares
held by existing stockholders (the "Restricted Shares") are subject to lock-up
agreements providing that, with certain limited exceptions, the stockholder will
not offer, sell, contract to sell, grant an option to purchase, make a short
sale or otherwise dispose of or engage in any hedging or other transaction that
is designed or reasonably expected to lead to a disposition of any shares of
Common Stock or any option or warrant to purchase shares of Common Stock or any
securities exchangeable for or convertible into shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the representatives of the Underwriters. As a result of these lock-up
agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, none of these shares will be saleable
until 181 days after the date of this Prospectus. Beginning 181 days after the
date of this Prospectus, the 7,228,127 Restricted Shares will be eligible for
sale in the public market, although all but 3,052,630 shares will be subject to
certain volume limitations. Holders of warrants for 1,148,937 shares of Common
Stock of the Company and the holder of the $5.5 Million Debenture which may be
converted at the option of the holder at any time into 513,423 shares of Common
Stock, have certain registration rights, but are also subject to the 180-day
lock-up agreement.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately 99,000 shares immediately after this offering);
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to the Company
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to
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comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701 shares are required to wait
until 90 days after the date of this Prospectus before selling such shares.
However, all shares issued pursuant to Rule 701 are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after the
offering upon obtaining the prior written consent of the representatives of the
Underwriters.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's Executive Officer Plan, 1993 Plan and
1996 Plan and reserved for issuance under the 1997 Plan, the Directors Plan and
the Purchase Plan. Based on the number of shares subject to outstanding options
at June 30, 1997 and currently reserved for issuance under all such plans, such
registration statement would cover approximately 4,244,935 shares. Such
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates of the Company, be
available for sale in the open market immediately after the 180-day lock-up
agreements expire. Also beginning six months after the date of this offering,
certain holders of shares of Common Stock and warrants to acquire Common Stock
and the holder of the $5.5 Million Debenture will be entitled to certain rights
with respect to registration of such shares of Common Stock for offer and sale
to the public. See "Description of Capital Stock--Registration Rights."
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities and UBS Securities LLC (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent, and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities............................................................
UBS Securities LLC...............................................................
----------
Total........................................................................ 2,700,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this offering, the price
and concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 405,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,700,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments made in connection with this offering.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
All of the Company's stockholders have agreed that, for a period of 180 days
after the date of this Prospectus, they will not, without the prior written
consent of Montgomery Securities, directly or indirectly sell, offer to sell or
otherwise dispose of any such shares of Common Stock or any right to acquire
such shares. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the prior written
consent of Montgomery Securities, issue, offer, sell, grant options to purchase
or otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable for the Common Stock or other equity
security, other than the grant of options to purchase Common Stock or the
issuance of shares of Common Stock under the Company's stock option and stock
purchase plans and the issuance of shares of Common Stock pursuant to the
exercise of outstanding options and warrants.
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Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, the Company's past and present operations, its past and
present financial performance, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of the offering and the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock
offered hereby. Such transactions may include stabilizing, the purchase of
Common Stock to cover syndicate short positions and the imposition of penalty
bids. A stabilizing bid means the placing of any bid or the effecting of any
purchase for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when shares of Common Stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may stabilize or maintain the market price of the Common Stock
at a level above that which otherwise might prevail in the open market and, if
commenced, may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996
and, for each of the three years in the period ended December 31, 1996 included
in this Prospectus have been so included in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of said firm as
experts in auditing and accounting.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement and the exhibits and schedules thereto may be inspected without charge
at the offices of the Commission at Judiciary Plaza, 450 Fifth Street,
Washington, D.C. 20549, and copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon the payment of the fees prescribed by the
Commission. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy, and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. Information concerning the registrant is also available for
inspection at the offices of the Nasdaq National Market, Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
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GLOSSARY OF TERMS
ADSL
Asymmetric Digital Subscriber Line. Also see Digital Subscriber Line.
ANALOG
A form of transmission employing a continuous electrical signal (rather than
a pulsed or digital system) that varies in frequency and amplitude.
ASYMMETRIC
A property of a network where digital data conveyed in upstream and
downstream paths of the network are transmitted at different speeds and/or under
different protocols, or are transferred over different (e.g., heterogeneous)
media.
BACKBONE
A centralized, high-speed network that interconnects smaller, independent
networks.
BANDWIDTH
The amount of data, usually measured in bits per second (bps), that can be
sent through a dedicated transmission circuit; the capacity of a
telecommunications circuit or network to carry voice, data and video
information.
BROADBAND WIRELESS SYSTEM OPERATOR
A wireless service provider with 2 MHz or more of contiguous bandwidth that
can be used to offer high speed Internet access.
CENTRAL OFFICE
A term commonly used to describe the location of the switching equipment
that is used to connect telephone calls.
COAXIAL
A type of electrical cable in which one conductor is wrapped around another,
separated from the inner conductor by an insulating layer. Coaxial cable (coax)
is most often used in the home to bring incoming cable TV signals to the
television.
DAVIC
Digital Audio Video Interactive Council. DAVIC is an industry consortium
that has defined a set of cable modem interface specifications.
DIGITAL
The representation of information as discrete values (i.e., 1s and 0s).
These digital values can be processed, manipulated, exchanged or stored by
electronic systems.
DIGITAL SUBSCRIBER LINE
See xDSL.
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ETHERNET
A set of media independent LAN transport protocols that offers 10
(Ethernet), 100 (Fast Ethernet) and 1000 (Gigabit Ethernet) megabit per second
speeds for data throughput.
FSK
Frequency Shift Keying. A modulation technique used to transmit digital
signals.
FREQUENCY
The number of identical cycles per second, measured in hertz, of a periodic
oscillation wave in radio propagation.
HFC
Hybrid Fiber/Coaxial cable. A mixed media architecture that some cable TV
operators are deploying. HFC networks utilize fiber optic cables for the trunks
from the headend to neighborhood nodes and coaxial cables for connecting
neighborhood nodes to end-users.
ISDN
Integrated Services Digital Network. An internationally accepted telephony
standard for voice, data and signaling that makes all transmission circuits
end-to-end digital and defines a standard out-of-band signaling system. It can
give a user up to 64 Kbps of data bandwidth on a telephone line that is also
used for voice, or up to 128 Kbps if the voice capability is not used.
ISP
Internet Service Provider. An entity that provides commercial access to the
Internet.
ITFS
Instructional TV Fixed Service. A set of wireless frequencies beginning at
2.5 GHz that have been allocated by the FCC for educational use. Often bundled
with MDS and MMDS channels in a wireless cable system.
Kbps
Kilobits per second. A transmission rate equal to 1,024 bits per second.
LAN
Local Area Network. A data communications network (often using Ethernet as
its protocol) designed to interconnect personal computers, workstations, file
servers and other communications and computing devices within a local
environment, generally extending throughout a building or over several buildings
within a two-mile radius.
LAST MILE
A term used to describe the last portion of a WAN that connects the end-user
to a network node (such as a telephone central office or cable headend).
LMDS
Local Multipoint Distribution Service. A set of wireless frequencies
starting at 28 GHz that have recently been set aside by the FCC for auction in
1998.
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LPTV
Low Power TV. A group of community TV broadcasters that have been granted
licenses by the FCC to broadcast community-oriented low power TV over UHF and
VHF frequencies. Some LPTV operators have received experimental licenses from
the FCC for providing high speed Internet access.
MBPS
Megabits per second. A transmission rate equal to 1,000,000 bits per second.
MCNS
Multimedia Cable Network System. A set of cable modem interface
specifications defined by a consortium of cable TV operators and vendors.
MDS
Multipoint Distribution Service. A set of wireless frequencies starting at
2.1 GHz that are often bundled with MMDS and ITFS in a wireless cable system.
MMDS
Multichannel Multipoint Distribution Service. Often used as a synonym for
"Wireless Cable." MMDS specifically refers to a set of wireless frequencies in
the 2.6 GHz range that were originally allocated for analog television
rebroadcast.
MODEM
A device for transmitting and receiving digital information over an analog
telephone line.
PLAIN OLD TELEPHONE SERVICE (POTS)
Basic analog telephone service with no enhanced features (such as call
waiting, conference calling or call forwarding), typically available in
residences throughout the United States.
PoP
Point of Presence. A site which houses a collection of telecommunications
equipment, usually digital leased lines and multi-protocol routers. Used in this
document to refer to the location of the Company's headend equipment.
PROTOCOL
A formal description of messages to be exchanged and rules to be followed
for two or more systems to exchange information.
PSTN
Public Switched Telephone Network. The combined telephony infrastructure of
Inter Exchange Carriers (e.g. AT&T) and Local Exchange Carriers (e.g., RBOCs).
Universal telephone service, embodied as the goal of the 1934 Communications
Act, is provided by access to the PSTN.
QPSK
Quadrature Phase Shift Keying. A modulation technique used to transmit
digital signals.
71
<PAGE>
ROUTER
A system including a specialized computer that takes incoming packets and
compares their destination addresses to internal routing tables and, depending
on network conditions, sends the packets out to the appropriate receiving
router. This process may be repeated many times until the packets reach their
intended destination.
T-1
A digital carrier facility capable of transmitting a DS-1 formatted digital
signal at a rate of 1.544 Mbps.
T-3
A digital carrier facility capable of transmitting a DS-3 formatted digital
signal at a rate of 44.746 Mbps.
TCP/IP
Transport Control Protocol/Internet Protocol (TCP/IP). A worldwide public
domain standard for connecting computers accepted by many vendors for use over
WANs.
TERMINAL SERVER
A device located at a PoP that connects a bank of telephone modems to a LAN.
The terminal server is attached to the router which in turn is attached to the
DSU-CSU.
UHF
Ultra High Frequency. Defines frequencies typically used by broadcast
television signals in the 470 to 806 megahertz range, denoted by channels 14-69
on a standard television.
VHF
Very High Frequency. Defines frequencies typically used by broadcast
television signals in the 54 to 216 megahertz range, denoted by channels 2-13 on
a standard television.
WIRELESS COMMUNICATION SERVICES (WCS)
A set of wireless frequencies auctioned by the FCC in April 1997. The
frequencies start at 2.3 GHz and come in 5 and 10 MHz blocks.
xDSL
Digital Subscriber Line. A technology that enables high speed transmission
of data over copper wires. There are several implementations of DSL technology,
including: ADSL (Asymmetric Digital Subscriber Line); HDSL (High Bit Rate
Digital Subscriber Line); IDSL (Integrated Digital Subscriber Line); RDSL (Rate
Adaptive Digital Subscriber Line); SDSL (Symmetric Digital Subscriber Line); and
VDSL (Very High Bit Rate Digital Subscriber Line).
72
<PAGE>
HYBRID NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited).............................. F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Six Months Ended
June 30, 1996 and 1997 (unaudited)....................................................................... F-4
Statements for Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 and for the Six
Months Ended June 30, 1997 (unaudited)................................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Six Months Ended
June 30, 1996 and 1997 (unaudited)....................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Hybrid Networks, Inc.:
We have audited the accompanying balance sheets of Hybrid Networks, Inc. as
of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hybrid Networks, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
August 28, 1997, except for Note 15
as to which the date is
September 19, 1997
F-2
<PAGE>
HYBRID NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
-------------------- JUNE 30, (NOTE 14)
1995 1996 1997 JUNE 30, 1997
--------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 2,863 $ 6,886 $ 3,836
Short-term investments............................................. 490 -- --
Accounts receivable, net of allowance for doubtful accounts of none
in 1995 and 1996 and $690 in 1997................................ 287 1,348 3,206
Inventories........................................................ 196 943 1,799
Prepaid expenses and other current assets.......................... 10 125 356
--------- --------- ---------
Total current assets............................................. 3,846 9,302 9,197
Property and equipment, net.......................................... 707 1,178 1,708
Deferred financing costs............................................. -- -- 500
Other assets......................................................... 33 59 74
--------- --------- ---------
Total assets..................................................... $ 4,586 $ 10,539 $ 11,479
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 280 $ 1,424 $ 1,451
Accrued liabilities................................................ 307 712 937
Current portion of capital lease obligations....................... 110 222 364
--------- --------- ---------
Total current liabilities........................................ 697 2,358 2,752
Convertible debenture................................................ -- -- 5,500
Capital lease obligations, less current portion...................... 184 438 737
Other liabilities.................................................... 44 34 --
--------- --------- ---------
Total liabilities................................................ 925 2,830 8,989
--------- --------- ---------
Commitments (Note 8)
Stockholders' equity:
Convertible preferred stock, $.001 par value:
Authorized: 18,000 shares;
Issued and outstanding: 8,363 shares in 1995, 12,069 shares in
1996 and 12,563 shares in 1997; no shares pro forma............ 8 12 13
(Liquidation value: $25,750 at December 1996)
Common stock, $.001 par value:
Authorized: 29,000 shares;
Issued and outstanding: 2,496 shares in 1995, 2,519 shares in
1996 and 2,575 shares in 1997; 7,228 pro forma shares.......... 2 2 2 $ 15
Additional paid-in capital........................................... 12,478 25,037 27,070 27,070
Accumulated deficit.................................................. (8,827) (17,342) (24,595) (24,595)
--------- --------- --------- -------------
Total stockholders' equity....................................... 3,661 7,709 2,490 $ 2,490
--------- --------- --------- -------------
-------------
Total liabilities and stockholders' equity..................... $ 4,586 $ 10,539 $ 11,479
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................................. $ 668 $ 630 $ 2,962 $ 758 $ 4,905
Cost of sales.............................................. 1,362 761 3,130 936 4,689
--------- --------- --------- --------- ---------
Gross profit (loss).................................... (694) (131) (168) (178) 216
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................. 1,251 3,862 5,076 2,269 3,379
Sales and marketing...................................... 348 390 1,786 389 2,264
General and administrative............................... 533 748 1,714 745 1,802
--------- --------- --------- --------- ---------
Total operating expenses............................... 2,132 5,000 8,576 3,403 7,445
--------- --------- --------- --------- ---------
Loss from operations................................. (2,826) (5,131) (8,744) (3,581) (7,229)
Interest income and other expense, net..................... 30 166 257 53 135
Interest expense........................................... (101) (304) (28) (22) (159)
--------- --------- --------- --------- ---------
Net loss............................................. $ (2,897) $ (5,269) $ (8,515) $ (3,550) $ (7,253)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share......................................... $ (1.00) $ (1.82) $ (2.66) $ (1.11) $ (2.25)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation....................... 2,894 2,891 3,202 3,209 3,218
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL
-------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994..... 1,547 $ 1 2,250 $ 2 $ 662 $ (661) $ 4
Repurchase of common
stock..................... -- -- (74) -- (8) -- (8)
Issuance of Series B
preferred stock, net of
issuance costs of $21..... 552 1 -- -- 943 -- 944
Issuance of Series C
preferred stock upon
conversion of notes
payable, net of issuance
costs of $1............... 761 1 -- -- 1,248 -- 1,249
Net loss.................... -- -- -- -- -- (2,897) (2,897)
------ ------ ------ --- ----------- ----------- -------
Balances, December 31, 1994... 2,860 3 2,176 2 2,845 (3,558) (708)
Exercise of common stock
options................... -- -- 9 -- 3 -- 3
Exercise of stock purchase
rights.................... -- -- 44 -- 24 -- 24
Grant of stock bonus
awards.................... -- -- 5 -- 3 -- 3
Issuance of common stock for
technology license........ -- -- 262 -- 141 -- 141
Issuance of Series B and
Series D preferred stock
warrants.................. -- -- -- -- 18 -- 18
Issuance of Series D
preferred stock, net of
issuance costs of $42..... 3,200 3 -- -- 5,555 -- 5,558
Issuance of Series E
preferred stock upon
conversion of
notes payable............. 1,316 1 -- -- 1,999 -- 2,000
Additional paid in capital
in connection with accrued
interest forgiven from
conversion of notes
payable to Series E
preferred stock........... -- -- -- -- 402 -- 402
Issuance of Series F
preferred stock from
conversion of prepaid
royalties, net of issuance
costs of $11.............. 987 1 -- -- 1,488 -- 1,489
Net loss.................... -- -- -- -- -- (5,269) (5,269)
------ ------ ------ --- ----------- ----------- -------
Balances, December 31, 1995... 8,363 8 2,496 2 12,478 (8,827) 3,661
Exercise of common stock
options................... -- -- 65 -- 34 -- 34
Repurchase of common
stock..................... -- -- (42) -- (9) -- (9)
Issuance of Series B
preferred stock upon net
exercise of warrants...... 248 -- -- -- -- -- --
Issuance of Series G
preferred stock for cash
and conversion of notes
payable, net of issuance
costs of $704............. 3,458 4 -- -- 12,534 -- 12,538
Net loss.................... -- -- -- -- -- (8,515) (8,515)
------ ------ ------ --- ----------- ----------- -------
Balances, December 31, 1996... 12,069 12 2,519 2 25,037 (17,342) 7,709
Exercise of common stock
options................... -- -- 47 -- 26 -- 26
Grant of stock bonus
awards.................... -- -- 9 -- 8 -- 8
Issuance of Series H
preferred stock........... 494 1 -- -- 1,999 -- 2,000
Net loss.................... -- -- -- -- -- (7,253) (7,253)
------ ------ ------ --- ----------- ----------- -------
Balances, June 30, 1997
(unaudited)................. 12,563 $13 2,575 $ 2 $27,070 $(24,595) $ 2,490
------ ------ ------ --- ----------- ----------- -------
------ ------ ------ --- ----------- ----------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (2,897) $ (5,269) $ (8,515) $ (3,550) $ (7,253)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 70 162 322 155 299
Provision for doubtful accounts............................. -- -- -- -- 690
Interest converted to Series E preferred stock.............. -- 402 -- -- --
Common stock issued for technology license.................. -- 141 -- -- --
Common stock issued for services rendered................... -- 3 -- -- 8
Change in assets and liabilities:
Accounts receivable....................................... 51 (224) (1,061) 74 (2,548)
Inventories............................................... (50) (81) (747) (141) (856)
Prepaid expenses and other current assets................. 5 7 (115) (51) (231)
Accounts payable.......................................... 78 102 1,144 295 27
Accrued liabilities and other............................. 101 1,418 395 89 191
--------- --------- --------- --------- ---------
Net cash used in operating activities................... (2,642) (3,339) (8,577) (3,129) (9,673)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............................ (218) (295) (321) (56) (269)
Change in other assets........................................ -- (22) (26) 1 (15)
Purchase of short-term investments............................ (199) (490) -- -- --
Proceeds from maturity of short-term investments.............. -- 199 490 490 --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities..... (417) (608) 143 435 (284)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayment of capital lease obligations........................ -- (20) (106) (61) (119)
Repayment of notes payable.................................... (25) -- -- -- --
Proceeds from issuance of preferred stock warrants............ -- 18 -- -- --
Net proceeds from issuance of notes payable................... 2,344 -- 3,160 3,160 5,000
Net proceeds from issuance of preferred stock................. 944 5,558 9,378 -- 2,000
Proceeds from issuance of common stock........................ -- 27 34 33 26
Repurchase of common stock.................................... (8) -- (9) -- --
--------- --------- --------- --------- ---------
Net cash provided by financing activities............... 3,255 5,583 12,457 3,132 6,907
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents................ 196 1,636 4,023 438 (3,050)
Cash and cash equivalents, beginning of period.................. 1,031 1,227 2,863 2,863 6,886
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period........................ $ 1,227 $ 2,863 $ 6,886 $ 3,301 $ 3,836
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of notes payable into preferred stock.............. $ 1,250 $ 2,000 $ 3,160 $ 3,160 --
Conversion of prepaid royalties to Series F preferred stock... -- 1,500 -- -- --
Property and equipment acquired under capital leases.......... -- 314 472 149 $ 560
Capitalization of finance costs............................... -- -- -- -- 500
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................. $ 5 $ 5 $ 28 $ 11 $ 159
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
1. FORMATION AND BUSINESS OF THE COMPANY
The Company is a broadband access equipment company that designs, develops,
manufactures and markets cable and wireless systems that provide high speed
access to the Internet and corporate intranets for both businesses and
consumers. The Company's products remove the bottleneck over the "last mile"
connection to the end user which causes slow response time for those accessing
bandwidth-intensive information over the Internet and corporate intranets.
The Company was incorporated in Delaware on June 6, 1990.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE IN FISCAL YEAR
In 1997, the Company changed its fiscal year end from March 31 to December
31, effective January 1, 1992.
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 periods. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS, BUSINESS RISKS AND CREDIT CONCENTRATION
The carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term cash investments, accounts
receivable, accounts payable and other accrued liabilities' approximate fair
value due to their short maturities.
The Company sells its products primarily to communication and networking
companies in North America, and does not require collateral. As of December 31,
1995, four customers represented 35%, 19%, 18% and 18% of accounts receivable,
and as of December 31, 1996, two customers represented 51% and 10% of accounts
receivable, respectively.
The Company operates in the intensely competitive and rapidly changing
communications industry which has been characterized by rapid technological
change, evolving industry standards and federal, state and local regulation
which may impede the Company's penetration of certain markets.
The Company currently operates with one product line. The Company's future
success depends upon its ability to develop, introduce and market new products,
its ability to obtain components from key suppliers, obtaining sufficient
manufacturing capacity, and the success of the broadband access business. The
Company may experience future fluctuations in operating results and declines in
selling prices.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid instruments with an original or
remaining maturity of three months or less to be cash equivalents. Instruments
with a maturity greater than three months at the date of purchase and maturing
within one year from the balance sheet date are included in short-term
investments. The Company's cash and cash equivalents as of December 31, 1996 are
in three demand accounts
F-7
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with a major bank. Short-term investments as of December 31, 1995 are classified
as available for sale and are carried at cost which approximates fair market
value, and consist of a government bond.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets of
three to five years. Leasehold improvements are amortized over their estimated
useful lives or the remaining lease term, whichever is less.
DEFERRED FINANCING COSTS
Deferred financing costs relate to fees incurred in connection with the
issuance of a senior convertible debenture in April 1997 and will be amortized
over the five year life of the debenture (see Note 5).
REVENUE RECOGNITION
The Company recognizes revenue and accrues for estimated warranty costs upon
shipment of products.
PRODUCT DEVELOPMENT COSTS
Costs related to research, design and development of products are charged to
research and development expenses as incurred.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company's financial
statements for the year ended December 31, 1996. SFAS No. 123 allows companies
to either account for stock-based compensation under the new provisions of SFAS
No. 123 or under the provisions of Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," but requires pro forma
disclosure in the footnotes to the financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company has continued to
account for its stock based compensation in accordance with the provisions of
APB 25 and provided the required pro forma disclosures (see Note 9).
COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Historical net loss per share is computed using the weighted average number
of shares of common stock outstanding during the period. Common equivalent
shares from stock options and convertible preferred stock are excluded from the
computation of net loss per share as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and common equivalent shares issued at prices below the public
offering price during the 12 months immediately preceding the filing date of an
initial public offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
F-8
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
anticipated initial public offering price). Pro forma net loss per share assumes
that the common shares issuable upon conversion of the outstanding convertible
preferred stock have been outstanding during such periods. Pro forma net loss
per share is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ -------------
<S> <C> <C>
(UNAUDITED)
Net loss................................ $(8,515) $(7,253)
------------ -------------
------------ -------------
Pro forma net loss per share............ $ (1.24) $ (0.95)
------------ -------------
------------ -------------
Pro forma number of shares used in per
share
calculation........................... 6,887 7,596
------------ -------------
------------ -------------
</TABLE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim balance sheet as of June 30, 1997 and the
statements of operations and cash flows for the six months ended June 30, 1996
and 1997 together with the related notes are unaudited but include all
adjustments, consisting of only normal recurring adjustments, which the Company
considers necessary to present fairly, in all material aspects, the financial
position, results of operations and cash flows for the period ended June 30,
1996 and 1997. Results for the six months ended June 30, 1996 and 1997 are not
necessarily indicative of results for an entire year.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation and disclosure requirements for earnings per
share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and is
effective for financial statements issued for periods ending after December 15,
1997. SFAS No. 128 requires restatement of all prior-period earnings per share
data presented after the effective date. SFAS No. 128 will not have a material
effect on the Company's earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. The impact of adopting SFAS No. 130, which
is effective for the Company in 1998, has not been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company in 1998 and the impact of adoption has not been
determined.
F-9
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
3. INVENTORIES
Inventories are comprised of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................................. $ 98 $ 526 $ 914
Work in progress........................................... 93 267 329
Finished goods............................................. 5 150 556
--------- --------- -----------
$ 196 $ 943 $ 1,799
--------- --------- -----------
--------- --------- -----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, including furniture and equipment under capital
leases, (cost of $321,000 and $793,000, accumulated amortization of $36,000 and
$177,000 as of December 31, 1995 and 1996, respectively) consist of the
following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................. $ 755 $ 1,440
Office furniture and fixtures............................................ 91 107
Leasehold improvements................................................... 97 189
--------- ---------
943 1,736
Less accumulated depreciation and amortization........................... (236) (558)
--------- ---------
$ 707 $ 1,178
--------- ---------
--------- ---------
</TABLE>
5. CONVERTIBLE DEBENTURE
On April 30, 1997, the Company issued a senior convertible debenture in the
amount of $5,500,000, bearing interest at 12% per annum, payable quarterly, and
maturing on April 30, 2002. The placement fee of $500,000 was deducted from the
cash proceeds to the Company. The debenture is convertible, at the option of the
holder, at any time, into common stock at $10.71 per share, subject to
adjustment. Conversion is automatic if (i) the gross proceeds to the Company
from its initial public offering are at least $15.0 million, (ii) the public
offering price per share is at least $166,500,000 divided by the number of fully
diluted shares of capital stock of the Company (as determined pursuant to the
terms of the debenture) prior to this offering and (iii) the closing price of
the Common Stock for any 90 consecutive calendar day period after this offering
is equal to or greater than $166,500,000 divided by the number of fully diluted
shares of capital stock of the Company (as determined pursuant to the terms of
the debenture) or, alternatively, upon the acquisition of the Company for at
least $166,500,000 in cash or fair market value of freely tradable securities
from the acquiring company.
The debenture is collateralized by substantially all the Company's assets
until October 30, 1997. Subject to certain upgrade adjustments, the Company may
not make capital expenditures in excess of $1,500,000, $2,500,000, $5,500,000
and $11,000,000 during the twelve months ending March 31, 1998, 1999, 2000 and
2001, respectively. Additionally, the Company may not declare dividends, retire
any subordinated
F-10
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
5. CONVERTIBLE DEBENTURE (CONTINUED)
debt other than in accordance with its terms, or distribute its assets to any
stockholder as long as the debenture remains outstanding.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Accrued payroll and related accruals....................................... $ 244 $ 425
Other liabilities.......................................................... 63 287
--------- ---------
$ 307 $ 712
--------- ---------
--------- ---------
</TABLE>
7. CAPITAL LEASE OBLIGATIONS
In August 1996, the Company entered into a financing agreement under which
the Company may lease equipment and furniture in an amount not to exceed
$1,000,000. As of December 31, 1996, $722,000 remained available under this
lease line, which expires on September 15, 1997. Capital leases at December 31,
1996 expire at various dates through March 2002 and bear interest ranging from
7.6% to 10.8%.
Future minimum lease payments under all capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................................. $ 255
1998................................................................. 254
1999................................................................. 187
2000................................................................. 43
2001................................................................. 1
---------
740
Less amount representing interest.................................... (80)
---------
660
Less current portion................................................. (222)
---------
$ 438
---------
---------
</TABLE>
8. COMMITMENTS
The Company leases its facilities and equipment under operating leases
expiring at various dates from May 1998 through March 2002. Under the terms of
two of the facilities leases, the Company is responsible for its share of common
area expenses, and has the option to extend two of the facilities leases for
additional three year terms at fair market rates.
F-11
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
8. COMMITMENTS (CONTINUED)
Future minimum lease payments are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
1997................................................................. $ 377
1998................................................................. 174
1999................................................................. 57
2000................................................................. 55
2001................................................................. 52
Thereafter........................................................... 9
---------
$ 724
---------
---------
</TABLE>
Rent expense for 1994, 1995 and 1996 was approximately $89,000, $161,000 and
$201,000, respectively.
9. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The convertible preferred stock as of December 31, 1996 and June 30, 1997
(UNAUDITED) comprises (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES
SHARES ISSUED AND PROCEEDS LIQUIDATION DIVIDEND
AUTHORIZED OUTSTANDING (NET) VALUE PER SHARE
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A............................................ 1,547 1,547 $ 613 $ 758 $ 0.03
Series B............................................ 1,238 800 944 1,400 0.13
Series C............................................ 762 762 1,249 1,250 0.12
Series D............................................ 5,251 3,200 5,558 5,600 0.13
Series E............................................ 1,316 1,316 2,000 2,000 0.11
Series F............................................ 987 987 1,489 1,500 0.11
Series G............................................ 6,360 3,457 12,538 13,242 0.29
----------- ----------- --------- -----------
Balances, December 31, 1996......................... 17,461 12,069 24,391 25,750
Series H............................................ 497 494 2,000 2,000 $ 0.32
Undesignated........................................ 42
----------- ----------- --------- -----------
Balances, June 30, 1997 (unaudited)................. 18,000 12,563 $ 26,391 $ 27,750
----------- ----------- --------- -----------
----------- ----------- --------- -----------
</TABLE>
F-12
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
The rights, preferences and privileges of the preferred stockholders are as
follows:
DIVIDENDS
The holders of preferred stock are entitled to noncumulative dividends,
pari passu, when and as declared by the Board of Directors, at an annual
rate as stated above. No cash dividend or other distribution may be made
with respect to the common stock during any year unless dividends in the
total amount specified for the preferred stock have been paid or declared
and set apart. No dividends have been declared through December 31, 1996.
LIQUIDATION
The holders of preferred stock are entitled to a preference in
liquidation, pari passu, to common stockholders of a liquidation amount as
indicated in the above table, plus declared but unpaid dividends. Any
remaining assets are distributed to the holders of common stock.
CONVERSION AND REGISTRATION
The preferred stock is convertible, at the option of the holders, at any
time, into common stock on a 1-for-2.7 basis after giving effect to a
reverse split of the Company's common stock (Note 15). Conversion is
automatic upon the earlier of the consummation of a firm commitment
underwritten public offering of the Company's common stock for aggregate
proceeds of $15,000,000, with an offering price of not less than 175% of the
Series G conversion price per share ($6.70 at December 31, 1996), or written
consent by a majority of the holders of the then outstanding shares of
preferred stock. The holders of Series A, B, D, G and H preferred stock, one
of the founders, and two other entities have the right to participate in
future issuances of the Company's stock prior to an initial public offering
and all holders of preferred stock have certain registration rights. The
Company has reserved 4,653,535 shares of common stock for issuance upon
conversion of the preferred stock.
VOTING
Each share of preferred stock is entitled to vote on an "as converted"
basis along with common stockholders. As long as 2,000,000 shares, or more
than 1,000,000 but less than 2,000,0000 shares of Series D preferred stock
are outstanding, the holders of Series D preferred stock, voting separately
as a series, have the right to elect two or one of the Company's directors,
respectively, but are not entitled to vote for other directors. As long as
at least 750,000 shares of Series A preferred stock are outstanding, the
holders of Series A preferred stock, voting together as a separate series,
have the right to elect one of the Company's directors, but are not entitled
to vote for other directors. As long as at least 800,000 shares, in the
aggregate, of Series E and F preferred stock are outstanding, the holders of
Series E and F preferred stock, voting together as a separate class, have
the right to elect one of the Company's directors, but are not entitled to
vote for other directors.
So long as at least 700,000 shares of Series A preferred stock, 500,000
shares of Series B preferred stock, 250,000 shares of Series C preferred
stock, 2,000,000 shares of Series D preferred stock, 600,000 shares of
Series E preferred stock, 400,000 shares of Series F preferred stock,
1,500,000 shares of Series G preferred stock or 200,000 shares of Series H
preferred stock are outstanding, the Company shall not, without the vote or
written consent of the holders of a majority of the preferred
F-13
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
stock, (i) merge into or consolidate with another corporation resulting in a
transfer of more than 50% of the outstanding stock or ownership of less than
50% of the voting securities of the surviving corporation or (ii) create any
other equity security senior to or on a parity with the existing series of
preferred stock.
WARRANTS
In connection with the issuance of Series G preferred stock in July 1996,
and the equipment lease line, the Company issued warrants to purchase 156,658
and 15,665 shares of Series G preferred stock, respectively, at $3.83 per share.
These warrants are exercisable at any time and expire in July 2001 and August
2006, respectively. The Company has reserved 172,323 shares of Series G
preferred stock for issuance upon exercise of these warrants. The Series G
preferred stock is convertible, at the option of the holders, at any time, into
common stock on a 1-for-2.7 basis after giving effect to a reverse split of the
Company's common stock (Note 15).
In connection with the issuance of convertible promissory notes in June 1996
which were later converted into Series G preferred stock, the Company issued
warrants to purchase 451,000 shares of Series D preferred stock at $1.75 per
share. In connection with the issuance of Series D preferred stock May 1995, the
Company issued warrants, at $.001 per warrant, to purchase 1,600,001 shares of
Series D preferred stock at $1.75 per share. These warrants are exercisable at
any time and expire in June 2001. The Company has reserved 2,051,001 shares of
Series D preferred stock for issuance upon exercise of these warrants. The
Series D preferred stock is convertible, at the option of the holders, at any
time, into common stock on a 1-for-2.7 basis after giving effect to a reverse
split of the Company's common stock (Note 15).
During 1996, the Company issued warrants, at $.001 per warrant, to purchase
205,861 shares of Series B preferred stock at $1.75 per share. In connection
with the technology transfer discussed in Note 12 and the 1995 equipment lease
line, the Company issued warrants to purchase 457,000 and 22,857 shares of
Series B preferred stock, respectively, at $1.75 per share. During 1996, the
warrant to purchase 457,000 shares was exercised for a net exercise of 248,000
shares. The remaining warrants are exercisable at any time and expire in June
2001 and August 2005, respectively. The Company has reserved 228,718 shares of
Series B preferred stock for issuance upon exercise of these warrants. The
Series B preferred stock is convertible, at the option of the holders, at any
time, into common stock on a 1-for-2.7 basis after giving effect to a reverse
split of the Company's common stock (Note 15).
COMMON STOCK
Common stock held by certain employees is subject to stock purchase
agreements whereby the Company has the option to repurchase unvested shares upon
termination of employment at the initial issuance price. The Company's right to
repurchase these shares generally lapses at the rate of 12.5% six months from
the date of the agreement and 2.0833% per month thereafter. As of December 31,
1996, 22,530 shares of common stock remain subject to the Company's right of
repurchase. Thereafter, the Company has the right of first refusal, should any
stockholder decide to sell shares.
F-14
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
In addition, the Series A, B and D preferred stockholders have the right to
participate in a sale by a founder, should a founder decide to sell shares
resulting in proceeds greater than $250,000, or $1,000,000 after conversion of
the preferred stock.
STOCK OPTION PLANS
In December 1996, the Company adopted the 1996 Equity Incentive Plan and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants, independent contractors and advisors. In June 1997, the
Company increased the number of shares reserved for issuance under the 1996
Equity Incentive Plan by 222,222. The 1996 Equity Incentive Plan expires in
December 2006.
In December 1995, the Company adopted the Executive Officer Incentive Plan
and reserved 370,370 shares of common stock for issuance to the Company's chief
executive officer and other senior executive officers. In July 1996, the Company
increased the number of shares reserved under this plan to 500,000 shares. In
the event of a merger, consolidation, liquidation or similar change of control
transaction as a result of which the participants' responsibilities and position
with the Company are materially diminished, options granted under this plan
become fully exercisable and remain so for one year thereafter. This plan will
expire in December 2005.
In October 1993, the Company adopted the 1993 Equity Incentive Plan, and
reserved 185,185 shares of common stock for issuance to employees, officers,
directors, consultants and advisors. In 1995, 1996 and 1997, the Company
increased the number of shares reserved for issuance under the 1993 Equity
Incentive Plan by 351,851, 425,925 and 66,340 shares, respectively. The 1993
Equity Incentive Plan expires in October 1993.
Options, under all of the above plans, may be granted at prices not less
than fair market value at the date of grant, as determined by the Board of
Directors, in case of incentive options (110% in certain instances), and not
less than 85% of fair market value at the date of grant, as determined by the
Board of Directors, in case of nonqualified options, restricted stock awards and
stock bonus awards (100% in certain instances). Options and stock awards
generally vest 12.5% six months from date of grant and 2.0833% per month
thereafter; stock options expire three months after termination of employment
and five years from date of grant.
F-15
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
Activity under the Plans is set forth below (IN THOUSANDS, EXCEPT PER SHARE
DATA):
<TABLE>
<CAPTION>
VALUE OF
OPTIONS AND OPTIONS AND WEIGHTED
PURCHASE EXERCISE PURCHASE AVERAGE
SHARES RIGHTS PRICE PER RIGHTS EXERCISE
AVAILABLE OUTSTANDING SHARE OUTSTANDING PRICE
----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993......................... 374 9 -- -- --
Additional shares reserved...................... 185 -- -- -- --
Restricted stock issued......................... (226) -- -- -- --
Options granted................................. (192) 192 $0.27-$0.54 $ 69 $ 0.34
Options canceled................................ 28 (28) 0.27 (8) 0.27
----------- ----- ------
Balances, December 31, 1994....................... 169 173 0.27-0.54 61 0.35
Additional shares reserved...................... 722 -- -- -- --
Options granted................................. (235) 235 0.54 127 0.54
Purchase rights granted......................... (44) 44 0.54 24 0.54
Purchase rights exercised....................... -- (44) 0.54 (24) 0.54
Stock bonus awards.............................. (5) -- 0.54 -- 0.54
Options canceled................................ 59 (59) 0.27-0.54 (28) 0.48
Options exercised............................... -- (9) 0.27-0.54 (3) 0.33
----------- ----- ------
Balances, December 31, 1995....................... 666 340 0.27-0.54 157 0.46
Additional shares reserved...................... 741 -- -- -- --
Options granted................................. (1,267) 1,267 0.54-1.08 865 0.68
Options canceled................................ 53 (53) 0.27-0.54 (24) 0.45
Options exercised............................... -- (65) 0.54 (35) 0.54
----------- ----- ------
Balances, December 31, 1996....................... 193 1,489 0.27-1.08 963 0.65
Additional shares reserved...................... 288 -- -- -- --
Options granted................................. (316) 316 1.08-2.70 695 2.20
Stock bonus awards.............................. (9) -- 1.08-2.70 -- 1.27
Stock repurchased............................... 11 -- 0.54 -- --
Options canceled................................ 108 (108) 0.54-2.16 (76) 0.70
Options exercised............................... -- (47) 0.54-1.08 (26) 0.55
----------- ----- ------
Balances, June 30, 1997 (unaudited)............... 275 1,650 $0.27-$2.70 $ 1,556 $ 0.94
----------- ----- ------
----------- ----- ------
</TABLE>
In 1995 and 1996, the weighted average fair value of options granted during
the year was $0.42 and $0.54 per share, respectively.
F-16
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1996, the stock options outstanding were as follows (IN
THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------- ------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.27 61 2.58 $ 0.27 46 $ 0.27
0.54 1,093 4.10 0.54 248 0.54
1.08 335 4.84 1.08 1.08
----- ---
1,489 $ 0.65 294 $ 0.54
----- ---
----- ---
</TABLE>
As of December 31, 1995, options to purchase 125,555 shares were exercisable
at an average weighted exercise price of $0.46 per share.
The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees", for financial reporting purposes and
has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS No. 123").
Accordingly, no compensation cost has been recognized for the Company's stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1995 and 1996
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for 1995 and 1996 would have been increased to the pro forma
amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Net loss--as reported...................................................... $ 5,269 $ 8,515
--------- ---------
--------- ---------
Net loss--pro forma........................................................ $ 5,275 $ 8,548
--------- ---------
--------- ---------
Net loss per share--as reported............................................ $ (1.82) $ (2.66)
--------- ---------
--------- ---------
Net loss per share--pro forma.............................................. $ (1.82) $ (2.67)
--------- ---------
--------- ---------
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
In accordance with the provisions of SFAS No. 123, the fair value of each
option is estimated using the following assumptions used for grants during 1995
and 1996; dividend yield of 0%, volatility of 0%, risk-free interest rates of
between 5.18% to 7.68% at the date of grant and an expected term of four years.
F-17
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
10. INCOME TAXES
Temporary differences which gave rise to significant portions of deferred
tax assets are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Net operating loss carryforwards......................................... $ 2,120 $ 4,119
Capitalized research expenditures........................................ 1,501 3,553
Tax credit carryforwards................................................. 221 637
Inventory reserves....................................................... 67 103
Other accrued liabilities................................................ 46 104
--------- ---------
Total deferred asset................................................... 3,955 8,516
Valuation allowance...................................................... (3,955) (8,516)
--------- ---------
Net deferred asset..................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it uncertain that a
tax benefit may be realized from the asset in the future. The Company has
established a valuation allowance to the extent of its deferred tax assets since
it is not certain that a benefit can be realized in the future due to the
Company's recurring operating losses. The valuation allowance increased by
$1,136,000, $2,345,000 and $4,561,000 in 1994, 1995, and 1996. The Company had
federal and state net operating loss carryforwards of approximately $10,600,000
and $7,800,000, respectively, as of December 31, 1996 available to offset future
regular and alternative minimum taxable income. The Company's net operating loss
carryforwards expire in 1997 through 2011, if not utilized.
<TABLE>
<CAPTION>
TAX EXPIRATION
REPORTING DATES
---------- -----------
<S> <C> <C>
Research and development credit..................................... $ 412,000 2007-2010
State research and development credit............................... 225,000
State manufacturers investment credit............................... $ 66,000 2004-2006
</TABLE>
The Company's net operating loss and tax credit carryforwards are subject to
a limitation of approximately $5,120,000 upon an ownership change, as defined by
tax laws.
11. EMPLOYEE BENEFIT PLAN
The Company adopted a defined contribution retirement plan (the "Plan"),
which qualifies under Section 401(k) of the Internal Revenue Code of 1986. The
Plan covers essentially all employees. Eligible employees may make voluntary
contributions to the Plan up to 15% of their annual compensation and the
employer is allowed to make discretionary contributions. In fiscal 1994, 1995
and 1996 the Company made no employer contributions.
12. RELATED PARTY TRANSACTIONS
During 1994, the Company entered into borrowing agreements with two parties.
At the time of each borrowing, the Company was required to issue warrants to
purchase its preferred stock. In December 1994,
F-18
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
one of the lenders applied its outstanding balance of $1,250,000 to the exercise
of its warrants. In December 1995, the second lender used its outstanding
balance of $2,000,000 to exercise its warrants. Accrued interest on the note was
forgiven. However, the Company recorded the related interest expense of $402,000
as an additional capital contribution related to the issuance of the Series E
preferred stock.
In connection with these agreements the Company granted an exclusive royalty
bearing license to certain technology to one of the lenders. In December 1995,
advance royalties in the amount of $1,500,000 were converted into 986,898 shares
of Series F preferred stock at $1.52 per share. At the same time, the above
license became nonexclusive, and the Company received a nonexclusive license to
certain technology, consideration for which was the issuance of 708,000 shares
of the Company's common stock at $.20 per share.
The Company had net sales to two stockholders of $565,000 and $248,000,
respectively, for the six months ending June 30, 1997.
13. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry segment and primarily sells its
products to customers in North America. Products sold to customers in other
geographic regions are insignificant.
Individual customers that comprise 10% or more of the Company's net sales
are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
A.................................................. 24% 28% 41%
B.................................................. 60 52 21
C.................................................. 12 -- --
</TABLE>
14. PRO FORMA FINANCIAL STATEMENT INFORMATION
Upon the closing of the Company's initial public offering, each outstanding
share of the Company's Series A, B, C, D, E, F, G and H preferred stock will be
converted automatically to common stock based on conversion rates set forth in
Note 9. The pro forma effect of the conversion has been presented as a separate
column in the Company's balance sheet assuming the conversion had occurred as of
June 30, 1997.
15. SUBSEQUENT EVENTS
In September 1997, the Company's Board of Directors approved a 1-for-2.7
reverse split of the Company's common stock and a corresponding change in the
preferred stock conversion ratios. All common stock and per share amounts in
these financial statements have been adjusted retroactively to give effect to
the split. In addition, the Company's Board of Directors approved an Amended and
Restated Certification of Incorporation which eliminates the existing
convertible preferred stock and changes the number of authorized preferred stock
to 5,000,000 shares, $0.001 par value, and increases the shares of common stock
authorized to 100,000,000 shares, which Certificate is to be filed following the
effectiveness of the initial public offering.
F-19
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS
UNAUDITED)
15. SUBSEQUENT EVENTS (CONTINUED)
In September 1997, the Board of Directors 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.
In September 1997, the Company entered into a commitment for a line of
credit facility with a bank which provides for borrowings up to $4,000,000.
Borrowings of up to $4,000,000 under the line of credit, which expires in
September 1998, will bear interest at the prime rate and will be collateralized
by substantially all the Company's assets. The agreement contains restrictive
covenants including maintenance of certain financial ratios and limitations of
quarterly losses.
In September 1997, the Company entered into a Convertible Subordinated
Promissory Note Purchase Agreement to issue approximately $6,900,000 of
subordinated notes at 10% interest (increasing to 18% after March 30, 1998 under
certain circumstances). In connection with the Convertible Subordinated Note
Purchase Agreement, the Company committed to issue warrants to purchase shares
of its common stock at $10.91 per share. The warrants become exercisable at the
earliest of 180 days after issuance or the effective date of an initial public
stock offering and expire in five years. The amount of warrants to be exercised
is based on the length of time the debt remains outstanding. Provided the debt
is repaid prior to March 30, 1998, the number of shares exercisable under the
warrants is 252,369. However if the debt is repaid at a latter date the number
of shares exercisable under the warrants can increase to a maximum of 630,932
shares. The Company must comply with certain restrictive covenants, including
non-payment of dividends, as long as the notes are outstanding.
In July and September 1997, the Company increased the shares authorized for
the Executive Officer Incentive Plan by an aggregate of 270,000 shares.
In September 1997, the Board of Directors approved the 1997 Equity Incentive
Plan and reserved a total of 1,750,000 shares for issuance to employees,
officers, directors, consultants, independent contractors, and advisors. Also in
September 1997, the Board of Directors adopted the 1997 Employee Stock Purchase
Plan and 1997 Directors' Stock Option Plan under which 225,000 and 100,000
shares of common stock, respectively, have been reserved for issuance. The
Directors' Plan provides for the grant of nonstatutory stock options to
non-employee directors of the Company.
F-20
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING 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 BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER 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 CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 5
USE OF PROCEEDS........................................................... 20
DIVIDEND POLICY........................................................... 20
CAPITALIZATION............................................................ 21
DILUTION.................................................................. 22
SELECTED FINANCIAL DATA................................................... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 24
BUSINESS.................................................................. 32
MANAGEMENT................................................................ 48
CERTAIN TRANSACTIONS...................................................... 56
PRINCIPAL STOCKHOLDERS.................................................... 59
DESCRIPTION OF CAPITAL STOCK.............................................. 61
SHARES ELIGIBLE FOR FUTURE SALE........................................... 64
UNDERWRITING.............................................................. 66
LEGAL MATTERS............................................................. 67
EXPERTS................................................................... 67
ADDITIONAL INFORMATION.................................................... 68
GLOSSARY OF TERMS......................................................... 69
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
----------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, 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.
2,700,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
MONTGOMERY SECURITIES
UBS SECURITIES
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<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 to be paid by the
Company in connection with the sale of the shares of Common Stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 13,173
NASD filing fee................................................... 4,847
Nasdaq National Market filing fee................................. 42,247
Accounting fees and expenses...................................... 250,000
Legal fees and expenses........................................... 350,000
Printing and engraving expenses................................... 125,000
Blue sky fees and expenses........................................ 5,000
Transfer agent and registrar fees and expenses.................... 5,000
Miscellaneous..................................................... 54,733
---------
Total......................................................... $ 850,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of
the Registrant provide that: (i) the Registrant is required to indemnify its
directors and executive officers to the fullest extent permitted by the Delaware
General Corporation Law; (ii) the Registrant may, in its discretion, indemnify
other officers, employees and agents as set forth in the Delaware General
Corporation Law; (iii) upon receipt of an undertaking to repay such advances if
indemnification is determined to be unavailable, the Registrant is required to
advance expenses, as incurred, to its directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law in connection
with a proceeding (except if a determination is reasonably and promptly made by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the proceeding or, in certain circumstances, by
independent legal counsel in a written opinion that the facts known to the
decision-making party demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in, or
not opposed to, the best interests of the corporation); (iv) the rights
conferred in the Bylaws are not exclusive and the Registrant is authorized to
enter into indemnification agreements with its directors, officers and employees
and agents; (v) the Registrant may not retroactively amend the Bylaw provisions
relating to indemnity; and (vi) to the fullest extent permitted by the Delaware
General Corporation Law, a director or executive officer will be deemed to have
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the Registrant and, with respect to any
criminal action or proceeding, to have had no reasonable cause to believe that
his or her conduct was unlawful if his or her action is based on the records or
books of account of the corporation or on information supplied to him or her by
officers of the corporation in the course of their duties or on the advice of
legal counsel for the corporation or on
II-1
<PAGE>
information or records given or reports made to the corporation by independent
certified public accountants or appraisers or other experts.
The Registrant's policy is to enter into indemnity agreements with each of
its directors and executive officers. The indemnity agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
directors, officers, employees or agents of any other company or enterprise when
they are serving in such capacities at the request of the Registrant. The
Registrant will not be obligated pursuant to the agreements to indemnify or
advance expenses to an indemnified party with respect to proceedings or claims
(i) initiated by the indemnified party and not by way of defense, except with
respect to a proceeding authorized by the Board of Directors and successful
proceedings brought to enforce a right to indemnification under the Indemnity
Agreement, (ii) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement, (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of profits
made from the purchase or sale by the indemnified party of securities of the
Registrant pursuant to the provisions of Section 16(b) of the Securities
Exchange Act of 1934 and related laws, (iv) on account of conduct by a director
which is finally adjudged to have been in bad faith or conduct that the director
did not reasonably believe to be in, or not opposed to, the best interests of
the Registrant, (v) on account of any criminal action or proceeding arising out
of conduct that the director had reasonable cause to believe was unlawful or
(vi) if a final decision by a court having jurisdiction in the matter shall
determine that such indemnification is not lawful.
The indemnity agreement also provides for contribution in certain situations
in which the Registrant and a director or executive officer are jointly liable
but indemnification is unavailable, such contribution to be based on the
relative benefits received and the relative fault of the Registrant and the
director or executive officer. Contribution is not allowed in connection with a
Section 16(b) judgment, an adjudication of bad faith or conduct that a director
or executive officer did not reasonably believe to be in, or not opposed to, the
best interests of the Registrant or a proceeding arising out of conduct a
director or executive officer had reasonable cause to believe was unlawful.
The indemnity agreement requires a director or executive officer to
reimburse the Registrant for all expenses advanced only to the extent it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, the indemnity agreement or otherwise, to be
indemnified for such expenses. The indemnity agreement provides that it is not
exclusive of any rights a director or executive officer may have under the
Certificate of Incorporation, Bylaws, other agreements, any majority-in-interest
vote of the stockholders or vote of disinterested directors, the Delaware law or
otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
executive officers and directors for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act").
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, expects to purchase director and officer liability insurance.
See also the undertakings set out in response to Item 17.
II-2
<PAGE>
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
- ------------------------------------------------------------------------------------ -----------
<S> <C>
Underwriting Agreement (draft dated September , 1997)............................. 1.01
Registrant's Currently Effective Amended and Restated Certificate of
Incorporation..................................................................... 3.01
Form of Registrant's Amended and Restated Certificate of Incorporation effecting
stock split....................................................................... 3.02
Form of Registrant's Amended and Restated Certificate of Incorporation to be filed
immediately following the offering................................................ 3.03
Registrant's Bylaws................................................................. 3.04
Form of Registrant's Amended and Restated Bylaws to be effective immediately
following the offering............................................................ 3.05
Form of Indemnification Agreement................................................... 10.08
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant since September 1, 1994.
<TABLE>
<CAPTION>
AGGREGATE PURCHASE
NUMBER OF PRICE AND FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES CONSIDERATION
- ----------------------------------- -------------- -------------------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Three (3) investors................ 10/94 and Series B Preferred Stock 551,721 $ 965,512(1)
11/94
General Instrument Corporation..... 2/95 Series C Preferred Stock 761,694 1,250,000(2)
Eleven (11) investors(3)........... 5/95 and 6/95 Series D Preferred Stock 3,200,002 5,600,004(1)
Eleven (11) investors(3)........... 5/95 and 6/95 Warrants to purchase Series D 1,600,001 --
Preferred Stock at $1.75 per
share
Three (3) investors(3)............. 5/95 Warrants to purchase Series B 205,861 --
Preferred Stock at $1.75 per
share
Comdisco, Inc...................... 8/95 Warrant to purchase Series B 22,857 -- (4)
Preferred Stock at $1.75 per
share
Intel Corporation.................. 12/95 Series E Preferred Stock 1,315,864 2,000,000(2)
Intel Corporation.................. 12/95 Series F Preferred Stock 986,898 1,500,000(5)
Intel Corporation.................. 12/95 Common Stock 262,222 141,600(6)
Intel Corporation.................. 12/95 Warrants to purchase Series B 457,000 -- (5)
Preferred Stock at $1.75 per
share
Twelve (12) investors(7)........... 6/96 Convertible Secured Promissory $3,160,257 3,160,257(1)
Notes face
value
Twelve (12) investors(7)........... 6/96 Warrants to purchase Series D 451,000 --
Preferred Stock at $1.75 per
share
Fifty-five (55) investors.......... 7/96 Series G Preferred Stock 3,457,501 13,242,224(8)
Alex. Brown & Sons Incorporated.... 7/96 Warrant to purchase Series G 156,658 -- (9)
Preferred Stock at $3.83 per
share
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE PURCHASE
NUMBER OF PRICE AND FORM OF
CLASS OF PURCHASERS DATE OF SALE TITLE OF SECURITIES SECURITIES CONSIDERATION
- ----------------------------------- -------------- -------------------------------- ---------- ------------------
<S> <C> <C> <C> <C>
Comdisco, Inc...................... 8/96 Warrant to purchase Series G 15,665 -- (4)
Preferred Stock at $3.83 per
share
Intel Corporation.................. 12/96 Series B Preferred Stock issued 248,187 -- (5)
upon exercise of warrant
Itochu Corporation................. 2/97 Series H Preferred Stock 493,827 2,000,000(1)
London Pacific Life & Annuity
Company(11)...................... 4/97 Senior Secured Convertible $5.5 $5,500,000 5,500,000(1)(10)
Million Debenture Due 2002 face
value
Eighteen (18) investors including
certain affiliates of the
Company.......................... 9/97 Subordinated Notes and $6,882,201 $ 6,882,201
warrants to purchase 255,028
Common Stock
Officers, directors, employees and
consultants...................... 9/94-8/97 Exercise of options to purchase 212,437 103,419
Common Stock restricted stock
awards and stock bonuses (12)
</TABLE>
- ------------------------------
(1) Paid in cash.
(2) In consideration for canceled indebtedness of the Registrant.
(3) Registrant sold shares of Series D Preferred Stock and warrants to purchase
additional shares of Series D Preferred Stock to investors. In addition, two
(2) investors of the Series D Preferred Stock and Gary Lauder received
warrants to purchase Series B Preferred Stock pursuant to their rights of
first refusal.
(4) In consideration for leases extended to the Registrant.
(5) In consideration for prepaid royalties of $1,500,000 paid to the
Registrant. On December 4, 1996, Intel net exercised the warrant and
received 248,187 shares of Series B Preferred Stock.
(6) In consideration for transfer to Hybrid pursuant to the Amended License
Agreement of certain technology rights.
(7) Registrant received loans in the amount of $3,160,257 in exchange for the
Convertible Secured Promissory Notes, new warrants to purchase Series D
Preferred Stock and the extension of expiration dates on existing warrants
to purchase Series D Preferred Stock and certain existing warrants to
purchase Series B Preferred Stock.
(8) In consideration for cash of $10,081,967 and the conversion of the
Convertible Secured Promissory Notes with a face value of $3,160,257.
(9) In consideration for acting as private placement agent in the sale of the
Series G Preferred Stock.
(10) In connection with the sale of the $5.5 Million Debenture, London Pacific
International Limited received a fee of $500,000 from the Registrant.
(11) In August 1997, the $5.5 Million Debenture was transferred to BG Services
Limited, an affiliate of London Pacific Life & Annuity Company.
(12) With respect to the grant of stock options, exemption from registration
under the Securities Act was unnecessary in that none of such transactions
involved a "sale" of securities as such term is used in Section 2(3) of the
Securities Act.
The securities acquired by the Registrant's officers, directors, employees
and consultants were made in reliance on Rule 701 under the Securities Act. All
sales of Preferred Stock, warrants and notes and the sale of the debentures were
made in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. The securities were sold to a limited
number of people with no general solicitation or advertising.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Underwriting Agreement (draft dated September 18, 1997).
3.01 -- Registrant's currently effective Amended and Restated Certificate of
Incorporation.
3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation
effecting stock split.
3.03 -- Form of Registrant's Amended and Restated Certificate of Incorporation to
be filed immediately following the offering.
3.04 -- Registrant's Bylaws.
3.05 -- Form of Registrant's Amended and Restated Bylaws to be effective
immediately following the offering.
4.01 -- Form of Specimen Certificate for Registrant's Common Stock.*
5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being
registered.*
10.01 -- Amended and Restated Investors Rights Agreement, dated as of April 30,
1997 between Registrant and certain investors.
10.02 -- Registrant's 1993 Equity Incentive Plan.
10.03 -- Registrant's 1996 Equity Incentive Plan.
10.04 -- Registrant's Executive Officer Incentive Plan.
10.05 -- Registrant's 1997 Equity Incentive Plan.
10.06 -- Registrant's 1997 Directors Stock Option Plan.
10.07 -- Registrant's 1997 Employee Stock Purchase Plan.
10.08 -- Form of Indemnity Agreement entered into by Registrant with each of its
directors and executive officers.
10.09 -- Net Lease Agreement between Devcon/Bubb Road Investors and Registrant
dated May 25, 1995.
10.10 -- Sublease between Norian Corporation and Registrant dated October 24, 1996.
10.11 -- Employment Agreement between Registrant and Carl S. Ledbetter dated
January 15, 1996.
10.12 -- Senior Secured Convertible $5.5 Million Debenture Purchase Agreement
between Registrant and London Pacific Life & Annuity Company dated April
30, 1997 and related Senior Secured Convertible $5.5 Million Debenture
Due 2002 and Security Agreement and Senior Secured Convertible $5.5
Million Debenture Due 2002 transferred to BG Services Limited.
10.13 -- Convertible Subordinated Promissory Note Purchase Agreement among
Registrant and certain investors dated September 19, 1997, form of
Subordinated Convertible Promissory Note and form of Common Stock
Purchase Warrant.*
10.14 -- Commitment Letter between Registrant and Venture Banking Group dated
September 16, 1997.
10.15 -- Collaboration Agreement among the Registrant, Sharp Corporation and Itochu
Corporation dated November 25, 1996.
10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation
dated January 10, 1997.
10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures,
Inc. dated July 1, 1996.**
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
10.18 -- Value Added Reseller Agreement between Registrant and Network System
Technologies dated November 25, 1996.**
<C> <C> <S>
10.19 -- Registrant's Incentive Based Compensation Program.
11.01 -- Statement regarding computation of net (loss) per share.
23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 -- Consent of Coopers & Lybrand L.L.P., independent accountants.
24.01 -- Power of Attorney (see Page II-7 of this Registration Statement).
27.01 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
** Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(b) Financial statement schedules are omitted.
Financial statement schedules are omitted because the information called for
is not required or is shown either in the financial statements or the notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, 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
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cupertino, State of
California, on the 19 day of September, 1997.
HYBRID NETWORKS, INC.
By: /s/ CARL S. LEDBETTER
-----------------------------------------
Carl S. Ledbetter
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Carl S. Ledbetter and Dan E. Steimle, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by the Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done or by
virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ CARL S. LEDBETTER President, Chief Executive
- ------------------------------ Officer, and Chairman of September 19, 1997
Carl S. Ledbetter the Board of Directors
PRINCIPAL FINANCIAL OFFICER
AND
PRINCIPAL ACCOUNTING OFFICER:
Vice President, Finance
/s/ DAN E. STEIMLE and Administration,
- ------------------------------ Chief Financial Officer September 19, 1997
Dan E. Steimle and Secretary
II-7
<PAGE>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
ADDITIONAL DIRECTORS:
/s/ JAMES R. FLACH
- ------------------------------ Director September 19, 1997
James R. Flach
/s/ STEPHEN E. HALPRIN
- ------------------------------ Director September 19, 1997
Stephen E. Halprin
/s/ GARY M. LAUDER
- ------------------------------ Director September 19, 1997
Gary M. Lauder
/s/ DOUGLAS M. LEONE
- ------------------------------ Director September 19, 1997
Douglas M. Leone
- ------------------------------ Director September , 1997
Howard L. Strachman
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Underwriting Agreement (draft dated September 18, 1997).
3.01 -- Registrant's currently effective Amended and Restated Certificate of
Incorporation.
3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation
effecting stock split.
3.03 -- Form of Registrant's Amended and Restated Certificate of Incorporation to
be filed immediately following the offering.
3.04 -- Registrant's Bylaws.
3.05 -- Form of Registrant's Amended and Restated Bylaws to be effective
immediately following the offering.
4.01 -- Form of Specimen Certificate for Registrant's Common Stock.*
5.01 -- Opinion of Fenwick & West LLP regarding legality of the securities being
registered.*
10.01 -- Amended and Restated Investors Rights Agreement, dated as of April 30,
1997 between Registrant and certain investors.
10.02 -- Registrant's 1993 Equity Incentive Plan.
10.03 -- Registrant's 1996 Equity Incentive Plan.
10.04 -- Registrant's Executive Officer Incentive Plan.
10.05 -- Registrant's 1997 Equity Incentive Plan.
10.06 -- Registrant's 1997 Directors Stock Option Plan.
10.07 -- Registrant's 1997 Employee Stock Purchase Plan.
10.08 -- Form of Indemnity Agreement entered into by Registrant with each of its
directors and executive officers.
10.09 -- Net Lease Agreement between Devcon/Bubb Road Investors and Registrant
dated May 25, 1995.
10.10 -- Sublease between Norian Corporation and Registrant dated October 24, 1996.
10.11 -- Employment Agreement between Registrant and Carl S. Ledbetter dated
January 15, 1996.
10.12 -- Senior Secured Convertible $5.5 Million Debenture Purchase Agreement
between Registrant and London Pacific Life & Annuity Company dated April
30, 1997 and related Senior Secured Convertible $5.5 Million Debenture
Due 2002 and Security Agreement and Senior Secured Convertible $5.5
Million Debenture Due 2002 transferred to BG Services Limited.
10.13 -- Convertible Subordinated Promissory Note Purchase Agreement among
Registrant and certain investors dated September 19, 1997, form of
Subordinated Convertible Promissory Note and form of Common Stock
Purchase Warrant.*
10.14 -- Commitment Letter between Registrant and Venture Banking Group dated
September 16, 1997.
10.15 -- Collaboration Agreement among the Registrant, Sharp Corporation and Itochu
Corporation dated November 25, 1996.
10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation
dated January 10, 1997.
10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures,
Inc. dated July 1, 1996.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <C> <S>
10.18 -- Value Added Reseller Agreement between Registrant and Network System
Technologies dated November 25, 1996.**
10.19 -- Registrant's Incentive Based Compensation Program.
11.01 -- Statement regarding computation of net loss per share.
23.01 -- Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 -- Consent of Coopers & Lybrand L.L.P., independent accountants.
24.01 -- Power of Attorney (see Page II-7 of this Registration Statement).
27.01 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
** Confidential treatment is being sought with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE>
DRAFT DATED 9/18/97
2,700,000 SHARES
HYBRID NETWORKS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED [__________], 1997
<PAGE>
UNDERWRITING AGREEMENT
[__________], 1997
MONTGOMERY SECURITIES
UBS SECURITIES LLC
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY.
Hybrid Networks, Inc., a Delaware corporation (the "Company), proposes to
issue and sell to the several underwriters named in SCHEDULE A (the
"Underwriters") an aggregate of 2,700,000 shares (the "Firm Common Shares")
of its Common Stock, par value $0.001 per share (the "Common Stock"). In
addition, the Company has granted to the Underwriters an option to purchase
up to an additional 405,000 shares (the "Optional Common Shares") of Common
Stock, as provided in Section 2. The Firm Common Shares and, if and to the
extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares." Montgomery Securities and UBS Securities LLC
have agreed to act as Representatives of the several Underwriters (in such
capacity, the "Representatives") in connection with the offering and sale of
the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration
statement, as amended, including the financial statements and the exhibits
thereto, in the form in which it was declared effective by the Commission
under the Securities Act of 1933 and the rules and regulations promulgated
thereunder (collectively, the "Securities Act"), including any information
deemed to be a part thereof at the time of effectiveness pursuant to Rule
430A or Rule 434 under the Securities Act, is called the "Registration
Statement." Any registration statement filed by the Company pursuant to Rule
462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement," and from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include the
Rule 462(b) Registration Statement. Such prospectus, in the form first used
by the Underwriters to confirm sales of the Common Shares, is called the
"Prospectus;" PROVIDED, HOWEVER, if the Company has, with the consent of
Montgomery Securities, elected to rely upon Rule 434 under the Securities
Act, the term "Prospectus" shall mean the Company's prospectus subject to
completion (each, a "preliminary prospectus") dated [___] (such preliminary
prospectus is called the "Rule 434 preliminary prospectus"), together with
the applicable term sheet (the "Term Sheet") prepared and filed by the
Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all
-2-
<PAGE>
references in this Agreement to the date of the Prospectus shall mean the
date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or
supplements to any of the foregoing, shall include any copy thereof filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been
instituted or are pending or, to the knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in all
material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common
Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all
material respects with the Securities Act and did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. The Prospectus, as amended or supplemented, as of its date and
at all subsequent times, did not and will not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The representations and warranties set forth in
the two immediately preceding sentences do not apply to statements in or
omissions from the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment thereto, or the Prospectus, or any
amendments or supplements thereto, made in reliance upon and in conformity
with information relating to any Underwriter furnished to the Company in
writing by the Representatives expressly for use therein. There are no
contracts or other documents required to be described in the Prospectus or to
be filed as exhibits to the Registration Statement which have not been
described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representatives two complete manually signed copies of the
Registration Statement and each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
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(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) or the completion of the Underwriters' distribution of
the Common Shares, any offering material in connection with the offering and
sale of the Common Shares other than a preliminary prospectus, the Prospectus or
the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification or contribution hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the rights and remedies of creditors or by general equitable
principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to be purchased
by the Underwriters from the Company have been duly authorized for issuance and
sale pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business
or operations, whether or not arising from transactions in the ordinary course
of business, of the Company (any such change is called a "Material Adverse
Change"); (ii) the Company has not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class of
capital stock or repurchase or redemption by the Company of any class of capital
stock.
(h) INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly in all material respects the consolidated
financial position of the Company as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. Such
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related
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notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data
set forth in the Prospectus under the captions "Prospectus Summary--Summary
Financial Data," "Selected Financial Data" and "Capitalization" fairly
present in all material respects the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement.
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY. The Company has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation and has
corporate power and corporate authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement. The Company is
duly qualified as a foreign corporation to transact business and is in good
standing in the State of California and each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions (other
than the State of California) where the failure so to qualify or to be in
good standing would not, individually or in the aggregate, result in a
Material Adverse Change. The Company has no subsidiaries.
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All
of the issued and outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock was issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(l) STOCK EXCHANGE LISTING; NASD APPROVAL. The Common Shares have been
approved for listing on the Nasdaq National Market, subject only to official
notice of issuance. The National Association of Securities Dealers, Inc. (the
"NASD") has approved the Underwriters' participation in the offering and
distribution of the Common Shares.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS
OR APPROVALS REQUIRED. The Company is not in violation of its charter or
by-laws nor is it in breach or default (nor, with the giving of notice or lapse
of time, would it be in default) ("Default") under any indenture, mortgage, loan
or credit agreement, note, contract, franchise, lease or other instrument to
which the Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject (each, an "Existing Instrument"),
except for such Defaults as would not, individually or in the aggregate, result
in a Material Adverse Change. The Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated
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hereby and by the Prospectus (i) have been duly authorized by all necessary
corporate action and will not result in any violation of the provisions of
the charter or bylaws of the Company, (ii) will not conflict with or
constitute a breach of, or Default or a Debt Repayment Triggering Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company pursuant to,
or require the consent of any other party to, any Existing Instrument, except
for such conflicts, breaches, Defaults, liens, charges or encumbrances as
would not, individually or in the aggregate, result in a Material Adverse
Change and (iii) will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company. No
consent, approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and by the
Prospectus, except such as have been obtained or made by the Company and are
in full force and effect under the Securities Act, applicable state
securities or blue sky laws and from the NASD. As used herein, a "Debt
Repayment Triggering Event" means any event or condition which gives, or with
the giving of notice or lapse of time would give, the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or repayment
of all or a portion of such indebtedness by the Company.
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as disclosed in the
Registration Statement and Prospectus, there are no legal or governmental
actions, suits or proceedings pending or, to the best of the Company's
knowledge, threatened (i) against or affecting the Company, (ii) which has as
the subject thereof any officer or director of, or property owned or leased by,
the Company or (iii) relating to environmental or discrimination matters, where
in any such case (A) there is a reasonable possibility that such action, suit or
proceeding might be determined adversely to the Company and (B) any such action,
suit or proceeding, if so determined adversely, would reasonably be expected to
result in a Material Adverse Change or adversely affect the consummation of the
transactions contemplated by this Agreement. No material labor dispute with the
employees of the Company exists or, to the Company's knowledge, is threatened or
imminent. To the Company's knowledge, no labor dispute exists with the
employees of any principal supplier of the Company.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses the
trademarks, trade names, patent rights, copyrights, licenses, approvals, trade
secrets and other similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct its business substantially as now conducted; and
the expected expiration of any of such Intellectual Property Rights would not
result in a Material Adverse Change. Except as disclosed in the Registration
Statement and Prospectus, the Company has not received any notice of
infringement or conflict with asserted Intellectual Property Rights of others,
which infringement or conflict, if the subject of an unfavorable decision, could
result in a Material Adverse Change.
(p) ALL NECESSARY PERMITS, ETC. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate state,
federal or foreign regulatory agencies or bodies as are necessary to conduct its
business, and the Company has not received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.
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(q) TITLE TO PROPERTIES. The Company has good and marketable title to all
the properties and assets reflected as owned in the financial statements
referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as are disclosed in the
Registration Statement and Prospectus or as do not materially and adversely
affect the value of such property and do not materially interfere with the use
made or proposed to be made of such property by the Company. The real property,
improvements, equipment and personal property held under lease by the Company
are held under valid and enforceable leases, with such exceptions as are
disclosed in the Registration Statement and Prospectus or as are not material
and do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company.
(r) TAX LAW COMPLIANCE. The Company has filed all necessary federal,
state and foreign income and franchise tax returns and paid all taxes required
to be paid by the Company other than those being contested in good faith and, if
due and payable, any related or similar assessment, fine or penalty levied
against the Company other than those being contested in good faith. The Company
has made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(i) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company has not been finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY." The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of
payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act and will conduct its business in a manner so
that it will not become subject to the Investment Company Act.
(t) INSURANCE. The Company is insured by recognized, financially sound
and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for its business including, but not limited to, policies covering real
and personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason to
believe that it will not be able (i) to renew its existing insurance coverage as
and when such policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted and at a cost that would not result in a Material Adverse Change. The
Company has not been denied any insurance coverage which it has sought or for
which it has applied.
(u) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Common Shares.
(v) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any other person required to
be described in the Prospectus which have not been described as required.
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(w) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor, to the Company's knowledge, any employee or agent of the Company, has made
any contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of the character
required to be disclosed in the Prospectus.
(x) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not, individually
or in the aggregate, result in a Material Adverse Change (i) the Company is not
in violation of any federal, state, local or foreign law or regulation relating
to pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened releases
of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum and petroleum products (collectively, "Materials of
Environmental Concern"), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environment Concern (collectively, "Environmental Laws"), which
violation includes, but is not limited to, noncompliance with any permits or
other governmental authorizations required for the operation of the business of
the Company under applicable Environmental Laws, or noncompliance with the terms
and conditions thereof, nor has the Company received any written communication,
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company is in violation of any Environmental Law;
(ii) there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the Company has
received written notice, and no written notice by any person or entity alleging
potential liability for investigatory costs, cleanup costs, governmental
responses costs, natural resources damages, property damages, personal injuries,
attorneys' fees or penalties arising out of, based on or resulting from the
presence, or release into the environment, of any Material of Environmental
Concern at any location owned, leased or operated by the Company, now or in the
past (collectively, "Environmental Claims"), pending or, to the Company's
knowledge, threatened against the Company or any person or entity whose
liability for any Environmental Claim the Company has retained or assumed either
contractually or by operation of law; and (iii) to the Company's knowledge,
there are no past or present actions, activities, circumstances, conditions,
events or incidents, including, without limitation, the release, emission,
discharge, presence or disposal of any Material of Environmental Concern, that
reasonably could result in a violation of any Environmental Law or form the
basis of a potential Environmental Claim against the Company or against any
person or entity whose liability for any Environmental Claim the Company has
retained or assumed either contractually or by operation of law.
(z) ERISA COMPLIANCE. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as amended,
and the regulations and
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published interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company or its "ERISA Affiliates" (as defined below) are in
compliance in all material respects with ERISA. "ERISA Affiliate" means,
with respect to the Company, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations
thereunder (the "Code") of which the Company is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to
occur with respect to any "employee benefit plan" established or maintained
by the Company or any of its ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company or any of its ERISA Affiliates, if
such "employee benefit plan" were terminated, would have any "amount of
unfunded benefit liabilities" (as defined under ERISA). Neither the Company
nor any of its ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975
or 4980B of the Code. Each "employee benefit plan" established or maintained
by the Company or any of its ERISA Affiliates that is intended to be
qualified under Section 401(a) of the Code is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss of
such qualification.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
(a) THE FIRM COMMON SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
SCHEDULE A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
(b) THE FIRST CLOSING DATE. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California
(or such other place as may be agreed to by the Company and the Representatives)
at 6:00 a.m. San Francisco time, on [___], or such other time and date not later
than 10:30 a.m. San Francisco time, as the Representatives shall designate by
notice to the Company (the time and date of such closing are called the "First
Closing Date"). The Company hereby acknowledges that circumstances under which
the Representatives may provide notice to postpone the First Closing Date as
originally scheduled include, but are in no way limited to, any determination by
the Company or the Representatives to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 9.
(c) THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 405,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common
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Shares. The option granted hereunder is for use by the Underwriters solely
in covering any over-allotments in connection with the sale and distribution
of the Firm Common Shares. The option granted hereunder may be exercised at
any time (but not more than once) upon notice by the Representatives to the
Company, which notice may be given at any time within 30 days from the date
of this Agreement. Such notice shall set forth (i) the aggregate number of
Optional Common Shares as to which the Underwriters are exercising the
option, (ii) the names and denominations in which the certificates for the
Optional Common Shares are to be registered and (iii) the time, date and
place at which such certificates will be delivered (which time and date may
be simultaneous with, but not earlier than, the First Closing Date; and in
such case the term "First Closing Date" shall refer to the time and date of
delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional
Common Shares are to be purchased, each Underwriter agrees, severally and not
jointly, to purchase the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may
determine) that bears the same proportion to the total number of Optional
Common Shares to be purchased as the number of Firm Common Shares set forth
on SCHEDULE A opposite the name of such Underwriter bears to the total number
of Firm Common Shares. The Representatives may cancel the option at any time
prior to its expiration by giving written notice of such cancellation to the
Company.
(d) PUBLIC OFFERING OF THE COMMON SHARES. The Representatives hereby
advise the Company that the Underwriters intend to offer for sale to the public,
as described in the Prospectus, their respective portions of the Common Shares
as soon after this Agreement has been executed and the Registration Statement
has been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company. It
is understood that the Representatives have been authorized, for their own
accounts and the accounts of the several Underwriters, to accept delivery of and
receipt for, and make payment of the purchase price for, the Firm Common Shares
and any Optional Common Shares the Underwriters have agreed to purchase.
Montgomery Securities, individually and not as a Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) DELIVERY OF THE COMMON SHARES. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against, at the Representatives' option, payment or the irrevocable release of
a wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company shall also deliver, or cause to be delivered, to
the Representatives for the accounts of the several Underwriters, certificates
for the Optional Common Shares the Underwriters have agreed to purchase at the
First Closing Date or the Second Closing Date, as the case may be, against, at
the Representatives' option, payment or the irrevocable release of a wire
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transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form
and registered in such names and denominations as the Representatives shall
have requested at least two full business days prior to the First Closing
Date (or the Second Closing Date, as the case may be) and shall be made
available for inspection on the business day preceding the First Closing Date
(or the Second Closing Date, as the case may be) at such location in New York
City as the Representatives may designate. Time shall be of the essence, and
delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
SECTION 3. ADDITIONAL COVENANTS.
The Company further covenants and agrees with each Underwriter as follows:
(a) REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS.
During the period beginning on the date hereof and ending on the later of the
First Closing Date or such date as, in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement or the
Prospectus, the Company shall furnish to the Representatives for review a copy
of each such proposed amendment or supplement, and the Company shall not file
any such proposed amendment or supplement to which the Representatives
reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the receipt
of any comments of, or requests for additional or supplemental information from,
the Commission, (ii) of the time and date of any filing of any post-effective
amendment to the Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) of the time and date that any
post-effective amendment to the Registration Statement becomes effective and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any of
such purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order at the
earliest possible moment. Additionally, the Company agrees that it shall comply
with the provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any filings
made by the Company under such Rule 424(b) were received in a timely manner by
the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES ACT
MATTERS. If, during the Prospectus Delivery Period, any event shall occur or
condition exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the reasonable opinion of the Representatives or counsel for the
Underwriters it is otherwise necessary to amend or supplement the Prospectus to
comply with law, the Company agrees to prepare promptly (subject to Section 3(a)
hereof), file with the Commission and furnish at its own
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expense to the Underwriters and to dealers, amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the Prospectus
is delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Representatives reasonably may request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of) the
state securities or blue sky laws or Canadian provincial securities laws of
those jurisdictions designated by the Representatives, shall comply with such
laws and shall continue such qualifications, registrations and exemptions in
effect so long as required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the Representatives
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain the
withdrawal thereof at the earliest possible moment.
(f) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Common Shares sold by it in the manner described under the caption
"Use of Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending December 31, 1998 that satisfies the provisions of Section 11(a) of the
Securities Act.
(i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period, the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During the
period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of Montgomery Securities (which
consent may be withheld at the sole discretion of Montgomery Securities),
directly or indirectly, sell, offer, contract or grant any option to sell,
pledge, transfer or establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement
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under the Securities Act in respect of, any shares of Common Stock, options
or warrants to acquire shares of the Common Stock or securities exchangeable
or exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares); PROVIDED,
HOWEVER, that (i) the Company may issue shares of Common Stock upon the
exercise of warrants and stock options that are presently outstanding and
described as such in the Prospectus, or are granted under the option plans or
equity incentive plans described in the Prospectus, (ii) the Company may
issue Common Stock under the employee stock purchase plan described in the
Prospectus and (iii) the Company may issue shares of Common Stock in an
acquisition of another corporation, entity or assets provided that (1) such
shares represent less than 10% of the Company's then outstanding shares of
Common Stock and (2) the Company has taken reasonable steps to ensure that
such shares may not be resold during the 180 days after the date of the
Prospectus; PROVIDED, FURTHER, that the Company will impose a stop-transfer
order with respect to such shares, options, or shares issued upon exercise of
such options held by a holder in the event a holder attempts to sell, offer,
dispose of or otherwise transfer any such shares or options during the 180
day period following the date of the Prospectus and without the prior written
consent of Montgomery Securities (which consent may be withheld at the sole
discretion of Montgomery Securities).
(k) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of three
years hereafter, the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, California 94111 Attention: Mr. Michael
Richter: (i) as soon as practicable after the end of each fiscal year, copies of
the Annual Report of the Company containing the balance sheet of the Company as
of the close of such fiscal year and statements of income, stockholders' equity
and cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the NASD or any securities exchange;
and (iii) as soon as available, copies of any report or communication of the
Company mailed generally to holders of its capital stock.
SECTION 4. PAYMENT OF EXPENSES.
The Company agrees, whether or not the transactions contemplated hereunder
are consummated, to pay all costs, fees and expenses incurred in connection with
the performance of its obligations hereunder and in connection with the
transactions contemplated hereby, including without limitation (i) all expenses
incident to the issuance and delivery of the Common Shares (including all
printing and engraving costs), (ii) all fees and expenses of the registrar and
transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified public accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the state securities or blue sky laws or the provincial securities laws
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of Canada, and, if requested by the Representatives, preparing and printing a
"Blue Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the reasonable fees and expenses of counsel for
the Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with listing the Common
Stock on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 13 of Part II of the Registration Statement.
Except as provided in this Section 4, Section 6, Section 7 and Section 8
hereof, the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the
Common Shares as provided herein, on the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the Representatives
shall have received from Coopers & Lybrand, L.L.P., independent public or
certified public accountants for the Company, a letter dated the date hereof
addressed to the Underwriters, in form and substance reasonably satisfactory to
the Representatives, containing statements and information of the type
ordinarily included in accountant's "comfort letters" to underwriters, delivered
according to Statement on Auditing Standards No. 72 (or any successor bulletin),
with respect to the audited and unaudited financial statements and certain
financial information contained in the Registration Statement and the Prospectus
(and the Representatives shall have received an additional three conformed
copies of such accountants' letter for each of the several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION
FROM NASD. For the period from and after effectiveness of this Agreement and
prior to the First Closing Date and, with respect to the Optional Common Shares,
the Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act) in
the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment to
the Registration Statement containing the information required by such Rule
430A, and such post-effective amendment shall have become effective; or, if the
Company elected to rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term Sheet with
the Commission in the manner and within the time period required by such
Rule 424(b);
(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration
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Statement, shall be in effect and no proceedings for such purpose shall have
been instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) NO MATERIAL ADVERSE CHANGE. For the period from and after the date of
this Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, in the reasonable judgment of
the Representatives there shall not have occurred any Material Adverse Change.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First Closing Date
and the Second Closing Date, the Representatives shall have received an opinion
of Fenwick & West LLP, counsel for the Company, dated as of such Closing Date,
in the form attached as EXHIBIT A (and the Representatives shall have received
an additional [___] conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First Closing
Date and the Second Closing Date, the Representatives shall have received an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
for the Underwriters, dated as of such Closing Date, in the form attached as
EXHIBIT B, with respect to the matters set forth in paragraphs (i), (vii) (with
respect to subparagraph (i) only, (viii), (ix), (x) (xi) and (xiii) (with
respect to the captions "Description of Capital Stock" and "Underwriting" under
subparagraph (i) only), (xii), and the next-to-last paragraph of EXHIBIT A (and
the Representatives shall have received an additional [___] conformed copies of
such counsel's legal opinion for each of the several Underwriters).
(f) OPINION OF INTELLECTUAL PROPERTY COUNSEL FOR THE COMPANY. On each of
the First Closing Date and the Second Closing Date, the Representatives shall
have received an opinion of Farkas & Manelli P.L.L.C., intellectual property
counsel for the Company, dated as of such Closing Date, in the form attached as
EXHIBIT C (and the Representatives shall have received an additional [____]
conformed copies of such counsel's legal opinion for each of the several
Underwriters).
(g) OFFICERS' CERTIFICATE. On each of the First Closing Date and the
Second Closing Date, the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer and
President of the Company and the Chief Financial Officer of the Company, dated
as of such Closing Date, to the effect set forth in subsections (b)(ii) and (c)
of this Section 5, and further to the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of the Company set
forth in Section 1 of this Agreement are true and correct with the same force
and effect as though expressly made on and as of such Closing Date; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
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(h) BRING-DOWN COMFORT LETTER. On each of the First Closing Date and the
Second Closing Date, the Representatives shall have received from Coopers &
Lybrand, L.L.P., independent accountants for the Company, a letter dated such
date, in form and substance reasonably satisfactory to the Representatives, to
the effect that they reaffirm the statements made in the letter furnished by
them pursuant to subsection (a) of this Section 5, except that the specified
date referred to therein for the carrying out of procedures shall be no more
than three business days prior to the First Closing Date or Second Closing Date,
as the case may be (and the Representatives shall have received an additional
[___] conformed copies of such accountants' letter for each of the several
Underwriters).
(i) LOCK-UP AGREEMENT FROM STOCKHOLDERS OF THE COMPANY. On the date
hereof, the Company shall have furnished to the Representatives an agreement in
the form of EXHIBIT D hereto from each director, officer and stockholder of the
Company and such agreement shall be in full force and effect on each of the
First Closing Date and the Second Closing Date.
(j) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date and
the Second Closing Date, the Representatives and counsel for the Underwriters
shall have received such information, documents and opinions as they may
reasonably require for the purposes of enabling them to pass upon the issuance
and sale of the Common Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6,
Section 7 and Section 8 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
If this Agreement is terminated by the Representatives pursuant to
Section 5 or Section 10(i), (iv) or (v), or if the sale to the Underwriters of
the Common Shares on the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representatives and the other Underwriters (or such Underwriters
as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Representatives and the Underwriters in connection with the proposed
purchase and the offering and sale of the Common Shares, including but not
limited to reasonable fees and disbursements of counsel, printing expenses,
travel expenses, postage, facsimile and telephone charges.
SECTION 7. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act
and the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may
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become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of the Company), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based (i) upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
or any amendment thereto, including any information deemed to be a part
thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; or (iii) in
whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) upon
any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Common
Stock or the offering contemplated hereby, and which is included as part of
or referred to in any loss, claim, damage, liability or action arising out of
or based upon any matter covered by clause (i) or (ii) above, PROVIDED that
the Company shall not be liable under this clause (v) to the extent that a
court of competent jurisdiction shall have determined by a final judgment
that such loss, claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse
each Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by Montgomery
Securities) as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; PROVIDED, HOWEVER, that the foregoing indemnity agreement
shall not apply to any loss, claim, damage, liability or expense to the
extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any
preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Common Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or
on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense. The indemnity agreement set forth in this
Section 7(a) shall be in addition to any liabilities that the Company may
otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act or the Exchange Act, against any
loss, claim,
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damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, or the Prospectus (or any amendment or supplement thereto), in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use therein; and to reimburse the
Company, or any such director, officer or controlling person for any legal and
other expense reasonably incurred by the Company, or any such director, officer
or controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The Company hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the last two paragraphs
on the inside front cover page of the Prospectus concerning stabilization by the
Underwriters and (B) in the table in the first paragraph and as the second
paragraph and as the last paragraph under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct. The
indemnity agreement set forth in this Section 7(b) shall be in addition to any
liabilities that each Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of
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such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (Montgomery Securities in the case of Section 7(b) and Section 8),
representing the indemnified parties who are parties to such action) or (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the
reasonable fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
Section 7(c) hereof, the indemnifying party agrees that it shall be liable for
any settlement of any proceeding effected without its written consent if
(i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement,
compromise or consent to the entry of judgment in any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
SECTION 8. CONTRIBUTION.
If the indemnification provided for in Section 7 is for any reason held to
be unavailable to or is otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net
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proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company, and the total
underwriting discount received by the Underwriters, in each case as set forth
on the front cover page of the Prospectus (or, if Rule 434 under the
Securities Act is used, the corresponding location on the Term Sheet) bear to
the aggregate initial public offering price of the Common Shares as set forth
on such cover. The relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 7(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 7(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 8; PROVIDED, HOWEVER, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 7(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 8.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
SCHEDULE A. For purposes of this Section 8, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 9. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITER.
If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the several Underwriters shall fail or refuse to purchase
Common Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters
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shall be obligated, severally, in the proportions that the number of Firm
Common Shares set forth opposite their respective names on SCHEDULE A bears
to the aggregate number of Firm Common Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter
or Underwriters agreed but failed or refused to purchase on such date. If, on
the First Closing Date or the Second Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Common
Shares and the aggregate number of Common Shares with respect to which such
default occurs, equals or exceeds 10% of the aggregate number of Common
Shares to be purchased on such date, and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares are
not made within 48 hours after such default, this Agreement shall terminate
without liability of any party to any other party except that the provisions
of Section 4, Section 6, Section 7 and Section 8 shall at all times be
effective and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event
for longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this
Section 9. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 10. TERMINATION OF THIS AGREEMENT.
Prior to the First Closing Date, this Agreement may be terminated by the
Representatives by notice given to the Company if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the Nasdaq Stock Market, or trading in
securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York or California authorities; (iii) there
shall have occurred any outbreak or escalation of national or international
hostilities or any crisis or calamity, or any change in the United States or
international financial markets, or any substantial change or development
involving a prospective substantial change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable to market the
Common Shares in the manner and on the terms described in the Prospectus or to
enforce contracts for the sale of securities; (iv) in the judgment of the
Representatives there shall have occurred any Material Adverse Change; or (v)
the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Representatives may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 10 shall be without liability
on the part of (a) the Company to any Underwriter, except that the Company shall
be obligated to reimburse the expenses of the Representatives and the
Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter
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<PAGE>
to the Company, or (c) of any party hereto to any other party except that the
provisions of Section 7 and Section 8 shall at all times be effective and
shall survive such termination.
SECTION 11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers and of the several Underwriters
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 12. NOTICES.
All communications hereunder shall be in writing and shall be mailed, hand
delivered or telecopied and confirmed to the parties hereto as follows:
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Mr. Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Hybrid Networks, Inc.
10161 Bubb Road
Cupertino, California 95014
Facsimile: (408) 725-0990
Attention: Mr. Carl Ledbetter
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
-22-
<PAGE>
Facsimile: (650) 494-1417
Attention: Dennis R. Debroeck, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 13. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the parties
hereto, including any substitute Underwriters pursuant to Section 9 hereof, and
to the benefit of the employees, officers and directors and controlling persons
referred to in Section 7 and Section 8, and in each case their respective
successors, and personal representatives, and no other person will have any
right or obligation hereunder. No assignment shall relieve any party of its
obligations hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from any of the Underwriters merely by reason of such
purchase.
SECTION 14. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or provision
of this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 15. GOVERNING LAW PROVISIONS.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO
BE PERFORMED IN SUCH STATE.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
(c) WAIVER OF IMMUNITY. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after
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<PAGE>
judgment) and execution to which it might otherwise be entitled in the
Specified Courts, and with respect to any Related Judgment, each party waives
any such immunity in the Specified Courts or any other court of competent
jurisdiction, and will not raise or claim or cause to be pleaded any such
immunity at or in respect of any such Related Proceeding or Related Judgment,
including, without limitation, any immunity pursuant to the United States
Foreign Sovereign Immunities Act of 1976, as amended.
SECTION 16. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement may not be amended or
modified unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom
the condition is meant to benefit. The Section headings herein are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated business
person who was adequately represented by counsel during negotiations regarding
the provisions hereof, including, without limitation, the indemnification
provisions of Section 7 and the contribution provisions of Section 8, and is
fully informed regarding said provisions. Each of the parties hereto further
acknowledges that the provisions of Sections 7 and 8 hereto fairly allocate the
risks in light of the ability of the parties to investigate the Company, its
affairs and its business in order to assure that adequate disclosure has been
made in the Registration Statement, any preliminary prospectus and the
Prospectus (and any amendments and supplements thereto), as required by the
Securities Act and the Exchange Act.
-24-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
HYBRID NETWORKS, INC.
By:
-------------------------------------
Carl S. Ledbetter
President, Chief Executive Officer
and Chairman of the Board
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California, as of the date first above
written.
MONTGOMERY SECURITIES
UBS SECURITIES LLC
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:
-------------------------------
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<PAGE>
SCHEDULE A
UNDERWRITERS NUMBER OF FIRM COMMON
SHARES TO BE PURCHASED
Montgomery Securities [_______________]
UBS Securities LLC [_______________]
[________________] [_______________]
[________________] [_______________]
Total 2,700,000
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<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section 5(e)
of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and corporate authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of California and in each
other jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except for such
jurisdictions (other than the State of California) where the failure so to
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change.
(iv) To the knowledge of such counsel, the Company has no subsidiaries.
(v) The authorized, issued and outstanding capital stock of the Company
(including the Common Stock) conform in all material respects to the
descriptions thereof set forth in the Prospectus. All of the outstanding
shares of Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable and, to such counsel's knowledge, have been
issued in compliance with the registration and qualification requirements of
federal and California securities laws. The form of certificate used to
evidence the Common Stock is in due and proper form and complies with all
applicable requirements of the certificate of incorporation and bylaws of the
Company and the General Corporation Law of the State of Delaware. The
description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus, to such counsel's knowledge,
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights.
(vi) Following the closing, no stockholder of the Company or any other
person will have any preemptive right, right of first refusal or other
similar right not effectively waived to subscribe for or purchase securities
of the Company arising (i) by operation of the certificate of incorporation
or bylaws of the Company or the General Corporation Law of the State of
Delaware or (ii) to the knowledge of such counsel, otherwise.
<PAGE>
(vii) The Underwriting Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
and contribution thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(viii) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable and will not be
subject to any preemptive right, right of first refusal or other similar right
not effectively waived to subscribe for or purchase securities of the Company
arising (i) by operation of the certificate of incorporation or bylaws of the
Company or the General Corporation Law of the State of Delaware or (ii) to the
knowledge of such counsel, otherwise.
(ix) Based solely upon oral advice from the Commission's staff, each of the
Registration Statement, if any, has been declared effective by the Commission
under the Securities Act. To the knowledge of such counsel, no stop order
suspending the effectiveness of either of the Registration Statement or the
Rule 462(b) Registration Statement, if any, has been issued under the Securities
Act and no proceedings for such purpose have been instituted or are pending or
are contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(x) The Registration Statement, the Prospectus, and each amendment or
supplement to the Registration Statement and the Prospectus, as of their
respective effective or issue dates (other than the financial statements and
supporting schedules included therein and the financial data derived therefrom
or in exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(xi) Based solely upon a letter from the Nasdaq Stock Market, the Common
Shares have been approved for listing on the Nasdaq National Market.
(xii) The statements (A) in the Prospectus under the captions "Risk
Factors--Control by Principal Stockholders, Executive Officers and Directors,"
"--Shares Eligible for Future Sale," "--Anti-Takeover Effects of Delaware Law,"
"--No Dividends," "Description of Capital Stock," "Certain Transactions,"
"Shares Eligible for Future Sale," and "Underwriting" and (B) in Item 14 and
Item 15 of the Registration Statement, insofar as such statements constitute
matters of law, summaries of legal matters, the Company's certificate of
incorporation or bylaw provisions, documents or legal proceedings, or legal
conclusions, has been reviewed by such counsel and fairly present and summarize,
in all material respects, the matters referred to therein.
<PAGE>
(xiii) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened that are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xiv) To the knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto; and the descriptions
thereof and references thereto are correct in all material respects.
(xv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution and delivery of the
Underwriting Agreement and performance by the Company of its obligations
pursuant thereto, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(xvi) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no opinion
need be rendered); (i) will not result in any violation of the provisions of
the charter or bylaws of the Company; (ii) to the knowledge of such counsel,
will not constitute a breach of, or Default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets
of the Company pursuant to any material Existing Instrument; or (iii) to the
knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company.
(xvii) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" within the meaning of Investment
Company Act.
(xviii) Except as disclosed in the Prospectus under the caption "Shares
Eligible for Future Sale," to the knowledge of such counsel, there are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by the Underwriting Agreement, except for such rights
as have been duly waived.
(xix) To the knowledge of such counsel, the Company is not in violation
of its certificate of incorporation or bylaws nor is it in Default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any material Existing Instrument filed as an exhibit to the
Registration Statement, except in each such case for such violations or Defaults
as would not, individually or in the aggregate, result in a Material Adverse
Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and with
Representatives of the Underwriters and their counsel at which the contents of
the Registration Statement and the Prospectus, and related matters were
discussed and, although such
<PAGE>
counsel has not independently checked or verified the accuracy, completeness
or fairness of the statements contained in the Registration Statement or the
Prospectus and is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), on
the basis of the foregoing, nothing has come to their attention which would
lead them to believe that either the Registration Statement or any amendments
thereto, at the time the Registration Statement or such amendments became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or
at the First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no belief as to the financial
statements or schedules, or other financial data derived therefrom, included
in the Registration Statement or the Prospectus or any amendments or
supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the laws of the State of California or
the federal law of the United States, to the extent they deem proper and
specified in such opinion, upon the opinion (which shall be dated the First
Closing Date or the Second Closing Date, as the case may be, shall be
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; PROVIDED, HOWEVER, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials.
<PAGE>
EXHIBIT C
Opinion of counsel for the Company to be delivered pursuant to Section 5(f)
of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT C include any supplements
thereto at the Closing Date.
(i) To such counsel's knowledge, the Company owns all patents, patent
applications, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by it or necessary for the conduct
of its business, and such counsel is not aware of any claim to the contrary
or any challenge by any other person to the rights of the Company with
respect to the foregoing;
(ii) Such counsel is not aware of any legal actions, claims or
proceedings pending or threatened against the Company alleging that the
Company is infringing or otherwise violating any patents or trade secrets
owned by others;
(iii) Such counsel has reviewed the descriptions of the Company's
patents and patent applications under the captions "Risk Factors--Protection
and Enforcement of Intellectual Property Rights" and Business--Intellectual
Property" in the Registration Statement and Prospectus, and, to the extent
they constitute matters of law or legal conclusions, these descriptions are
accurate in all material respects and fairly and completely present the
patents and patent applications of the Company;
(iv) To such counsel's knowledge, for each patent or patent application
filed by the Company or described in the Prospectus as being owned by it or
necessary for the conduct of its business, the Company has obtained a written
assignment of all rights and title therein to the Company from all inventors
and owners of such patent or patent application and has properly recorded
such written assignment with the appropriate patent office or governmental
agency;
(v) To such counsel's knowledge, for each copyrightable product
described in the Prospectus, the Company was vested with original title to
all copyrights for such product and no written assignments for such
copyrights are required to perfect Company's rights and title thereto; and
(vi) To such counsel's knowledge after review of the file history and
patent attorney's file for the patents and patent applications described in
the Prospectus as being owned by the Company or necessary for the conduct of
its business, such counsel is aware of nothing that causes such counsel to
believe that, as of the date the Registration Statement became effective and
as of the date of such opinion, the description of patents and patent
applications under the captions "Risk Factors--Protection and Enforcement of
Intellectual Property Rights" and "Business--Intellectual Property" in the
Registration Statement and Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, including without limitation, any undisclosed material
issue with respect to the subsequent validity or enforceability of such
patents or patent applications.
<PAGE>
EXHIBIT D
[Date]
Montgomery Securities
UBS Securities LLC
As Representatives of the Several Underwriters
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Re: Hybrid Networks, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
Representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company [by,
among other things, raising additional capital for its operations]. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), directly or indirectly,
sell, offer, contract or grant any option to sell (including without limitation
any short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for or
convertible into shares of Common Stock currently or hereafter owned either of
record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act
of 1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date hereof
and continuing through the close of trading on the date 180 days after the date
of the Prospectus. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
-1-
<PAGE>
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal Representatives, and assigns of the
undersigned.
- ----------------------------------
Printed Name of Holder
By:
-------------------------------
Signature
- ----------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)
-2-
<PAGE>
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF
HYBRID NETWORKS, INC.
Hybrid Networks, Inc., a corporation organized and existing under and by
virtue of the General Corporation law of the State of Delaware (the
"CORPORATION"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Hybrid Networks, Inc.
SECOND: The date on which the Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware is
June 6, 1990, under the name of Hybrid Networks, Inc. The Certificate of
Incorporation of the Corporation was amended and restated on September 15, 1992
and was further amended on January 12, 1994, on October 21, 1994, February 15,
1995, May 25, 1995, December 22, 1995, July 17, 1996 and February 17, 1997.
THIRD: The Board of Directors of this Corporation, at a meeting duly
called and held, adopted resolutions further amending and restating the
Restated Certificate of Incorporation to read in full as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation of
the Corporation be amended and restated in its entirety as follows:
ARTICLE I
The name of this Corporation is Hybrid Networks, Inc.
ARTICLE II
The address of the registered office of this Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is The Corporation
Trust Company.
ARTICLE III
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
Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This Corporation is authorized to issue two classes
of stock to be designated, respectively, "PREFERRED STOCK" and "COMMON
STOCK." The total number of shares which the Corporation is authorized to
issue is Fifty Two Million (52,000,000) shares. Thirty four Million
(34,000,000) shares shall be designated Common Stock, par value $.001 per
share ("COMMON STOCK"), and Eighteen Million (18,000,000) shares shall be
designated Preferred Stock, par value $.001 per share ("PREFERRED STOCK").
One Million Five Hundred Forty-Seven Thousand One Hundred and Seventy Five
(1,547,175) shares of the Preferred Stock shall be designated Series A
Preferred Stock, par value $.001 per share ( "SERIES A PREFERRED STOCK"), One
Million Two
<PAGE>
Hundred and Thirty-Seven Thousand Four Hundred and Thirty-Nine (1,237,439)
shares of the Preferred Stock shall be designated Series B Preferred Stock,
par value $.001 per share ("SERIES B PREFERRED STOCK"), Seven Hundred
Sixty-One Thousand Six Hundred and Ninety Four (761,694) shares of the
Preferred Stock shall be designated Series C Preferred Stock, par value $.001
per share ("SERIES C PREFERRED STOCK"), Five Million Two Hundred Fifty-One
Thousand and Three (5,251,003) shares of the Preferred Stock shall be
designated Series D Preferred Stock, par value $.001 per share ("SERIES D
PREFERRED STOCK"), One Million Three Hundred Fifteen Thousand Eight Hundred
and Sixty-Four (1,315,864) shares of the Preferred Stock shall be designated
Series E Preferred Stock, par value $.001 per share ("SERIES E PREFERRED
STOCK"), Nine Hundred Eighty-Six Thousand Eight Hundred and Ninety-Eight
(986,898) shares of the Preferred Stock shall be designated Series F
Preferred Stock, par value $.001 per share ("SERIES F PREFERRED STOCK"), Six
Million Three Hundred Sixty Thousand Three Hundred and Eighty-One (6,360,381)
shares of the Preferred Stock shall be designed Series G Preferred Stock, par
value $.001 per share ("SERIES G PREFERRED STOCK"), and Four Hundred
Ninety-Seven Thousand Three Hundred and Twenty-Seven (497,327) shares of the
Preferred Stock shall be designated Series H Preferred Stock ("SERIES H
PREFERRED STOCK").
The Board of Directors is authorized to provide for the issuance of the
shares of Preferred Stock, other than the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock
and Series H Preferred Stock, in one or more series, and, by filing a
certificate of designation pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to be included in
each such series, to fix the designation, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series,
and to increase or decrease the number of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock
and/or Series H Preferred Stock (but not in the case of any series below the
number of shares of such series then outstanding). The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the stock of this Corporation entitled to vote, unless
a vote of any other holders is required pursuant to a certificate or
certificates establishing a series of Preferred stock.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. Subject to
the rights of any series of Preferred Stock which may from time to time come
into existence, the rights, preferences, restrictions and other matters
relating to Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock and Series H Preferred Stock are as
follows:
1. DIVIDEND PROVISIONS.
a. The holders of shares of Series A Preferred Stock, the
holders of shares of Series B Preferred Stock, the holders of shares of Series
C Preferred Stock, the holders of shares of Series D Preferred Stock, the
holders of Series E Preferred Stock, the holders of shares of Series F
Preferred Stock, the holders of shares of Series G Preferred Stock and the
holders of shares of Series H Preferred Stock shall be entitled to receive,
pari passu, dividends, out of any assets legally available therefor, prior and
in preference to any declaration or payment of any dividend (payable other than
in Common Stock or other securities and rights convertible
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into or entitling the holder thereof to receive, directly or indirectly,
additional shares of Common Stock of this Corporation) on Common Stock of
this Corporation, at the rate of, (i) with respect to the Series A Preferred
Stock, $.03 per share per annum, (ii) with respect to the Series B Preferred
Stock, $.13125 per share per annum, (iii) with respect to the Series C
Preferred Stock, $.123 per share per annum, (iv) with respect to the Series D
Preferred Stock, $.13125 per share per annum, (v) with respect to the Series
E Preferred Stock and the Series F Preferred Stock $.114 per share per annum,
(vi) with respect to the Series G Preferred Stock, $.28725 per share per
annum and (vii) with respect to the Series H Preferred Stock, $.32 per share
per annum. Such dividends shall be payable only when, as, and if declared by
the Board of Directors and shall not be cumulative. No dividends shall be
declared or paid with respect to Common Stock (other than a dividend payable
solely in Common Stock or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of this Corporation) unless a dividend of equal or
greater amount per share (on an as-if converted to Common Stock basis) is
first declared and paid with respect to Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock.
b. In the event the Corporation shall declare a distribution
(other than a distribution described in Section 2) payable in securities of
other persons, evidences of indebtedness issued by the Corporation or other
persons, assets (excluding cash dividends) or options or rights to purchase any
such securities or evidences of indebtedness, then, in each such case, the
holders of Series A Preferred Stock, the holders of Series B Preferred Stock,
the holders of Series C Preferred Stock, the holders of Series D Preferred
Stock, the holders of Series E Preferred Stock, the holders of Series F
Preferred Stock, the holders of Series G Preferred Stock and the holders of
Series H Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of Series A Preferred Stock, the holders of
Series B Preferred Stock, the holders of Series C Preferred Stock, the holders
of Series D Preferred Stock, the holders of Series E Preferred Stock, the
holders of Series F Preferred Stock, the holders of Series G Preferred Stock
and the holders of Series H Preferred Stock were the holders of the number of
shares of Common Stock of the Corporation into which their respective shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock, as the case may be, are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
2. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or winding up
of this Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock, the holders of Series B Preferred Stock, the holders of Series
C Preferred Stock, the holders of Series D Preferred Stock, the holders of
Series E Preferred Stock, the holders of Series F Preferred Stock, the holders
of Series G Preferred Stock and the holders of Series H Preferred Stock shall
be entitled to receive, pari passu prior and in preference to any
distribution of any of the assets of the Corporation to the holders of Common
Stock by reason of their ownership thereof, an amount per share equal to (i) in
the case of Series A Preferred Stock, the sum of (A) $.49 for each share of
Series A Preferred Stock, as adjusted for stock dividends, combinations,
splits, recapitalizations and the like ("AS ADJUSTED") with respect to such
series of Preferred Stock (the "ORIGINAL SERIES A ISSUE PRICE"), plus (B) an
amount equal to declared but unpaid dividends
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on such share, (ii) in the case of Series B Preferred Stock, the sum of (A)
$1.75 for each share of Series B Preferred Stock, As Adjusted with respect to
such series of Preferred Stock (the "ORIGINAL SERIES B ISSUE PRICE"), plus
(B) an amount equal to declared but unpaid dividends on such share, (iii) in
the case of Series C Preferred Stock, the sum of (A) $1.6411 for each share
of Series C Preferred Stock, As Adjusted with respect to such series of
Preferred Stock (the "ORIGINAL SERIES C ISSUE PRICE"), plus (B) an amount
equal to declared but unpaid dividends on such share, (iv) in the case of
Series D Preferred Stock, the sum of (A) $1.75 for each share of Series D
Preferred Stock, As Adjusted with respect to such series of Preferred Stock
(the "ORIGINAL SERIES D ISSUE PRICE"), plus (B) an amount equal to declared
but unpaid dividends on such share, (v) in the case of Series E Preferred
Stock, the sum of (A) $1.52 for each share of Series E Preferred Stock, As
Adjusted with respect to such series of Preferred Stock (the "ORIGINAL SERIES
E ISSUE PRICE"), plus (B) an amount equal to declared but unpaid dividends on
such share, (vi) in the case of Series F Preferred Stock, the sum of (A)
$1.52 for each share of Series F Preferred Stock, As Adjusted with respect to
such series of Preferred Stock (the "ORIGINAL SERIES F ISSUE PRICE"), plus
(B) an amount equal to declared but unpaid dividends on such share, (vii) in
the case of Series G Preferred Stock, the sum of (A) $3.83 for each share of
Series G Preferred Stock, As Adjusted with respect to such series of
preferred Stock (the "ORIGINAL SERIES G ISSUE PRICE") and (viii) in the case
of Series H Preferred Stock, the sum of (A) $4.05 for each share of Series H
Preferred Stock, As Adjusted with respect to such series of preferred Stock
(the "ORIGINAL SERIES H ISSUE PRICE"), plus (B) an amount equal to declared
but unpaid dividends on such share. If, upon the occurrence of such event,
the assets and funds thus distributed among the holders of Series A Preferred
Stock, the holders of Series B Preferred Stock, the holders of Series C
Preferred Stock, the holders of Series D Preferred Stock, the holders of
Series E Preferred Stock, the holders of Series F Preferred Stock, the
holders of Series G Preferred Stock and the holders of Series H Preferred
Stock shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts (the "TOTAL PREFERENTIAL AMOUNT"), then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of Series A Preferred Stock,
the holders of Series B Preferred Stock, the holders of Series C Preferred
Stock, the holders of Series D Preferred Stock, the holders of Series E
Preferred Stock, the holders of Series F Preferred Stock, the holders of
Series G Preferred Stock and the holders of Series H Preferred Stock in the
ratio, with respect to each such holder, of (i) the preferential amount that
such holder would have received if the Total Preferential Amount were
distributed to all such holders to (ii) the Total Preferential Amount.
b. After payment to the holders of Series A Preferred Stock,
the holders of Series B Preferred Stock, the holders of Series C Preferred
Stock, the holders of Series D Preferred Stock, the holders of Series E
Preferred Stock, the holders of Series F Preferred Stock, the holders of Series
G Preferred Stock and the holders of Series H Preferred Stock of the amounts
set forth in subsection 2.a. above, the entire remaining assets and funds of
the Corporation legally available for distribution, if any, shall be
distributed among the holders of Common Stock pro rata based on the number of
shares of Common Stock then held by them.
c. (i) A consolidation or merger of this Corporation with or
into any other corporation or corporations pursuant to which the stockholders
of the Corporation prior to the merger or similar transaction shall own less
than 50% of the voting securities of the surviving corporation, (ii) a sale,
conveyance or disposition of all or substantially all of the assets of this
Corporation or (iii) the effectuation by the Corporation of a transaction or
series of related
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transactions in which more than 50% of the voting power of the Corporation is
disposed of (excluding any issuance of capital stock upon the exercise of
options, warrants or conversion rights issued prior to the Purchase Date,
excluding any sale by the Corporation of Series G Preferred Stock if such
sale is consummated on or before August 31, 1996 and excluding any issuance
of capital stock upon the exercise of warrants issued in connection with any
such sale of Series G Preferred Stock), shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 2 and shall
entitle the holders of Series A Preferred Stock, the holders of Series B
Preferred Stock, the holders of Series C Preferred Stock, the holders of
Series D Preferred Stock, the holders of Series E Preferred Stock, the
holders of Series F Preferred Stock, the holders of Series G Preferred Stock,
the holders of Series H Preferred Stock and the holders of Common Stock to
receive at the closing in cash, securities or other property (valued as
provided in subsection 2.d. below) amounts as specified in subsections 2.a.
and 2.b. above.
d. Whenever the distribution provided for in this Section 2
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property as determined in good faith by the Board of Directors.
e. The Corporation shall give each holder of record of Series
A Preferred Stock, each holder of Series B Preferred Stock, each holder of
Series C Preferred Stock, each holder of Series D Preferred Stock, each holder
of Series E Preferred Stock, each holder of Series F Preferred Stock, each
holder of Series G Preferred Stock and each holder of Series H Preferred Stock
written notice of any impending event designated in subsection 2.a. above not
later than 20 days prior to the stockholders' meeting called to approve such
transaction, or 20 days prior to the closing of such transaction, whichever is
earlier, and shall also notify such holders in writing of the final approval of
such transaction. The transaction shall in no event take place sooner than 20
days after the Corporation has given the notice provided for herein; provided,
however, that such periods may be shortened upon the written consent of the
holders of Series A Preferred Stock, the holders of Series B Preferred Stock,
the holders of Series C Preferred Stock, the holders of Series D Preferred
Stock, the holders of Series E Preferred Stock, the holders of Series F
Preferred Stock, the holders of Series G Preferred Stock and the holders of
Series H Preferred Stock entitled to such notice rights or similar notice
rights and representing at least a majority of the aggregate voting power of
all then outstanding shares of such Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series
H Preferred Stock.
f. The provisions of subsection 2.e. above are in addition to
the protective provisions of Section 6 hereof.
3. REDEMPTION. Neither Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock nor Series
H Preferred Stock is redeemable.
4. CONVERSION. The holders of the outstanding shares of Series A
Preferred Stock, the holders of the outstanding shares of Series B Preferred
Stock, the holders of the outstanding shares of Series C Preferred Stock, the
holders of the outstanding shares of Series D Preferred Stock, the holders of
the outstanding shares of Series E Preferred Stock, the holders of the
outstanding shares of Series F Preferred Stock, the holders of the outstanding
shares of Series
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G Preferred Stock and the holders of the outstanding shares of Series H
Preferred Stock shall have conversion rights as follows (the "CONVERSION
RIGHTS"):
a. RIGHT TO CONVERT.
(1) Subject to Section 4.c. below, each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series A Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series A Issue Price by the Series A Conversion Price
at the time in effect for such share. The initial Series A Conversion Price
per share for shares of Series A Preferred Stock shall be the Original Series A
Issue Price; provided, however, that the Series A Conversion Price for the
Series A Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(2) Subject to Section 4.c. below, each share of Series B
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series B Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series B Issue Price by the Series B Conversion Price
at the time in effect for such share. The initial Series B Conversion Price
per share for shares of Series B Preferred Stock shall be the Original Series B
Issue Price; provided, however, that the Series B Conversion Price for the
Series B Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(3) Subject to Section 4.c. below, each share of Series C
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series C Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series C Issue Price by the Series C Conversion Price
at the time in effect for such share. The initial Series C Conversion Price
per share for shares of Series C Preferred Stock shall be the Original Series C
Issue Price; provided, however, that the Series C Conversion Price for the
Series C Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(4) Subject to Section 4.c. below, each share of Series D
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series D Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series D Issue Price by the Series D Conversion Price
at the time in effect for such share. The initial Series D Conversion Price
per share for shares of Series D Preferred Stock shall be the Original Series D
Issue Price; provided, however, that the Series D Conversion Price for the
Series D Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(5) Subject to Section 4.c. below, each share of Series E
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series E Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is
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determined by dividing the Original Series E Issue Price by the Series E
Conversion Price at the time in effect for such share. The initial Series E
Conversion Price per share for shares of Series E Preferred Stock shall be
the Original Series E Issue Price; provided, however, that the Series E
Conversion Price for the Series E Preferred Stock shall be subject to
adjustment as set forth in Section 4.c.
(6) Subject to Section 4.c. below, each share of Series F
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series F Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series F Issue Price by the Series F Conversion Price
at the time in effect for such share. The initial Series F Conversion Price
per share for shares of Series F Preferred Stock shall be the Original Series F
Issue Price; provided, however, that the Series F Conversion Price for the
Series F Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(7) Subject to Section 4.c. below, each share of Series G
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series G Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series G Issue Price by the Series G Conversion Price
at the time in effect for such share. The initial Series G Conversion Price
per share for shares of Series G Preferred Stock shall be the Original Series G
Issue Price; provided, however, that the Series G Conversion Price for the
Series G Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(8) Subject to Section 4.c. below, each share of Series H
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of this
Corporation or any transfer agent for the Series H Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series H Issue Price by the Series H Conversion Price
at the time in effect for such share. The initial Series H Conversion Price
per share for shares of Series H Preferred Stock shall be the Original Series H
Issue Price; provided, however, that the Series H Conversion Price for the
Series H Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(9) Each share of Series A Preferred Stock, each share of
Series B Preferred Stock, each share of Series C Preferred Stock, each share of
Series D Preferred Stock, each share of Series E Preferred Stock, each share of
Series F Preferred Stock, each share of Series G Preferred Stock and each share
of Series H Preferred Stock shall automatically be converted into shares of
Common Stock at the Series A Conversion Price, the Series B Conversion Price,
the Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
or the Series H Conversion Price, as the case may be, at the time in effect
immediately upon the earlier of (A) the consummation of the Corporation's sale
of its Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"ACT"), the public offering price per share of which was not less than 175% of
the then applicable Series G Conversion Price and that results in aggregate
gross proceeds to the Corporation of $15,000,000.00 or more or (B) the date
upon which the Corporation obtains (I)
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the consent of the holders of a majority of the then outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock, considered in the
aggregate, and (II) if the consent is obtained in connection with a public
offering in which the public offering price is less than the then conversion
price of any series of Preferred Stock, the consent of the holders of a
majority of the then outstanding shares of such series.
b. MECHANICS OF CONVERSION. Before any holder of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock shall be entitled to
convert such shares into shares of Common Stock, such holder shall surrender
the certificate or certificates therefor, duly endorsed, at the office of this
Corporation or of any transfer agent for Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H
Preferred Stock, as the case may be, and shall give written notice by mail,
postage prepaid, to this Corporation at its principal corporate office, of the
election to convert such shares and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. This Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, as the case may be, or to the nominee or nominees
thereof the shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock to be converted (except that, in
the case of any automatic conversion pursuant to Section 4.a.(9), the
conversion shall be deemed to have been made immediately prior to occurrence
that triggers such conversion as provided in Section 4.a.(9)), and the person
or persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offer of securities registered pursuant to the
Act, the conversion may, at the option of any holder tendering shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock for conversion, be conditioned upon
the closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the shares of Common
Stock issuable upon such conversion of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, as the case may be, shall not be deemed to have
converted such shares until immediately prior to the closing of such sale of
securities.
c. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G
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Conversion Price and the Series H Conversion Price shall be subject to
adjustment from time to time as follows:
(1) A. Upon each issuance by the Corporation of any
Additional Stock (as defined below), after the date upon which any shares of
Series H Preferred Stock were first issued (the "PURCHASE DATE"), without
consideration (except as provided in clause (3) below) or for a consideration
per share less than the Series A Conversion Price, the Series B Conversion
Price, the Series C Conversion Price, the Series D Conversion Price, the Series
E Conversion Price, the Series F Conversion Price, the Series G Conversion
Price or the Series H Conversion Price, as the case may be, in effect
immediately prior to the issuance of such Additional Stock, the Series A
Conversion Price, the Series B Conversion Price, the Series C Conversion Price,
the Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price, the Series G Conversion Price or the Series H Conversion
Price, as the case may be, in effect immediately prior to each such issuance
shall forthwith (except as otherwise provided in this clause (1)) be adjusted
to a price determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
which the aggregate consideration received by the Corporation for such issuance
would purchase at such Conversion Price, and the denominator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of such Additional Stock; it is provided,
however, that during the period commencing on the Purchase Date and ending on
January 23, 1998, upon each issuance of Additional Stock without consideration
(except as provided in clause (3) below) or for a consideration per share less
than the Series G Conversion Price in effect immediately prior to the issuance
of such Additional Stock, the Series G Conversion Price in effect immediately
prior to each such issuance shall forthwith (except as otherwise provided below
in this clause (1)) be adjusted to the Effective Price (as defined below) at
which such Additional Stock is issued. The "EFFECTIVE PRICE" for any issuance
of shares of Additional Stock shall mean the greater of $1.75 or the quotient
determined by dividing the total number of shares of Additional Stock issued by
the Corporation in such issuance into the aggregate amount of consideration
received by the Corporation therefor, as provided in this clause (1).
B. No adjustment of the Series A Conversion Price,
the Series B Conversion Price, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, the Series F Conversion Price,
the Series G Conversion Price or the Series H Conversion Price shall be made in
an amount less than one cent per share, provided that any adjustments which are
not required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to 3
years from the date of the event giving rise to the adjustment being carried
forward, or shall be made at the end of 3 years from the date of the event
giving rise to the adjustment being carried forward. Except to the limited
extent provided for in subsections E.3. and E.4. below, no adjustment of the
Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G Conversion Price or the Series H
Conversion Price pursuant to this subsection 4.c(1) shall have the effect of
increasing the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
or the Series H
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Conversion Price, as the case may be, above the Conversion Price in effect
immediately prior to such adjustment.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as determined by
the Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on
or after the Purchase Date), of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4.c.(1) and subsection 4.c.(2):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of
time, but without taking into account potential antidilution adjustments) of
such options to purchase or rights to subscribe for Common Stock shall be
deemed to have been issued at the time such options or rights were issued and
for a consideration equal to the consideration (determined in the manner
provided in subsections 4.c.(1)C and 4.c.(1)D, except as provided in subsection
4.c.(1)E.5), if any, received by the Corporation upon the issuance of such
options or rights plus the minimum exercise price provided in such options or
rights (without taking into account potential antidilution adjustments) for the
Common Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Corporation (without
taking into account potential antidilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subsection 4.c.(1)C and 4.c.(1)D, except as provided in subsection 4.c.(1)E.5).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution
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provisions thereof, the Series A Conversion Price, the Series B Conversion
Price, the Series C Conversion Price, the Series D Conversion Price, the
Series E Conversion Price, the Series F Conversion Price, the Series G
Conversion Price and the Series H Conversion Price, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made
for the actual issuance of Common Stock or any payment of such consideration
upon the exercise of any such options or rights or the conversion or exchange
of such securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
and the Series H Conversion Price, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities; provided that no such
recomputation shall have the effect of increasing or decreasing the Series A
Conversion Price, the Series B Conversion Price, the Series C Conversion Price,
the Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price, the Series G Conversion Price or the Series H Conversion
Price, as applicable, to an amount other than the amount that would have
existed on the recomputation date had the unexercised options or rights never
been issued.
5. In determining the amount of consideration
received by the Corporation for or upon the issuance of any Additional Stock or
other securities for the purposes of this subsection 4.c.(1) or 4.c.(2), the
value of any options to purchase or rights to subscribe for Common Stock,
securities by their terms convertible into or exchangeable for Common Stock or
options to purchase or rights to subscribe for such convertible or exchangeable
securities (each a "DERIVATIVE SECURITY") issued by the Company shall be deemed
to be zero (so that the issuance itself of any such Derivative Security shall
not be deemed to increase or decrease the consideration otherwise received by
the Corporation under this subsection 4.c(1) and subsection 4.c(2)), inasmuch
as the rights under such Derivative Security shall be deemed to have been
exercised immediately upon the issuance of such Derivative Security (as
contemplated by subsections 4.c.(1)E.1 and 4.c.(1)E.2 above).
(2) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4.c.(1)E) by
this Corporation after the Purchase Date other than
A. Common Stock issued pursuant to a transaction
described in subsection 4.c.(3) hereof;
B. shares of Common Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, or options, warrants or rights to acquire any such
shares, issuable or issued to employees, consultants, directors or vendors (if
in transactions with primarily non-financing purposes and approved by
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the Board of Directors of the Corporation) of the Corporation directly or
pursuant to a stock option plan or restricted stock plan approved by the
Board of Directors of this Corporation; provided that the price at which such
shares are issued (or, in the case of such options, warrants or rights, the
exercise price thereof) is at the time of issuance of such shares (or at the
time of the issuance of such options, warrants or rights, as the case may be)
not less than the fair market value of such shares as determined by the Board
of Directors; as provided in subsection 4.c(1)(E), the term "Additional
Stock" shall not include any shares of capital stock that are issued upon the
exercise of any options, warrants or rights excluded from the definition of
Additional Stock hereunder;
C. shares of Common Stock issued or issuable upon
conversion of or as a dividend or distribution on shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock or Series H Preferred Stock.
(3) In the event the Corporation should at any time or
from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G Conversion Price and the Series H
Conversion Price shall be appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common Stock
Equivalents with the number of shares issuable with respect to Common Stock
Equivalents determined from time to time in the manner provided for deemed
issuances in subsection 4.c.(1)E.
(4) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
and the Series H Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding shares.
d. OTHER DISTRIBUTIONS. In the event this Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in subsection 4.c.(3),
then, in each such case for the purpose of this subsection 4.d., the holders of
shares of Series A Preferred Stock, the holders of shares of Series B Preferred
Stock, the holders of shares of Series C Preferred Stock, the holders of shares
of Series D Preferred Stock,
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the holders of shares of Series E Preferred Stock, the holders of shares of
Series F Preferred Stock, the holders of shares of Series G Preferred Stock
or the holders of shares of Series H Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders
of the number of shares of Common Stock of the Corporation into which their
shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the
case may be, are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
e. RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction which is
deemed a liquidation under this Article IV) provision shall be made so that the
holders of shares of Series A Preferred Stock, the holders of shares of Series
B Preferred Stock, the holders of shares of Series C Preferred Stock, the
holders of shares of Series D Preferred Stock, the holders of shares of Series
E Preferred Stock, the holders of shares of Series F Preferred Stock, the
holders of shares of Series G Preferred Stock and the holders of shares of
Series H Preferred Stock shall thereafter be entitled to receive upon
conversion of their shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock or Series H Preferred
Stock, as the case may be, the number of shares of stock or other securities or
property of the Company or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of
the provisions of this Section 4 with respect to the rights of the holders of
shares of Series A Preferred Stock, the holders of shares of Series B Preferred
Stock, the holders of shares of Series C Preferred Stock, the holders of shares
of Series D Preferred Stock, the holders of shares of Series E Preferred Stock,
the holders of shares of Series F Preferred Stock, the holders of shares of
Series G Preferred Stock and the holders of shares of Series H Preferred Stock
after the recapitalization to the end that the provisions of this Section 4
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, as the case may be), shall be applicable after that
event as nearly equivalent as may be practicable.
f. NO IMPAIRMENT. This Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this Corporation, but will at all times in good faith assist in
the carrying out of all the provisions of this Section 4 and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of shares of Series A Preferred Stock, the
holders of shares of Series B Preferred Stock, the holders of shares of the
Series C Preferred Stock, the holders of shares of Series D Preferred Stock,
the holders of shares of Series E Preferred Stock, the holders of shares of
Series F Preferred Stock, the holders of shares of Series G Preferred Stock or
the holders of shares of Series H Preferred Stock against impairment.
g. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
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(1) No fractional shares shall be issued upon conversion
of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock, as the case may be, that
the holder is at the time converting into Common Stock and the number of shares
of Common Stock issuable upon such aggregate conversion.
(2) Upon the occurrence of each adjustment or readjustment
of the Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G Conversion Price or the Series H
Conversion Price pursuant to this Section 4, this Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock, as the case may be, a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. This
Corporation shall, upon the written request at any time of any holder of shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock or Series H Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Series A Conversion Price, the Series B
Conversion Price, the Series C Conversion Price, the Series D Conversion Price,
the Series E Conversion Price, the Series F Conversion Price, the Series G
Conversion Price or the Series H Conversion Price, as the case may be, at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the
case may be.
h. NOTICES OF RECORD DATE. In the event of any taking by this
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, this
Corporation shall mail to each holder of shares of Series A Preferred Stock, to
each holder of shares of Series B Preferred Stock, to each holder of shares of
Series C Preferred Stock, to each holder of shares of Series D Preferred Stock,
to each holder of shares of Series E Preferred Stock, to each holder of shares
of Series F Preferred Stock, to each holder of shares of Series G Preferred
Stock and to each holder of shares of Series H Preferred Stock, at least 20
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution
or right, and the amount and character of such dividend, distribution or right.
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i. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and Series H 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 Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock and Series H 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 Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock, in addition to such other remedies as shall
be available to the holder of such Preferred Stock, this Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
j. NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock shall be deemed given, with respect to each holder of
record, (1) upon personal delivery to such holder, (2) on the fifth business
day after deposit in United States mail, postage prepaid and addressed to such
holder at such holder's address appearing on the records of this Corporation or
at such other address as such holder may designate by advance notice in
accordance with this Section 4.j, or (3) upon confirmed receipt by such holder
of a facsimile transmission addressed to such holder and sent to such holder's
fax number indicated for such holder in the records of this Corporation, or to
such other fax number as such holder may designate by advance notice in
accordance with this Section 4.j.
5. VOTING RIGHTS. The holder of each share of Series A Preferred
Stock, each share of Series B Preferred Stock, each share of Series C Preferred
Stock, each share of Series D Preferred Stock, each share of Series E Preferred
Stock, each share of Series F Preferred Stock, each share of Series G Preferred
Stock and each share of Series H Preferred Stock shall have the right to one
vote for each share of Common Stock into which such share of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock or Series H Preferred Stock, as the case may be, could then be converted
(with any fractional share determined on an aggregate conversion basis being
rounded to the nearest whole share), and with respect to such vote, such holder
shall have full voting rights and powers equal to the voting rights and powers
of the holders of Common Stock, and shall be entitled, notwithstanding any
provision hereof, to notice of any stockholders' meeting in accordance with the
by-laws of this Corporation, and shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote; it is provided, however, that (i) for so
long as at least 2,000,000 shares of Series D Preferred Stock (As Adjusted with
respect to such series of Preferred Stock) are outstanding, the holders of the
outstanding shares of Series D Preferred Stock, voting separately as a series,
shall have the right to elect or appoint two of the Corporation's directors
(or two fifths of the Corporation's directors, if the Corporation has ten or
more directors) and shall not be entitled to vote for the Corporation's other
directors; (ii) for so
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long as at least 1,000,000 shares but less than 2,000,000 shares of Series D
Preferred Stock are outstanding (As Adjusted with respect to such series of
Preferred Stock), the holders of the outstanding shares of Series D Preferred
Stock, voting separately as a series, shall have the right to elect or
appoint one of the Corporation's directors (or one fifth of the Corporation's
directors, if the Corporation has ten or more directors) and shall not be
entitled to vote for the Corporation's other directors; (iii) commencing with
the date on which shares of Series D Preferred Stock are first issued and for
so long as at least 750,000 shares of Series A Preferred Stock are
outstanding (As Adjusted with respect to such series of Preferred Stock), the
holders of the outstanding shares of Series A Preferred Stock, voting
separately as a series, shall have the right to elect or appoint one of the
Corporation's directors (or one fifth of the Corporation's directors, if the
Corporation has ten or more directors) and shall not be entitled to vote for
the Corporation's other directors; (iv) commencing with the date on which
shares of Series E Preferred Stock and shares of Series F Preferred Stock are
first issued and for so long as at least 800,000 shares, in the aggregate, of
Series E Preferred Stock and Series F Preferred Stock are outstanding (As
Adjusted with respect to such series of Preferred Stock), the holders of
Series E Preferred Stock and the holders of Series F Preferred Stock, voting
together (but separately from any other capital stock) shall have the right
to elect or appoint one of the Corporation's directors (or one-fifth of the
Corporation's directors, if the Corporation has ten or more directors) and
shall not be entitled to vote for the Corporation's other directors and (v)
the holders of shares of Preferred Stock shall be entitled to vote upon any
change in the authorized number of Corporation's directors as provided in
Article V.
6. PROTECTIVE PROVISIONS. So long as at least 700,000 shares of
Series A Preferred Stock, at least 500,000 shares of Series B Preferred Stock,
at least 250,000 shares of Series C Preferred Stock, at least 2,000,000 shares
of Series D Preferred Stock, at least 600,000 shares of Series E Preferred
Stock, at least 400,000 shares of Series F Preferred Stock, at least 1,500,000
shares of Series G Preferred Stock or at least 200,000 shares of Series H
Preferred Stock are outstanding, in each case As Adjusted with respect to such
series of Preferred Stock, the Corporation shall not without first obtaining
the approval (by vote or written consent, as provided by law) of the holders of
at least a majority of the then outstanding shares of Preferred Stock:
a. (i) merge into or consolidate with or into any other
corporation (other than a wholly owned subsidiary corporation) pursuant to
which the stockholders of the Corporation prior to the merger or similar
transaction shall own less than 50% of the voting securities of the surviving
corporation; (ii) sell, convey, or otherwise dispose of all or substantially
all of its property or business; or (iii) effect a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of (other than pursuant to the sale of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock), Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock; or
b. increase the authorized number of shares of Preferred Stock
or Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock or Series H Preferred Stock; or
c. create any new class or series of stock or any other
securities convertible into equity securities of the Corporation having a
preference over, or being on a
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parity with, Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock with
respect to voting, dividends or upon liquidation; or
d. effect any liquidation, dissolution or winding-up of the
Corporation; or
e. pay or declare any dividend or distribution on, or redeem
(other than pursuant to agreements approved by the Board of Directors of the
Corporation with the holders thereof providing for repurchase of shares of
Common Stock upon termination of employment with or services to the
Corporation). any shares of Common Stock; or
f. do any act or thing that would result in taxation of the
holders of shares of the Series D Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provisions of the
Internal Revenue Code as hereafter from time to time in effect).
7. RESIDUAL RIGHTS. All rights accruing to the outstanding shares
of the Corporation not otherwise expressly provided for in this Amended and
Restated Certificate of Incorporation shall be vested in the Common Stock.
8. STATUS OF CONVERTED STOCK. In the event any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock shall be converted pursuant to
Section 4 hereof, the shares so converted shall be cancelled and shall not be
issuable by the Corporation. The Amended and Restated Certificate of
Incorporation of the Corporation shall be appropriately amended to effect the
corresponding reduction in the Corporation's authorized capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation shall be
distributed as provided in Section 2 of Division A. of this Article IV.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation, and
shall be entitled to vote upon any change in the authorized number of the
Corporation's directors as provided in Article V and shall otherwise be
entitled to vote upon such matters and in such manner as may be provided by
law.
ARTICLE V
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The authorized number of directors of the Corporation shall be six, and
such authorized number of directors shall not thereafter be increased or
decreased. This Article V may not be amended without (i) the affirmative vote
of the holders of at least a majority of the outstanding shares of Common Stock
and (ii) the affirmative vote of at least a majority of the outstanding shares
of Preferred Stock, each class of stock voting separately as a class.
ARTICLE VI
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, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware or (iv) for any transaction from which the
director derived any improper personal benefit. If the General Corporation Law
of the State of Delaware is amended after approval by the stockholders of this
Article to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
ARTICLE VII
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to)
agents of the Corporation (and any other persons to which Delaware law permits
the Corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or nonstatutory), with respect to actions for breach of duty to the
Corporation, its stockholders and others.
ARTICLE VIII
Subject to the provisions of this Amended and Restated Certificate of
Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE IX
The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws; provided, however, that the stockholders may change or
repeal any Bylaw adopted by the Board of Directors; and provided, further, that
no amendment or supplement to the Bylaws adopted by the Board of Directors
shall vary or conflict with any amendment or supplement adopted by the
stockholders.
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FOURTH: That thereafter, pursuant to resolution of the Board of
Directors, the Amended and Restated Certificate of Incorporation, as so amended
and restated, was submitted to the stockholders for their approval, which
approval was given by written consent of a majority of the stockholders
pursuant to Section 228 of the General Corporation Law of the State of
Delaware.
FIFTH: That prompt written notice was duly given pursuant to Section
228 of the General Corporation Law of the State of Delaware to those
stockholders who did not approve the Amended and Restated Certificate of
Incorporation, as so amended, by written consent.
SIXTH: That the Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Hybrid Networks, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and
attested to by its Secretary this ___ day of ___________, 1997.
HYBRID NETWORKS, INC.
/s/ Carl S. Ledbetter
--------------------------------------------
Carl S. Ledbetter, Chief Executive Officer
ATTEST:
/s/ Daniel E. Steimle
- ---------------------------
Daniel E. Steimle
Secretary
<PAGE>
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF
HYBRID NETWORKS, INC.
Hybrid Networks, Inc., a corporation organized and existing under and by
virtue of the General Corporation law of the State of Delaware (the
"CORPORATION"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Hybrid Networks, Inc.
SECOND: The date on which the Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware is
June 6, 1990, under the name of Hybrid Networks, Inc. The Certificate of
Incorporation of the Corporation was amended and restated on September 15, 1992
and was further amended on January 12, 1994, on October 21, 1994, February 15,
1995, May 25, 1995, December 22, 1995, July 17, 1996, February 17, 1997 and
__________________, 1997.
THIRD: The Board of Directors of the Corporation, at a meeting duly called
and held, adopted resolutions further amending and restating the Restated
Certificate of Incorporation to read in full as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation of the
Corporation be amended and restated in its entirety as follows:
ARTICLE I
The name of the Corporation is Hybrid Networks, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at that address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock to
be designated, respectively, "PREFERRED STOCK" and "COMMON STOCK." The total
number of shares which the Corporation is authorized to issue is One Hundred and
Eighteen Million (118,000,000) shares. One Hundred Million (100,000,000) shares
shall be designated Common Stock, par value $.001 per share ("COMMON STOCK"),
and Eighteen Million (18,000,000) shares shall be designated Preferred Stock,
<PAGE>
par value $.001 per share ("PREFERRED STOCK"). One Million Five Hundred
Forty-Seven Thousand One Hundred and Seventy Five (1,547,175) shares of the
Preferred Stock shall be designated Series A Preferred Stock, par value $.001
per share ( "SERIES A PREFERRED STOCK"), One Million Two Hundred and
Thirty-Seven Thousand Four Hundred and Thirty-Nine (1,237,439) shares of
the Preferred Stock shall be designated Series B Preferred Stock, par value
$.001 per share ("SERIES B PREFERRED STOCK"), Seven Hundred Sixty-One Thousand
Six Hundred and Ninety Four (761,694) shares of the Preferred Stock shall be
designated Series C Preferred Stock, par value $.001 per share ("SERIES C
PREFERRED STOCK"), Five Million Two Hundred Fifty-One Thousand and Three
(5,251,003) shares of the Preferred Stock shall be designated Series D Preferred
Stock, par value $.001 per share ("SERIES D PREFERRED STOCK"), One Million Three
Hundred Fifteen Thousand Eight Hundred and Sixty-Four (1,315,864) shares of the
Preferred Stock shall be designated Series E Preferred Stock, par value $.001
per share ("SERIES E PREFERRED STOCK"), Nine Hundred Eighty-Six Thousand Eight
Hundred and Ninety-Eight (986,898) shares of the Preferred Stock shall be
designated Series F Preferred Stock, par value $.001 per share ("SERIES F
PREFERRED STOCK"), Six Million Three Hundred Sixty Thousand Three Hundred and
Eighty-One (6,360,381) shares of the Preferred Stock shall be designed Series G
Preferred Stock, par value $.001 per share ("SERIES G PREFERRED STOCK"), and
Four Hundred Ninety-Seven Thousand Three Hundred and Twenty-Seven (497,327)
shares of the Preferred Stock shall be designated Series H Preferred Stock
("SERIES H PREFERRED STOCK").
The Board of Directors is authorized to provide for the issuance of the
shares of Preferred Stock, other than the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock, in one or more series, and, by filing a certificate of
designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series, and to
increase or decrease the number of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and/or
Series H Preferred Stock (but not in the case of any series below the number of
shares of such series then outstanding). The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the stock of the Corporation entitled to vote, unless a vote of any
other holders is required pursuant to a certificate or certificates establishing
a series of Preferred stock.
ARTICLE V
Each outstanding share of Common Stock as of the date of effectiveness of
these Amended and Restated Certificate of Incorporation shall be converted into
and reconstituted as 0.37037 of one share of Common Stock. No fractional
shares shall be issued upon such conversion and reconstitution, and the number
of shares of Common Stock to be issued shall be rounded down to the nearest
whole share. In lieu of any fractional share, each holder of shares of Common
Stock who would otherwise be entitled to receive a fraction of a share of Common
Stock (after aggregating all shares of Common Stock held by such holder) shall
be entitled to receive from the Corporation an amount in cash, without interest,
equal to the fair market value of such fractional interest as determined by the
Corporation's Board of Directors.
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ARTICLE VI
A. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. Subject to
the rights of any series of Preferred Stock which may from time to time come
into existence, the rights, preferences, restrictions and other matters relating
to Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock are as follows:
1. DIVIDEND PROVISIONS.
a. The holders of shares of Series A Preferred Stock, the
holders of shares of Series B Preferred Stock, the holders of shares of Series C
Preferred Stock, the holders of shares of Series D Preferred Stock, the holders
of Series E Preferred Stock, the holders of shares of Series F Preferred Stock,
the holders of shares of Series G Preferred Stock and the holders of shares of
Series H Preferred Stock shall be entitled to receive, pari passu, dividends,
out of any assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation) on Common Stock of the Corporation, at the rate of, (i) with
respect to the Series A Preferred Stock, $.03 per share per annum, (ii) with
respect to the Series B Preferred Stock, $.13125 per share per annum, (iii) with
respect to the Series C Preferred Stock, $.123 per share per annum, (iv) with
respect to the Series D Preferred Stock, $.13125 per share per annum, (v) with
respect to the Series E Preferred Stock and the Series F Preferred Stock $.114
per share per annum, (vi) with respect to the Series G Preferred Stock, $.28725
per share per annum and (vii) with respect to the Series H Preferred Stock, $.32
per share per annum. Such dividends shall be payable only when, as, and if
declared by the Board of Directors and shall not be cumulative. No dividends
shall be declared or paid with respect to Common Stock (other than a dividend
payable solely in Common Stock or other securities and rights convertible into
or entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of the Corporation) unless a dividend of equal or greater
amount per share (on an as-if converted to Common Stock basis) is first declared
and paid with respect to Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock.
b. In the event the Corporation shall declare a distribution
(other than a distribution described in Section 2) payable in securities of
other persons, evidences of indebtedness issued by the Corporation or other
persons, assets (excluding cash dividends) or options or rights to purchase any
such securities or evidences of indebtedness, then, in each such case, the
holders of Series A Preferred Stock, the holders of Series B Preferred Stock,
the holders of Series C Preferred Stock, the holders of Series D Preferred
Stock, the holders of Series E Preferred Stock, the holders of Series F
Preferred Stock, the holders of Series G Preferred Stock and the holders of
Series H Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of Series A Preferred Stock, the holders of
Series B Preferred Stock, the holders of Series C Preferred Stock, the holders
of Series D Preferred Stock, the holders of Series E Preferred Stock, the
holders of Series F Preferred Stock, the holders of Series G Preferred Stock and
the holders of Series H Preferred Stock were the holders of the number of shares
of Common Stock of the Corporation into which their respective shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock,
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Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, as the case may be, are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
2. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock, the holders of Series B Preferred Stock, the holders of Series
C Preferred Stock, the holders of Series D Preferred Stock, the holders of
Series E Preferred Stock, the holders of Series F Preferred Stock, the holders
of Series G Preferred Stock and the holders of Series H Preferred Stock shall be
entitled to receive, pari passu prior and in preference to any distribution of
any of the assets of the Corporation to the holders of Common Stock by
reason of their ownership thereof, an amount per share equal to (i) in the case
of Series A Preferred Stock, the sum of (A) $.49 for each share of Series A
Preferred Stock, as adjusted for stock dividends, combinations, splits,
recapitalizations and the like ("AS ADJUSTED") with respect to such series of
Preferred Stock (the "ORIGINAL SERIES A ISSUE PRICE"), plus (B) an amount equal
to declared but unpaid dividends on such share, (ii) in the case of Series B
Preferred Stock, the sum of (A) $1.75 for each share of Series B Preferred
Stock, As Adjusted with respect to such series of Preferred Stock (the "ORIGINAL
SERIES B ISSUE PRICE"), plus (B) an amount equal to declared but unpaid
dividends on such share, (iii) in the case of Series C Preferred Stock, the sum
of (A) $1.6411 for each share of Series C Preferred Stock, As Adjusted with
respect to such series of Preferred Stock (the "ORIGINAL SERIES C ISSUE PRICE"),
plus (B) an amount equal to declared but unpaid dividends on such share, (iv) in
the case of Series D Preferred Stock, the sum of (A) $1.75 for each share of
Series D Preferred Stock, As Adjusted with respect to such series of Preferred
Stock (the "ORIGINAL SERIES D ISSUE PRICE"), plus (B) an amount equal to
declared but unpaid dividends on such share, (v) in the case of Series E
Preferred Stock, the sum of (A) $1.52 for each share of Series E Preferred
Stock, As Adjusted with respect to such series of Preferred Stock (the "ORIGINAL
SERIES E ISSUE PRICE"), plus (B) an amount equal to declared but unpaid
dividends on such share, (vi) in the case of Series F Preferred Stock, the sum
of (A) $1.52 for each share of Series F Preferred Stock, As Adjusted with
respect to such series of Preferred Stock (the "ORIGINAL SERIES F ISSUE PRICE"),
plus (B) an amount equal to declared but unpaid dividends on such share, (vii)
in the case of Series G Preferred Stock, the sum of (A) $3.83 for each share of
Series G Preferred Stock, As Adjusted with respect to such series of preferred
Stock (the "ORIGINAL SERIES G ISSUE PRICE") and (viii) in the case of Series H
Preferred Stock, the sum of (A) $4.05 for each share of Series H Preferred
Stock, As Adjusted with respect to such series of preferred Stock (the "ORIGINAL
SERIES H ISSUE PRICE"), plus (B) an amount equal to declared but unpaid
dividends on such share. If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of Series A Preferred Stock, the
holders of Series B Preferred Stock, the holders of Series C Preferred Stock,
the holders of Series D Preferred Stock, the holders of Series E Preferred
Stock, the holders of Series F Preferred Stock, the holders of Series G
Preferred Stock and the holders of Series H Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts (the "TOTAL PREFERENTIAL AMOUNT"), then the entire assets
and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of Series A Preferred Stock, the holders
of Series B Preferred Stock, the holders of Series C Preferred Stock, the
holders of Series D Preferred Stock, the holders of Series E Preferred Stock,
the holders of Series F Preferred Stock,
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the holders of Series G Preferred Stock and the holders of Series H Preferred
Stock in the ratio, with respect to each such holder, of (i) the preferential
amount that such holder would have received if the Total Preferential Amount
were distributed to all such holders to (ii) the Total Preferential Amount.
b. After payment to the holders of Series A Preferred Stock,
the holders of Series B Preferred Stock, the holders of Series C Preferred
Stock, the holders of Series D Preferred Stock, the holders of Series E
Preferred Stock, the holders of Series F Preferred Stock, the holders of Series
G Preferred Stock and the holders of Series H Preferred Stock of the amounts set
forth in subsection 2.a. above, the entire remaining assets and funds of the
Corporation legally available for distribution, if any, shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock then held by them.
c. (i) A consolidation or merger of the Corporation with or
into any other corporation or corporations pursuant to which the stockholders of
the Corporation prior to the merger or similar transaction shall own less than
50% of the voting securities of the surviving corporation, (ii) a sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation or (iii) the effectuation by the Corporation of a transaction or
series of related transactions in which more than 50% of the voting power of the
Corporation is disposed of (excluding any issuance of capital stock upon the
exercise of options, warrants or conversion rights issued prior to the Purchase
Date, excluding any sale by the Corporation of Series G Preferred Stock if such
sale is consummated on or before August 31, 1996 and excluding any issuance of
capital stock upon the exercise of warrants issued in connection with any such
sale of Series G Preferred Stock), shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 2 and shall entitle
the holders of Series A Preferred Stock, the holders of Series B Preferred
Stock, the holders of Series C Preferred Stock, the holders of Series D
Preferred Stock, the holders of Series E Preferred Stock, the holders of Series
F Preferred Stock, the holders of Series G Preferred Stock, the holders of
Series H Preferred Stock and the holders of Common Stock to receive at the
closing in cash, securities or other property (valued as provided in subsection
2.d. below) amounts as specified in subsections 2.a. and 2.b. above.
d. Whenever the distribution provided for in this Section 2
shall be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
e. The Corporation shall give each holder of record of Series A
Preferred Stock, each holder of Series B Preferred Stock, each holder of Series
C Preferred Stock, each holder of Series D Preferred Stock, each holder of
Series E Preferred Stock, each holder of Series F Preferred Stock, each holder
of Series G Preferred Stock and each holder of Series H Preferred Stock written
notice of any impending event designated in subsection 2.a. above not later than
20 days prior to the stockholders' meeting called to approve such transaction,
or 20 days prior to the closing of such transaction, whichever is earlier, and
shall also notify such holders in writing of the final approval of such
transaction. The transaction shall in no event take place sooner than 20 days
after the Corporation has given the notice provided for herein; provided,
however, that such periods may be shortened upon the written consent of the
holders of Series A Preferred Stock, the holders of Series B Preferred Stock,
the holders of Series C Preferred Stock, the holders of Series D Preferred
Stock, the holders of Series E Preferred Stock,
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the holders of Series F Preferred Stock, the holders of Series G Preferred Stock
and the holders of Series H Preferred Stock entitled to such notice rights or
similar notice rights and representing at least a majority of the aggregate
voting power of all then outstanding shares of such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock.
f. The provisions of subsection 2.e. above are in addition to
the protective provisions of Section 6 hereof.
3. REDEMPTION. Neither Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock nor Series H Preferred
Stock is redeemable.
4. CONVERSION. The holders of the outstanding shares of Series A
Preferred Stock, the holders of the outstanding shares of Series B Preferred
Stock, the holders of the outstanding shares of Series C Preferred Stock, the
holders of the outstanding shares of Series D Preferred Stock, the holders of
the outstanding shares of Series E Preferred Stock, the holders of the
outstanding shares of Series F Preferred Stock, the holders of the outstanding
shares of Series G Preferred Stock and the holders of the outstanding shares of
Series H Preferred Stock shall have conversion rights as follows (the
"CONVERSION RIGHTS"):
a. RIGHT TO CONVERT.
(1) Subject to Section 4.c. below, each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series A Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series A Issue Price by the Series A Conversion Price
at the time in effect for such share. The initial Series A Conversion Price per
share for shares of Series A Preferred Stock shall be the Original Series A
Issue Price; provided, however, that the Series A Conversion Price for the
Series A Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(2) Subject to Section 4.c. below, each share of Series B
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series B Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series B Issue Price by the Series B Conversion Price
at the time in effect for such share. The initial Series B Conversion Price per
share for shares of Series B Preferred Stock shall be the Original Series B
Issue Price; provided, however, that the Series B Conversion Price for the
Series B Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(3) Subject to Section 4.c. below, each share of Series C
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series C Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series C Issue Price by the Series C Conversion Price
at the
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time in effect for such share. The initial Series C Conversion Price per share
for shares of Series C Preferred Stock shall be the Original Series C Issue
Price; provided, however, that the Series C Conversion Price for the Series C
Preferred Stock shall be subject to adjustment as set forth in Section 4.c.
(4) Subject to Section 4.c. below, each share of Series D
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series D Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series D Issue Price by the Series D Conversion Price
at the time in effect for such share. The initial Series D Conversion Price per
share for shares of Series D Preferred Stock shall be the Original Series D
Issue Price; provided, however, that the Series D Conversion Price for the
Series D Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(5) Subject to Section 4.c. below, each share of Series E
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series E Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series E Issue Price by the Series E Conversion Price
at the time in effect for such share. The initial Series E Conversion Price per
share for shares of Series E Preferred Stock shall be the Original Series E
Issue Price; provided, however, that the Series E Conversion Price for the
Series E Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(6) Subject to Section 4.c. below, each share of Series F
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series F Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series F Issue Price by the Series F Conversion Price
at the time in effect for such share. The initial Series F Conversion Price per
share for shares of Series F Preferred Stock shall be the Original Series F
Issue Price; provided, however, that the Series F Conversion Price for the
Series F Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(7) Subject to Section 4.c. below, each share of Series G
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series G Preferred Stock, into such
number of fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Series G Issue Price by the Series G Conversion Price
at the time in effect for such share. The initial Series G Conversion Price per
share for shares of Series G Preferred Stock shall be the Original Series G
Issue Price; provided, however, that the Series G Conversion Price for the
Series G Preferred Stock shall be subject to adjustment as set forth in Section
4.c.
(8) Subject to Section 4.c. below, each share of Series H
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series H
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Preferred Stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series H Issue Price by
the Series H Conversion Price at the time in effect for such share. The initial
Series H Conversion Price per share for shares of Series H Preferred Stock shall
be the Original Series H Issue Price; provided, however, that the Series H
Conversion Price for the Series H Preferred Stock shall be subject to adjustment
as set forth in Section 4.c.
(9) Each share of Series A Preferred Stock, each share of
Series B Preferred Stock, each share of Series C Preferred Stock, each share of
Series D Preferred Stock, each share of Series E Preferred Stock, each share of
Series F Preferred Stock, each share of Series G Preferred Stock and each share
of Series H Preferred Stock shall automatically be converted into shares of
Common Stock at the Series A Conversion Price, the Series B Conversion Price,
the Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
or the Series H Conversion Price, as the case may be, at the time in effect
immediately upon the earlier of (A) the consummation of the Corporation's sale
of its Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act of 1933, as amended (the "ACT"),
the public offering price per share of which was not less than 175% of the then
applicable Series G Conversion Price and that results in aggregate gross
proceeds to the Corporation of $15,000,000.00 or more or (B) the date upon which
the Corporation obtains (I) the consent of the holders of a majority of the then
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock and Series H Preferred Stock,
considered in the aggregate, and (II) if the consent is obtained in connection
with a public offering in which the public offering price is less than the then
conversion price of any series of Preferred Stock, the consent of the holders of
a majority of the then outstanding shares of such series.
b. MECHANICS OF CONVERSION. Before any holder of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock shall be entitled to
convert such shares into shares of Common Stock, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H
Preferred Stock, as the case may be, and shall give written notice by mail,
postage prepaid, to the Corporation at its principal corporate office, of the
election to convert such shares and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, as the case may be, or to the nominee or nominees
thereof the shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock to be converted (except that, in the
case of any
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automatic conversion pursuant to Section 4.a.(9), the conversion shall be deemed
to have been made immediately prior to occurrence that triggers such conversion
as provided in Section 4.a.(9)), and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with an underwritten offer of
securities registered pursuant to the Act, the conversion may, at the option of
any holder tendering shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock, Series G Preferred Stock or Series H Preferred
Stock for conversion, be conditioned upon the closing with the underwriter of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the shares of Common Stock issuable upon such conversion of
the shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the
case may be, shall not be deemed to have converted such shares until immediately
prior to the closing of such sale of securities.
c. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The Series
A Conversion Price, the Series B Conversion Price, the Series C Conversion
Price, the Series D Conversion Price, the Series E Conversion Price, the Series
F Conversion Price, the Series G Conversion Price and the Series H Conversion
Price shall be subject to adjustment from time to time as follows:
(1) A. Upon each issuance by the Corporation of any
Additional Stock (as defined below), after the date upon which any shares of
Series H Preferred Stock were first issued (the "PURCHASE DATE"), without
consideration (except as provided in clause (3) below) or for a consideration
per share less than the Series A Conversion Price, the Series B Conversion
Price, the Series C Conversion Price, the Series D Conversion Price, the Series
E Conversion Price, the Series F Conversion Price, the Series G Conversion Price
or the Series H Conversion Price, as the case may be, in effect immediately
prior to the issuance of such Additional Stock, the Series A Conversion Price,
the Series B Conversion Price, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, the Series F Conversion Price,
the Series G Conversion Price or the Series H Conversion Price, as the case may
be, in effect immediately prior to each such issuance shall forthwith (except as
otherwise provided in this clause (1)) be adjusted to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for such issuance would purchase at
such Conversion Price, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of such Additional Stock; it is provided, however, that during
the period commencing on the Purchase Date and ending on January 23, 1998, upon
each issuance of Additional Stock without consideration (except as provided in
clause (3) below) or for a consideration per share less than the Series G
Conversion Price in effect immediately prior to the issuance of such Additional
Stock, the Series G Conversion Price in effect immediately prior to each such
issuance shall forthwith (except as otherwise provided below in this clause (1))
be adjusted to the Effective Price (as defined below) at which such Additional
Stock is issued. The "EFFECTIVE PRICE" for any issuance of shares of Additional
Stock shall mean the greater of $1.75 or the quotient determined by dividing the
total number of shares of Additional Stock issued by the Corporation in such
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issuance into the aggregate amount of consideration received by the Corporation
therefor, as provided in this clause (1).
B. No adjustment of the Series A Conversion Price,
the Series B Conversion Price, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, the Series F Conversion Price,
the Series G Conversion Price or the Series H Conversion Price shall be made in
an amount less than one cent per share, provided that any adjustments which are
not required to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made prior to 3
years from the date of the event giving rise to the adjustment being carried
forward, or shall be made at the end of 3 years from the date of the event
giving rise to the adjustment being carried forward. Except to the limited
extent provided for in subsections E.3. and E.4. below, no adjustment of the
Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G Conversion Price or the Series H
Conversion Price pursuant to this subsection 4.c(1) shall have the effect of
increasing the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
or the Series H Conversion Price, as the case may be, above the Conversion Price
in effect immediately prior to such adjustment.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on or
after the Purchase Date), of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4.c.(1) and subsection 4.c.(2):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 4.c.(1)C and 4.c.(1)D, except as provided in subsection 4.c.(1)E.5),
if any, received by the Corporation upon the issuance of such options or rights
plus the minimum exercise price provided in such options or rights (without
taking into account potential antidilution adjustments) for the Common Stock
covered thereby.
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2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Corporation (without taking into
account potential antidilution adjustments) upon the conversion or exchange of
such securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner provided in subsection
4.c.(1)C and 4.c.(1)D, except as provided in subsection 4.c.(1)E.5).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G Conversion Price and the Series H
Conversion Price, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
and the Series H Conversion Price, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities; provided that no such
recomputation shall have the effect of increasing or decreasing the Series A
Conversion Price, the Series B Conversion Price, the Series C Conversion Price,
the Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price, the Series G Conversion Price or the Series H Conversion
Price, as applicable, to an amount other than the amount that would have existed
on the recomputation date had the unexercised options or rights never been
issued.
5. In determining the amount of consideration
received by the Corporation for or upon the issuance of any Additional Stock
or other securities for the purposes of this subsection 4.c.(1) or 4.c.(2),
the value of any options to purchase or rights to subscribe for Common Stock,
securities by their terms convertible into or exchangeable
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for Common Stock or options to purchase or rights to subscribe for such
convertible or exchangeable securities (each a "DERIVATIVE SECURITY") issued
by the Company shall be deemed to be zero (so that the issuance itself of any
such Derivative Security shall not be deemed to increase or decrease the
consideration otherwise received by the Corporation under this subsection
4.c(1) and subsection 4.c(2)), inasmuch as the rights under such Derivative
Security shall be deemed to have been exercised immediately upon the issuance
of such Derivative Security (as contemplated by subsections 4.c.(1)E.1 and
4.c.(1)E.2 above).
(2) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4.c.(1)E) by
the Corporation after the Purchase Date other than
A. Common Stock issued pursuant to a transaction
described in subsection 4.c.(3) hereof;
B. shares of Common Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock, or options, warrants or rights to acquire any such
shares, issuable or issued to employees, consultants, directors or vendors (if
in transactions with primarily non-financing purposes and approved by the Board
of Directors of the Corporation) of the Corporation directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of Directors of
the Corporation; provided that the price at which such shares are issued (or, in
the case of such options, warrants or rights, the exercise price thereof) is at
the time of issuance of such shares (or at the time of the issuance of such
options, warrants or rights, as the case may be) not less than the fair market
value of such shares as determined by the Board of Directors; as provided in
subsection 4.c(1)(E), the term "Additional Stock" shall not include any shares
of capital stock that are issued upon the exercise of any options, warrants or
rights excluded from the definition of Additional Stock hereunder;
C. shares of Common Stock issued or issuable upon
conversion of or as a dividend or distribution on shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock or Series H Preferred Stock.
(3) In the event the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Series A
Conversion Price, the Series B Conversion Price, the Series C Conversion Price,
the Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price, the Series G Conversion Price and the Series H Conversion
Price shall be appropriately decreased so that the
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number of shares of Common Stock issuable on conversion of each share of such
series shall be increased in proportion to such increase of the aggregate of
shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents with the number of shares issuable with respect to
Common Stock Equivalents determined from time to time in the manner provided for
deemed issuances in subsection 4.c.(1)E.
(4) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Series A Conversion Price, the Series B Conversion Price, the
Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price, the Series F Conversion Price, the Series G Conversion Price
and the Series H Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding shares.
d. OTHER DISTRIBUTIONS. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection 4.c.(3), then, in
each such case for the purpose of this subsection 4.d., the holders of shares of
Series A Preferred Stock, the holders of shares of Series B Preferred Stock, the
holders of shares of Series C Preferred Stock, the holders of shares of Series D
Preferred Stock, the holders of shares of Series E Preferred Stock, the holders
of shares of Series F Preferred Stock, the holders of shares of Series G
Preferred Stock or the holders of shares of Series H Preferred Stock shall be
entitled to a proportionate share of any such distribution as though they were
the holders of the number of shares of Common Stock of the Corporation into
which their shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the
case may be, are convertible as of the record date fixed for the determination
of the holders of Common Stock of the Corporation entitled to receive such
distribution.
e. RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction which is deemed a
liquidation under this Article VI) provision shall be made so that the holders
of shares of Series A Preferred Stock, the holders of shares of Series B
Preferred Stock, the holders of shares of Series C Preferred Stock, the holders
of shares of Series D Preferred Stock, the holders of shares of Series E
Preferred Stock, the holders of shares of Series F Preferred Stock, the holders
of shares of Series G Preferred Stock and the holders of shares of Series H
Preferred Stock shall thereafter be entitled to receive upon conversion of their
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock or Series H Preferred Stock, as the case may be,
the number of shares of stock or other securities or property of the Company or
otherwise, to which a holder of Common Stock deliverable upon conversion would
have been entitled on such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of the holders of shares of Series A Preferred Stock,
the holders of shares of Series B Preferred Stock, the holders of shares of
Series C Preferred Stock, the holders of shares of Series D Preferred Stock, the
holders of shares of Series E Preferred Stock, the holders of shares of
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Series F Preferred Stock, the holders of shares of Series G Preferred Stock and
the holders of shares of Series H Preferred Stock after the recapitalization to
the end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock or Series H Preferred Stock,
as the case may be), shall be applicable after that event as nearly equivalent
as may be practicable.
f. NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of the holders of shares of Series A Preferred Stock, the
holders of shares of Series B Preferred Stock, the holders of shares of the
Series C Preferred Stock, the holders of shares of Series D Preferred Stock, the
holders of shares of Series E Preferred Stock, the holders of shares of Series F
Preferred Stock, the holders of shares of Series G Preferred Stock or the
holders of shares of Series H Preferred Stock against impairment.
g. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(1) No fractional shares shall be issued upon conversion of
any shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock, as the case may be, that the holder
is at the time converting into Common Stock and the number of shares of Common
Stock issuable upon such aggregate conversion.
(2) Upon the occurrence of each adjustment or readjustment
of the Series A Conversion Price, the Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion Price,
the Series F Conversion Price, the Series G Conversion Price or the Series H
Conversion Price pursuant to this Section 4, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock, as the case may be, 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 the written request at any time of any holder of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock, furnish or cause to be furnished to
such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Series A Conversion Price, the Series B
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Conversion Price, the Series C Conversion Price, the Series D Conversion Price,
the Series E Conversion Price, the Series F Conversion Price, the Series G
Conversion Price or the Series H Conversion Price, as the case may be, at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock, as the
case may be.
h. NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of shares of Series A Preferred Stock, to each holder
of shares of Series B Preferred Stock, to each holder of shares of Series C
Preferred Stock, to each holder of shares of Series D Preferred Stock, to each
holder of shares of Series E Preferred Stock, to each holder of shares of Series
F Preferred Stock, to each holder of shares of Series G Preferred Stock and to
each holder of shares of Series H Preferred Stock, at least 20 days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
i. 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 Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock and Series H 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 Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock and Series H 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 Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
j. NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or
Series H Preferred Stock shall be deemed given, with respect to each holder of
record, (1) upon personal delivery to such holder, (2) on the fifth business day
after deposit in United States mail, postage prepaid and addressed to such
holder at such holder's address appearing on the records of the Corporation or
at such other address as such holder may designate by advance notice in
accordance with this Section 4.j, or (3) upon confirmed receipt by such holder
of a facsimile transmission addressed to such holder and sent to such holder's
fax
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number indicated for such holder in the records of the Corporation, or to such
other fax number as such holder may designate by advance notice in accordance
with this Section 4.j.
5. VOTING RIGHTS. The holder of each share of Series A Preferred
Stock, each share of Series B Preferred Stock, each share of Series C Preferred
Stock, each share of Series D Preferred Stock, each share of Series E Preferred
Stock, each share of Series F Preferred Stock, each share of Series G Preferred
Stock and each share of Series H Preferred Stock shall have the right to one
vote for each share of Common Stock into which such share of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred
Stock or Series H Preferred Stock, as the case may be, could then be converted
(with any fractional share determined on an aggregate conversion basis being
rounded to the nearest whole share), and with respect to such vote, such holder
shall have full voting rights and powers equal to the voting rights and powers
of the holders of Common Stock, and shall be entitled, notwithstanding any
provision hereof, to notice of any stockholders' meeting in accordance with the
by-laws of the Corporation, and shall be entitled to vote, together with holders
of Common Stock, with respect to any question upon which holders of Common Stock
have the right to vote; it is provided, however, that (i) for so long as at
least 2,000,000 shares of Series D Preferred Stock (As Adjusted with respect to
such series of Preferred Stock) are outstanding, the holders of the outstanding
shares of Series D Preferred Stock, voting separately as a series, shall have
the right to elect or appoint two of the Corporation's directors (or two fifths
of the Corporation's directors, if the Corporation has ten or more directors)
and shall not be entitled to vote for the Corporation's other directors; (ii)
for so long as at least 1,000,000 shares but less than 2,000,000 shares of
Series D Preferred Stock are outstanding (As Adjusted with respect to such
series of Preferred Stock), the holders of the outstanding shares of Series D
Preferred Stock, voting separately as a series, shall have the right to elect or
appoint one of the Corporation's directors (or one fifth of the Corporation's
directors, if the Corporation has ten or more directors) and shall not be
entitled to vote for the Corporation's other directors; (iii) commencing with
the date on which shares of Series D Preferred Stock are first issued and for so
long as at least 750,000 shares of Series A Preferred Stock are outstanding (As
Adjusted with respect to such series of Preferred Stock), the holders of the
outstanding shares of Series A Preferred Stock, voting separately as a series,
shall have the right to elect or appoint one of the Corporation's directors (or
one fifth of the Corporation's directors, if the Corporation has ten or more
directors) and shall not be entitled to vote for the Corporation's other
directors; (iv) commencing with the date on which shares of Series E Preferred
Stock and shares of Series F Preferred Stock are first issued and for so long as
at least 800,000 shares, in the aggregate, of Series E Preferred Stock and
Series F Preferred Stock are outstanding (As Adjusted with respect to such
series of Preferred Stock), the holders of Series E Preferred Stock and the
holders of Series F Preferred Stock, voting together (but separately from any
other capital stock) shall have the right to elect or appoint one of the
Corporation's directors (or one-fifth of the Corporation's directors, if the
Corporation has ten or more directors) and shall not be entitled to vote for the
Corporation's other directors and (v) the holders of shares of Preferred Stock
shall be entitled to vote upon any change in the authorized number of
Corporation's directors as provided in Article VII.
6. PROTECTIVE PROVISIONS. So long as at least 700,000 shares of
Series A Preferred Stock, at least 500,000 shares of Series B Preferred
Stock, at least 250,000 shares of Series C Preferred Stock, at least
2,000,000 shares of Series D Preferred Stock, at least 600,000 shares of
Series E Preferred Stock, at least 400,000 shares of Series F Preferred
Stock, at least
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1,500,000 shares of Series G Preferred Stock or at least 200,000 shares of
Series H Preferred Stock are outstanding, in each case As Adjusted with
respect to such series of Preferred Stock, the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law)
of the holders of at least a majority of the then outstanding shares of
Preferred Stock:
a. (i) merge into or consolidate with or into any other
corporation (other than a wholly owned subsidiary corporation) pursuant to which
the stockholders of the Corporation prior to the merger or similar transaction
shall own less than 50% of the voting securities of the surviving corporation;
(ii) sell, convey, or otherwise dispose of all or substantially all of its
property or business; or (iii) effect a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of (other than pursuant to the sale of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock), Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H
Preferred Stock; or
b. increase the authorized number of shares of Preferred Stock
or Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock or Series H Preferred Stock; or
c. create any new class or series of stock or any other
securities convertible into equity securities of the Corporation having a
preference over, or being on a parity with, Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock or Series H
Preferred Stock with respect to voting, dividends or upon liquidation; or
d. effect any liquidation, dissolution or winding-up of the
Corporation; or
e. pay or declare any dividend or distribution on, or redeem
(other than pursuant to agreements approved by the Board of Directors of the
Corporation with the holders thereof providing for repurchase of shares of
Common Stock upon termination of employment with or services to the Corporation)
any shares of Common Stock; or
f. do any act or thing that would result in taxation of the
holders of shares of the Series D Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provisions of the
Internal Revenue Code as hereafter from time to time in effect).
7. RESIDUAL RIGHTS. All rights accruing to the outstanding shares
of the Corporation not otherwise expressly provided for in this Amended and
Restated Certificate of Incorporation shall be vested in the Common Stock.
8. STATUS OF CONVERTED STOCK. In the event any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock or Series H Preferred Stock shall be converted pursuant to
Section 4 hereof, the shares so converted shall be cancelled and shall not be
issuable by the Corporation. The Amended and Restated Certificate of
Incorporation
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of the Corporation shall be appropriately amended to effect the corresponding
reduction in the Corporation's authorized capital stock.
B. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Division A. of this Article VI.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Corporation, and shall be entitled
to vote upon any change in the authorized number of the Corporation's directors
as provided in Article VII and shall otherwise be entitled to vote upon such
matters and in such manner as may be provided by law.
ARTICLE VII
The authorized number of directors of the Corporation shall be six, and
such authorized number of directors shall not thereafter be increased or
decreased. This Article VII may not be amended without (i) the affirmative vote
of the holders of at least a majority of the outstanding shares of Common Stock
and (ii) the affirmative vote of at least a majority of the outstanding shares
of Preferred Stock, each class of stock voting separately as a class.
ARTICLE VIII
To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Neither any amendment nor repeal of this ARTICLE VIII, nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
ARTICLE VIII, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the corporation
existing at the time of such amendment, repeal or adoption of such an
inconsistent provision.
ARTICLE IX
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of the Corporation (and any other
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persons to which Delaware law permits the Corporation to provide
indemnification) through bylaw provisions, agreements with such agents or other
persons, vote of stockholders or disinterested directors or otherwise, in excess
of the indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by applicable
Delaware law (statutory or nonstatutory), with respect to actions for breach of
duty to the Corporation, its stockholders and others.
ARTICLE X
Subject to the provisions of this Amended and Restated Certificate of
Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE XI
The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws; provided, however, that the stockholders may change or repeal
any Bylaw adopted by the Board of Directors; and provided, further, that no
amendment or supplement to the Bylaws adopted by the Board of Directors shall
vary or conflict with any amendment or supplement adopted by the stockholders.
FOURTH: That thereafter, pursuant to resolution of the Board of
Directors, the Amended and Restated Certificate of Incorporation, as so amended
and restated, was submitted to the stockholders for their approval, which
approval was given by written consent of a majority of the stockholders pursuant
to Section 228 of the General Corporation Law of the State of Delaware.
FIFTH: That prompt written notice was duly given pursuant to Section 228
of the General Corporation Law of the State of Delaware to those stockholders
who did not approve the Amended and Restated Certificate of Incorporation, as so
amended, by written consent.
SIXTH: That the Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, Hybrid Networks, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and attested
to by its Secretary this ____ day of __________, 1997.
HYBRID NETWORKS, INC.
---------------------------------------------
Carl S. Ledbetter, Chief Executive Officer
ATTEST:
- ----------------------------------
Daniel E. Steimle
Secretary
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AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF
HYBRID NETWORKS, INC.
Hybrid Networks, Inc., a corporation organized and existing under and by
virtue of the General Corporation law of the State of Delaware (the
"CORPORATION"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Hybrid Networks, Inc.
SECOND: The date on which the Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware is
June 6, 1990, under the name of Hybrid Networks, Inc. The Certificate of
Incorporation of the Corporation was amended and restated on September 15, 1992
and was further amended on January 12, 1994, on October 21, 1994, February 15,
1995, May 25, 1995, December 22, 1995, July 17, 1996, February 17, 1997,
____________, 1997 and _________, 1997.
THIRD: The Board of Directors of the Corporation, at a meeting duly called
and held, adopted resolutions further amending and restating the Restated
Certificate of Incorporation to read in full as follows:
RESOLVED, that the Amended and Restated Certificate of Incorporation of the
Corporation be amended and restated in its entirety as follows:
ARTICLE I
The name of this Corporation is Hybrid Networks, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at that address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the Corporation
has authority to issue is One Hundred Five Million (105,000,000) shares,
consisting of two classes: One
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Hundred Million (100,000,000) shares of Common Stock, $0.001 par value per
share, and Five Million (5,000,000) shares of Preferred Stock, $0.001 par value
per share.
The Board of Directors is authorized, subject to any limitations prescribed
by the law of the State of Delaware, to provide for the issuance of the shares
of Preferred Stock in one or more series, and, by filing a Certificate of
Designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding).
The number of authorized shares of Common Stock or Preferred Stock may also
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote, unless a vote of any other holders is
required pursuant to a Certificate or Certificates establishing a series of
Preferred Stock.
Except as otherwise expressly provided in any Certificate of Designation
designating any series of Preferred Stock pursuant to the foregoing provisions
of this Article IV, any new series of Preferred Stock may be designated, fixed
and determined as provided herein by the Board of Directors without approval of
the holders of Common Stock or the holders of Preferred Stock, or any series
thereof, and any such new series may have powers, preferences and rights,
including, without limitation, voting rights, dividend rights, liquidation
rights, redemption rights and conversion rights, senior to, junior to or pari
passu with the rights of the Common Stock, the Preferred Stock, or any future
class or series of Preferred Stock or Common Stock.
ARTICLE V
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is authorized to make, alter or repeal any or all of
the Bylaws of the Corporation; provided, however, that any Bylaw amendment
adopted by the Board of Directors increasing or reducing the authorized
number of directors shall require the affirmative vote of a majority of the
total number of directors which the Corporation would have if there were no
vacancies. In addition, new Bylaws may be adopted or the Bylaws may be
amended or repealed by the affirmative vote of at least a majority of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least a majority of
the combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class,
shall be required to alter, change, amend or repeal, or adopt any provision
inconsistent with, this ARTICLE V.
ARTICLE VI
(a) Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at an annual or special meeting of stockholders
of the Corporation and may not be effected by any consent in writing of such
stockholders.
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(b) Special meetings of stockholders of the Corporation may be
called only upon not fewer than 10 nor more than 60 days' written notice (i) by
the Chairman of the Board of Directors, or (ii) by the Chairman, or by the
Secretary at the written request of a majority of the total number of directors
which the Corporation would have if there were no vacancies. Any request for a
special meeting of stockholders shall be sent to the Chairman and the Secretary
and shall state the purposes of the proposed meeting. Special meetings of
holders of the outstanding Preferred Stock may be called in the manner and for
the purposes provided in the resolutions of the Board of Directors providing for
the issue of such stock. Business transacted at special meetings shall be
confined to the purpose or purposes stated in the notice of meeting.
(c) Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at
least a majority of the combined voting power of all shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, change, amend or
repeal, or adopt any provision inconsistent with, this Article VI.
ARTICLE VII
(a) The number of directors which shall constitute the whole
Board of Directors of the Corporation shall be as specified in the Bylaws of
this corporation, subject to this Article ARTICLE VII.
(b) The directors shall be classified with respect to the time
for which they severally hold office into three classes designated Class I,
Class II and Class III, as nearly equal in number as possible, as shall be
provided in the manner specified in the Bylaws of the Corporation. Each
director shall serve for a term ending on the date of the third annual
meeting of stockholders following the annual meeting at which the director
was elected; provided, however, that each initial director in Class I shall
hold office until the annual meeting of stockholders in 1998, each initial
director in Class II shall hold office until the annual meeting of
stockholders in 1999 and each initial director in Class III shall hold office
until the annual meeting of stockholders in 2000. Notwithstanding the
foregoing provisions of this Article ARTICLE VII, each director shall serve
until such director's successor is duly elected and qualified or until such
director's death, resignation or removal.
(c) In the event of any increase or decrease in the authorized
number of directors, (i) each director then serving as such shall nevertheless
continue as a director of the class of which such director is a member until the
expiration of such director's current term, or such director's early
resignation, removal from office or death and (ii) the newly created or
eliminated directorship resulting from such increase or decrease shall be
apportioned by the Board of Directors among the three classes of directors so as
to maintain such classes as nearly equally as possible.
(d) Any director or the entire board of directors may be
removed by the affirmative vote of the holders of at least a majority of the
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
(e) Notwithstanding anything contained in this Amended and
Restated Certificate of Incorporation to the contrary, the affirmative vote
of the holders of at least a majority of
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the combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to alter, change, amend or repeal, or adopt any provision
inconsistent with, this ARTICLE VII.
ARTICLE VIII
To the fullest extent permitted by law, no director of the Corporation
shall be personally liable for monetary damages for breach of fiduciary duty
as a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
Neither any amendment nor repeal of this ARTICLE VIII, nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
ARTICLE IX, shall eliminate, reduce or otherwise adversely affect any
limitation on the personal liability of a director of the Corporation
existing at the time of such amendment, repeal or adoption of such an
inconsistent provision.
ARTICLE IX
Subject to the provisions of this Amended and Restated Certificate of
Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE X
The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws; provided, however, that the stockholders may, in accordance
with ARTICLE V, change or repeal any Bylaw adopted by the Board of Directors;
and provided, further, that no amendment or supplement to the Bylaws adopted by
the Board of Directors shall vary or conflict with any amendment or supplement
adopted by the stockholders in accordance with ARTICLE V.
ARTICLE XI
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of the Corporation (and any other persons to which Delaware law permits the
Corporation to provide indemnification) through bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the Delaware General Corporation Law,
subject only to limits created by applicable Delaware law (statutory or
nonstatutory), with respect to actions for breach of duty to the Corporation,
its stockholders and others.
FOURTH: That thereafter, pursuant to resolution of the Board of
Directors, the Amended and Restated Certificate of Incorporation, as so amended
and restated, was submitted to the stockholders for their approval, which
approval was given by written consent of a majority of the stockholders pursuant
to Section 228 of the General Corporation Law of the State of Delaware.
FIFTH: That prompt written notice was duly given pursuant to Section 228
of the General Corporation Law of the State of Delaware to those stockholders
who did not approve the Amended and Restated Certificate of Incorporation, as so
amended, by written consent.
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SIXTH: That the Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Hybrid Networks, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and attested
to by its Secretary this ____ day of __________, 1997.
HYBRID NETWORKS, INC.
---------------------------------------------
Carl S. Ledbetter, Chief Executive Officer
ATTEST:
- -----------------------------------
Daniel E. Steimle
Secretary
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CERTIFICATE OF SECRETARY OF
HYBRID NETWORKS, INC.
The undersigned, Edwin N. Lowe, hereby certifies that he is the duly
elected and acting Secretary of Hybrid Networks, Inc., a Delaware corporation
(the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws
of said Corporation as duly adopted by the Board of Directors on June 7, 1990.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this 7th day of June, 1990.
/s/ Edwin N. Lowe
---------------------------------
Edwin N. Lowe
Secretary
<PAGE>
BYLAWS
OF
HYBRID NETWORKS, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Palo Alto, State of California, at such
place as may be fixed from time to time by the Board of Directors, or at such
other place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1991, shall be held at such date and time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
they shall elect by a plurality vote a board of directors, and transact such
other business as may properly be brought before the meeting.
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Section 3. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not 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.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum
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at all meetings of the stockholders for the transaction of business except as
otherwise provided by statute or by the certificate of incorporation. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally notified. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
At all elections of directors of the corporation each stockholder
having voting power shall be entitled to exercise the right of cumulative voting
as provided in the certificate of incorporation.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting
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forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking
of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in
writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be seven until November 1, 1995. Commencing on November 1, 1995,
the number of directors which shall constitute the whole board shall be six, and
such authorized number of directors shall not thereafter be increased or
decreased. The Company's Amended and Restated Certificate of Incorporation
provides for the election of certain directors by holders of the specified
series of Preferred Stock, and that three directors would be elected by the
holders of Common Stock, Series B Preferred Stock and Series C Preferred Stock
in accordance with its terms. In connection therewith, at least one of the
three directors elected by the holders of the Common Stock, Series B Preferred
Stock, and Series C Preferred Stock shall not be an employee or consultant, or
affiliate thereof, of the Company. Each director elected shall hold office
until such director's successor is elected and qualified. Directors need not to
be stockholders. This Section 1 is adopted by the stockholders of the Company
and may not be amended without (i) the affirmative vote of the holders of at
least at majority of the outstanding shares of Common Stock and (ii) the
affirmative vote of at least a majority of the outstanding shares of Preferred
Stock, each class of stock voting separately as a class.
Section 2. Vacancies and new created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be
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held in the manner provided by statute. If, at the time of filling any vacancy
or any newly created directorship, the directors then in office shall constitute
less than a majority of the whole board (as constituted immediately prior to any
such increase), the Court of Chancery may, upon application of any stockholder
or stockholders holding at least ten percent of the total number of the shares
at the time outstanding having the right to vote for such directors, summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
Section 3. The business of the corporation shall be managed by or
under the direction of its board of directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either
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personally or by telegram; special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of two
directors unless the board consists of only one director, in which case special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of the sole director.
Section 8. At all meetings of the board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate
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members of any committee, who may replace any absent or disqualified member at
any meeting of the committee.
In the absence of 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, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the
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corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
Board of Directors and shall be a president, treasurer and a secretary. The
Board of Directors may elect from among its members a Chairman of the Board and
a Vice Chairman of the Board. The Board of Directors may also choose one or
more vice-presidents, assistant secretaries and assistant treasurers. Any
number of offices may be held by the same person, unless the certificate of
incorporation or these bylaws otherwise provide.
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Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a president, a treasurer, and a
secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which he shall be
present. He shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors;
he shall have general and active management of the business of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect.
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Section 9. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 10. In the absence of the president or in the event of his
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The assistant secretary, or if there be more than one,
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary
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and shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 16. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the treasurer or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
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ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be
entitled to have a certificate, signed by, or in the name of the corporation by,
the chairman or vice- chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by him in the corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class
of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
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LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
level representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent
of the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
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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.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
14.
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FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or
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was serving at the corporation's request as a director or officer of another
corporation) shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized by relevant sections of the General Corporation Law of Delaware.
Notwithstanding the foregoing, the corporation shall not be required to advance
such expenses to an agent who is a party to an action, suit or proceeding
brought by the corporation and approved by a majority of the Board of Directors
of the corporation which alleges willful misappropriation of corporate assets by
such agent, disclosure of confidential information in violation of such agent's
fiduciary or contractual obligations to the corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the corporation or its
shareholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf
of the corporation to indemnify any person, other than a director, made a party
to any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the
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Act of Congress entitled "Employee Retirement Income Security Act of 1974," as
amended from time to time; the corporation shall be deemed to have requested a
person to serve an employee benefit plan where the performance by such person of
his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal bylaws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal bylaws.
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AMENDED AND RESTATED BYLAWS
OF
HYBRID NETWORKS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. Additional offices of the corporation shall
be located at such place or places, within or outside the State of Delaware,
as the board of Directors may from time to time authorize or the business of
the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS AND VOTING RIGHTS
SECTION 3. PLACE OF MEETINGS. All meetings of the stockholders for the
election of directors shall be held at such place as may be fixed from time
to time by the Board of Directors, or at such other place either within or
without the State of Delaware as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
SECTION 4. ANNUAL MEETING. Annual meetings of stockholders, commencing
with the year 1991, shall be held at such date and time as shall be
designated from time to time by the Board of Directors and stated in the
notice of the meeting. At such annual meeting, directors shall be elected
and any other business may be transacted which may properly come before the
meeting.
SECTION 5. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and
the President shall each have authority to hold at an earlier date and/or
time, or to postpone to a later date and/or time, the annual meeting of
stockholders.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders, for any purpose or purposes,
may be called by the Chairman of the Board of Directors, or by the Chairman
or the Secretary at the written request of a majority of the total number of
directors which the corporation would have if there
<PAGE>
were no vacancies.
(b) Upon written request to the Chairman of the Board of Directors, the
President, any vice president or the Secretary of the corporation by any
person or persons (other than the Board of Directors) entitled to call a
special meeting of the stockholders, such officer forthwith shall cause
notice to be given to the stockholders entitled to vote, that a meeting will
be held at a time requested by the person or persons calling the meeting,
such time to be not less than 10 nor more than 60 days after receipt of such
request. If such notice is not given within 20 days after receipt of such
request, the person or persons calling the meeting may give notice thereof in
the manner provided by law or in these bylaws. Nothing contained in this
Section 6 shall be construed as limiting, fixing or affecting the time or
date when a meeting of stockholders called by action of the Board of
Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise may be required by
law and subject to subsection 6 (b) above, written notice of each meeting of
stockholders shall be given to each stockholder entitled to vote at that
meeting (see Section 14 below), by the Secretary, assistant secretary or
other person charged with that duty, not less than 10 nor more than 60 days
before such meeting.
Notice of any meeting of stockholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted;
(b) in the case of an annual meeting, the general nature of
matters which the Board of Directors, at the time the notice is given,
intends to present for action by the stockholders; and
(c) in the case of any meeting at which directors are to be
elected, the names of the nominees intended at the time of the notice to be
presented by management for election.
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting,
action may be taken with respect to business started in the notice of such
meeting and any other business as may properly come before the meeting.
SECTION 8. MANNER OF GIVING NOTICE. Notice of any meeting of
stockholders shall be given either personally or by first-class mail,
telegraphic or other written communication, addressed to the stockholder at
the address of that stockholder appearing on the books of the corporation or
given by the stockholder to the corporation for the purpose of notice. If no
such address appears on the corporation's books or is given, notice shall be
deemed to have been given if sent to that stockholder by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited
in the mail or sent
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by telegram or other means of written communication.
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the
stockholder at that addresses, all future notices shall be deemed to have
been duly given without further mailing if these shall be available to the
stockholder on written demand by the stockholder at the principal executive
office of the corporation for a period of one year from the date of the
giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 8, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the
notice.
SECTION 9. QUORUM AND TRANSACTION OF BUSINESS.
(a) At any meeting of the stockholders, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a
quorum. If a quorum is present, the affirmative vote of the majority of
shares represented at the meeting and entitled to vote on any matter shall be
the act of the stockholders, unless the vote of a greater number or voting by
classes is required by law or by the Certificate of Incorporation, and except
as provided in subsection (c) below.
(b) At any meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (1) pursuant to
the corporation's notice of meeting, (2) by or at the direction of the Board
of Directors or (3) by any stockholder of the corporation who is a
stockholder of record at the time of giving of the notice provided for in
this bylaw, who shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this bylaw.
For business to be properly brought before any meeting by a stockholder
pursuant to clause (3) of this Section 9 (b), the stockholder must have given
timely notice thereof in writing to the Secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than 20 days nor
more than 60 days prior to the date of the meeting. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the meeting (a) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting, (b) the name and address, as they appear on the corporation's
books, of the stockholder proposing such business, and the name and address
of the beneficial owner, if any, on whose behalf the proposal is made, (c)
the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the
beneficial owner, if any, on whose behalf of the proposal is made and (d) any
material interest of such stockholder of record and the beneficial owner, if
any, on whose behalf the proposal is made in such business.
Notwithstanding anything in these bylaws to the contrary, no business
shall be conducted
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at a meeting except in accordance with procedures set forth in this Section 9
(b). The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the procedures prescribed by this
Section 9 (b), and if such person should so determine, such person shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted. Notwithstanding the foregoing provisions of
this Section 9 (b), a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder with respect to the matters set forth in
this Section 9 (b).
(c) The stockholders present at a duly called or held meeting of
the stockholders at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum, provided that any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
(d) In the absence of a quorum, no business other than adjournment
may be transacted, except as described in subsection (c) above.
SECTION 10. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders may be adjourned from time to time, whether or not a quorum
is present, by the affirmative vote of a majority of shares represented at
such meeting either in person or by proxy and entitled to vote at such
meeting.
In the event any meeting is adjourned, it shall not be necessary to give
notice of the time and place of such adjourned meeting pursuant to Sections 7
and 8 of these bylaws; provided that if any of the following three events
occur, such notice must be given:
(1) announcement of the adjourned meeting's time and place is not
made at the oriqinal meeting which it continues or
(2) such meeting is adjourned for more than 30 days from the date
set for the original meeting or
(3) after the adjournment a new record date is fixed for the
adjourned meeting.
At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting.
SECTION 11. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES.
(a) Subject to subsection (b) of this Section, the transactions of
any meeting of stockholders, 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 persons entitled to vote but
not
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present in person or by proxy signs a written waiver of notice or a consent
to holding of the meeting or an approval of the minutes thereof.
(b) A waiver of notice, consent to the holding of a meeting or
approval of the minutes thereof need not specify the business to be
transacted or transacted at nor the purpose of the meeting.
(c) All waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall constitute waiver of
notice of and presence at such meeting, except when such person objects at
the beginning of the meeting to transaction of any business because the
meeting is not 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 which are required by law or these bylaws to be in such notice
(including those matters described in subsection (d) of Section 7 of these
bylaws), but are not so included if such person expressly objects to
consideration of such matter or matters at any time during the meeting.
SECTION 12. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Effective upon
the closinq of the corporation's initial public offering of securities
pursuant to a registration statement filed under the Securities Act of 1933,
as amended, the stockholders of the corporation may not take action by
written consent without a meeting but must take any such actions at a duly
called annual or special meeting.
SECTION 13. VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
14 these bylaws.
Unless otherwise provided in the Certificate of Incorporation each
stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder.
Any stockholder may vote part of such stockholders shares in favor of a
proposal and refrain from voting the remaining shares or vote them against
the proposal, other than elections to office, but, if the stockholder fails
to specify the number of shares such stockholder is voting affirmatively, it
will be conclusively presumed that the stockholder's approving vote is with
respect to all shares such stockholder is entitled to vote.
SECTION 14. PERSONS ENTITLED TO VOTE OR CONSENT. The officer who has
charge of the stock ledger of the corporation shall prepare and make, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to
the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall
also be produced
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and kept at the time and place of the meeting during the whole time thereof,
and may be inspected by any stockholder who is present.
SECTION 15. PROXIES. Every person entitled to vote or execute consents
may do so either in person or by one or more agents authorized to act by a
written proxy executed by the person or such person's duly authorized agent
and filed with the Secretary of the corporation; provided that no such proxy
shall be valid after the expiration of three years from the date of its
execution, unless the proxy provides for a longer period. The manner of
execution, suspension, revocation, exercise and effect of proxies is governed
by law.
SECTION 16. INSPECTORS OF ELECTION. Before any meeting of stockholders,
the Board of Directors may appoint one or more persons, other than nominees
for office, to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the chairman of
the meeting may, and on the request of any stockholder or a stockholder's
proxy shall, appoint inspectors of election at the meeting. If any person
appointed as inspector fails to appear or fails or refuses to act, the
chairman of the meeting may, and upon the request of any stockholder or a
stockholders proxy shall, appoint a person to fill that vacancy.
These inspectors shall: (a) determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots, or consents; (c) hear and determine all
challenges and questions in any way arising in connection with the right to
vote; (d) count and tabulate all votes or consents; (e) determine when the
polls shall close; (f) determine the result; and (g) do any other acts that
may be proper to conduct the election or vote with fairness to all
stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 17. POWERS. The business of the corporation shall be managed by
or under the direction of its board of directors which may exercise all such
powers of the corporation and do all such lawful acts and things as are not
by statute or by the certificate of incorporation or by these bylaws directed
or required to be exercised or done by the stockholders.
SECTION 18. NUMBER OF DIRECTORS. The authorized number of directors
of this corporation shall be not less than five and not more than nine. The
initial number of directors shall be six (6) and thereafter the number of
directors shall be fixed from time to time exclusively by resolution of the
Board of Directors adopted by an affirmative vote of a majority of the total
number of directors that the corporation would have if there were no
vacancies. No reduction in the number of directors shall remove any director
prior to the expiration of such director's term of office. Any bylaw
amendment adopted by the Board of Directors increasing or reducing the
authorized number of directors shall require the affirmative vote of a
majority of the total number of directors which the corporation would have if
there were no vacancies.
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SECTION 19. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors
shall be elected at each annual meeting of stockholders, in accordance with
the Certificate of Incorporation, to hold office until the next annual
meeting. Each director elected shall hold office until his or her successor
is elected and qualified, or until his death, resignation or removal.
Nominations for election to the Board of Directors must be made by the
Board of Directors or by any stockholder of any outstanding class of capital
stock of the corporation entitled to vote for the election of directors.
Nominations, other than those made by the Board of Directors of the
corporation, must be preceded by notification in writing received by the
Secretary of the corporation not less than twenty (20) days nor more than 60
days prior to any meeting of stockholders called for the election of
directors. Such notification shall contain the written consent of each
proposed nominee to serve as a director if so elected and the following
information as to each proposed nominee and as to each person, acting alone
or in conjunction with one or more other persons as a partnership, limited
partnership, syndicate or other group, who participates or is expected to
participate in making such nomination or in organizing, directing or
financing such nomination or solicitation of proxies to vote for the nominee:
(a) the name, age, residence, address, and business address of each
proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of business
and address of the corporation or other organization in which such employment
is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially, either
directly or indirectly, by each proposed nominee and each such person; and
(d) a description of any arrangement or understanding of each proposed
nominee and of each such person with each other or any other person regarding
future employment or any future transaction to which the corporation will or
may be a party.
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
SECTION 20. RESIGNATIONS. Any director of the corporation may resign
effective upon giving written notice to the Chairman of the Board, the
President, the Secretary or the Board of Directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation.
If the resignation specifies effectiveness at a future time, a successor may
be elected pursuant to Section 22 of these bylaws to take office on the date
that the resignation becomes effective.
SECTION 21. REMOVAL. The entire Board of Directors or any individual
director may be removed from office by the affirmative vote of at least a
majority of the combined voting power of all shares of the corporation
entitled to vote generally in the election of directors,
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voting together as a single class.
SECTION 22. VACANCIES. A vacancy or vacancies on the Board of Directors
shall be deemed to exist in case of the death, resignation or removal of any
director, or upon increase in the authorized number of directors or if
stockholders fail to elect the full authorized number of directors at an
annual meeting of stockholders or if, for whatever reason, there are fewer
directors on the Board of Directors than the full number authorized. Such
vacancy or vacancies may be filled by a majority of the remaining directors,
though less than a quorum, or by a sole remaining director, and the directors
so chosen shall hold office until the next annual election and until their
successors are duly elected and qualified or until their earlier resignation
or removal. If there are no directors in office, then an election of
directors may be held in the manner provided by statute.
SECTION 23. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times, places and dates as fixed in these
bylaws or by the Board of Directors; provided, however, that if the date for
such a meeting falls on a legal holiday, then the meeting shall be held at
the same time on the next succeeding full business day. Regular meetings of
the Board of Directors held pursuant to this Section 23 may be held without
notice.
SECTION 24. PARTICIPATION BY TELEPHONE. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in
such meeting can hear one another. Such participation constitutes presence in
person at such meeting.
SECTION 25. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose may be called by the Chairman of the Board or the
President or any vice president or the Secretary of the corporation or any
two directors.
SECTION 26. NOTICE OF MEETINGS. Notice of the date, time and place of
all meetings of the Board of Directors, other than regular meetings held
pursuant to Section 24 above, shall be delivered personally, orally or in
writing, or by telephone, telegraph or facsimile, to each director at least
48 hours before the meeting, or sent in writing to each director by
first-class mail, charges prepaid, at least four days before the meeting.
Such notice may be given by the Secretary of the corporation or by the person
or persons who called a meeting. Such notice need not specify the purpose of
the meeting. Notice of any meeting of the Board of Directors need not be
given to any director who signs a waiver of notice of such meeting, or a
consent to holding the meeting or an approval of the minutes thereof, either
before or after the meeting, or who attends the meeting without protesting
prior thereto or at its commencement such director's lack of notice. All such
waivers, consents and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 27. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at any place within or without the state which has been designated in
the notice of the meeting or, if not stated in the notice or there is no
notice, designated in the bylaws or by resolution of the Board of Directors.
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SECTION 28. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
required or permitted to be taken by the Board of Directors may be taken
without a meeting, if all members of the Board of Directors individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors. Such action by written consent shall have the same force and
effect as a unanimous vote of such directors.
SECTION 29. QUORUM AND TRANSACTION OF BUSINESS. A majority of the
authorized number of directors shall constitute a quorum for the transaction
of business. Every act or decision done or made by a majority of the
authorized number of directors present at a meeting duly held at which a
quorum is present shall be the act of the Board of Directors, unless the law,
the Certificate of Incorporation or these bylaws specifically require a
greater number. A meeting at which a quorum is initially present may continue
to transact business, notwithstanding withdrawal of directors, if any action
taken is approved by at least a majority of the number of directors
constituting a quorum for such meeting. In the absence of a quorum at any
meeting of the Board of Directors, a majority of the directors present may
adjourn the meeting, as provided in Section 30 of these bylaws.
SECTION 30. ADJOURNMENT. Any meeting of the Board of Directors, whether
or not a quorum is present, may be adjourned to another time and place by the
affirmative vote of a majority of the directors present. If the meeting is
adjourned for more than 24 hours, notice of such adjournment to another time
or place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of the adjournment.
SECTION 31. ORGANIZATION. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. If there is no Chairman
of the Board or if the Chairman is not present, a Chairman chosen by a
majority of the directors present shall act as chairman. The Secretary of the
corporation or, in the absence of the Secretary, any person appointed by the
Chairman shall act as secretary of the meeting.
SECTION 32. COMPENSATION. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees
may be allowed like compensation for attending committee meetings.
SECTION 33. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees,
each committee to consist of one or more of the directors of the corporation.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting
of the committee.
In the absence of disqualification of a member of a committee, the member
or
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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, 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 in reference to amending the certificate of incorporation, adopting
an agreement of merger or consolidation, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the corporation's
property and assets, recommending to the stockholders a dissolution of the
corporation or a revocation of a dissolution, or amending the bylaws of the
corporation; and, unless the resolution or the certificate of incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to
time by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the
same to the Board of Directors when required.
ARTICLE IV
OFFICERS
SECTION 34. OFFICERS. The officers of the corporation shall be a
President, Chief Financial Officer and a Secretary. The Board of Directors
may elect from among its members a Chairman of the Board and a Vice Chairman
of the Board. The Board of Directors may also choose one or more
Vice-Presidents, Assistant Secretaries and Assistant Treasurers. Any number
of offices may be held by the same person, unless the certificate of
incorporation or these bylaws otherwise provide.
SECTION 35. APPOINTMENT. All officers shall be chosen and appointed by
the Board of Directors. The Board of Directors at its first meeting after
each annual meeting of stockholders shall choose a President, a Treasurer,
and a Secretary and may choose Vice Presidents. The Board of Directors may
appoint such other officers and agents as it shall deem necessary who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the board.
SECTION 36. INABILITY TO ACT. In the case of absence or inability to
act of any officer of the corporation or of any person authorized by these
bylaws to act in such officer's place, the Board of Directors may from time
to time delegate the powers or duties of such Officer to any other officer,
or any director or other person whom it may select, for such period of time
as the Board of Directors deems necessary.
SECTION 37. RESIGNATION. Any officer may resign at any time upon
written notice to the corporation, without prejudice to the rights, if any,
of the corporation under any
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contract to which such officer is a party. Such resignation shall be
effective upon its receipt by the Chairman of the Board, the President, the
Secretary or the Board of Directors, unless a different time is specified in
the notice for effectiveness of such resignation. The acceptance of any such
resignation shall not be necessary to make it effective unless otherwise
specified in such notice.
SECTION 38. REMOVAL. Any officer may resign at any time upon written
notice to the corporation, without prejudice to the rights, if any, of the
corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the President, the Secretary or the Board of Directors, unless a different
time is specified in the notice for effectiveness of such resignation. The
acceptance of any such resignation shall not be necessary to make it
effective unless otherwise specified in such notice.
Any officer may be removed from office at any time, with or without
cause, but subject to the rights, if any, of such officer under any contract
of employment, by the Board of Directors or by any committee to whom such
power of removal has been duly delegated, or, with regard to any officer who
has been appointed by the chief executive officer pursuant to Section 35
above, by the chief executive officer or any other officer upon whom such
power of removal may be conferred by the Board of Directors.
SECTION 39. VACANCIES. A vacancy occurring in any office for any cause
may be filled by the Board of Directors, in the manner prescribed by this
Article of the bylaws for initial appointment to such office.
SECTION 40. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any,
shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He/she shall have and may exercise
such powers as are, from time to time, assigned to him by the Board and as
may be provided by law. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by
the Board and as may be provided by law.
SECTION 41. PRESIDENT. Subject to such 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 general manager and chief executive
officer of the corporation and shall have general supervision, direction, and
control over the business and affairs of the corporation, subject to the
control of the Board of Directors. The President may sign and execute, in the
name of the corporation, any instrument authorized by the Board of Directors,
except when the signing and execution thereof shall have been expressly
delegated by the Board of Directors or by these bylaws to some other officer
or agent of the corporation. The President shall have all the general powers
and duties of management usually vested in the president of a corporation,
and shall have such other powers and duties as may be prescribed from time to
time by the Board of Directors or these bylaws. The President shall have
discretion to prescribe the duties of other officers and
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employees of the corporation in a manner not inconsistent with the provisions
of these bylaws and the directions of the Board of Directors.
SECTION 42. VICE PRESIDENTS. In the absence or disability of the
President, in the event of a vacancy in the office of President, or in the
event such officer refuses to act, the Vice President shall perform all the
duties of the President and, when so acting, shall have all the powers of,
and be subject to all the restrictions on, the President. If at any such time
the corporation has more than one vice president, the duties and powers of
the President shall pass to each vice president in order of such vice
president's rank as fixed by the Board of Directors or, if the vice
presidents are not so ranked, to the vice president designated by the Board
of Directors. The vice presidents shall have such other powers and perform
such other duties as may be prescribed for them from time to time by the
Board of Directors or pursuant to Sections 34 and 35 of these bylaws or
otherwise pursuant to these bylaws.
SECTION 43. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the
corporation's stockholders, Board of Directors, and committees of the Board
of Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office
of the corporation, or at the office of its transfer agent or registrar, if
any, a record of the corporation's stockholders, showing the names and
addresses of all stockholders, and the number and classes of shares held by
each. Such records shall be kept in written form or any other form capable of
being converted into written form.
(c) Give, or cause to be given, notice of all meetings of
stockholders, directors and committees of the Board of Directors, as required
by law or by these bylaws.
(d) Keep the seal of the corporation, if any, in safe custody.
(e) Exercise such powers and perform such duties as are usually
vested in the office of secretary of a corporation, and exercise such other
powers and perform such other duties as may be prescribed from time to time
by the Board of Directors or these bylaws.
If any assistant secretaries are appointed, the assistant secretary, or
one of the assistant secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the assistant secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge Such duties as may be assigned from
time to time pursuant to these bylaws or by the Board of Directors.
SECTION 44. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall:
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(a) Be responsible for all functions and duties of the treasurer
of the corporation.
(b) Keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and
payable to the corporation from any source whatsoever; have charge and
custody of, and be responsible for, all monies and other valuables of the
corporation and be responsible for deposit of all such monies in the name and
to the credit of the corporation with such depositories as may be designated
by the Board of Directors or a duly appointed and authorized committee of the
Board of Directors.
(d) Disburse or be responsible for the disbursement of the funds
of the corporation as may be ordered by the Board of Directors or a duly
appointed and authorized committee of the Board of Directors.
(e) Render to the chief executive officer and the Board of
Directors a statement of the financial condition of the corporation if called
upon to do so.
(f) Exercise such powers and perform such duties as are usually
vested in the office of chief financial officer of a corporation, and
exercise such other powers and perform such other duties as may be prescribed
by the Board of Directors or these bylaws.
If any assistant financial officer is appointed, the assistant financial
officer, or one of the assistant financial officers, if there are more than
one in the order of their rank as fixed by the Board of Directors or, if they
are not so ranked, the assistant financial officer designated by the Board of
Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such
powers and discharge such duties as may be assigned from time to time
pursuant to these bylaws or by the Board of Directors.
SECTION 45. COMPENSATION. The compensation of the officers shall be
fixed from time to time by the Board of Directors, and no officer shall be
prevented from receiving such compensation by reason of the fact that such
officer is also a director of the corporation.
ARTICLE V
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS
SECTION 46. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as
these bylaws may otherwise provide, the Board of Directors or its duly
appointed and authorized committee may authorize any officer or officers,
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. Except as so
authorized or otherwise expressly provided in these bylaws, 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
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or to render it liable for any purpose or in any amount.
SECTION 47. LOANS. No loans shall be contracted on behalf of the
corporation and no negotiable paper shall be issued in its name, unless and
except as authorized by the Board of Directors or its duly appointed and
authorized committee. When so authorized by the Board of Directors or such
committee, any officer or agent of the corporation may effect loans and
advances at any time for the corporation from any bank, trust company, or
other institution, or from any firms, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other evidences of indebtedness of the corporation and, when authorized as
aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks,
securities and other property, real or personal, at any time held by the
corporation, and to that end endorse, assign and deliver the same as security
for the payment of any and all loans, advances, indebtedness, and liabilities
of the corporation. Such authorization may be general or confined to specific
instances.
SECTION 48. BANK ACCOUNTS. The Board of Directors or its duly appointed
and authorized committee from time to time may authorize the opening and
keeping of general and/or special bank accounts with such banks, trust
companies, or other depositories as may be selected by the Board of
Directors, its duly appointed and authorized committee or by any officer or
officers, agent or agents, of the corporation to whom such power may be
delegated from time to time by the Board of Directors. The Board of Directors
or its duly appointed and authorized committee may make such rules and
regulations with respect to said bank accounts, not inconsistent with the
provisions of these bylaws, as are deemed advisable.
SECTION 49. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes, acceptances or other evidences of indebtedness
issued in the name of the corporation shall be signed by such officer or
officers, agent or agents, of the corporation, and in such manner, as shall
be determined from time to time by resolution of the Board of Directors or
its duly appointed and authorized committee. Endorsements for deposit to the
credit of the corporation in any of its duly authorized depositories may be
made, without counter-signature by the President or any vice president or the
Chief Financial Officer or any assistant financial officer or by any other
officer or agent of the corporation to whom the Board of Directors or its
duly appointed and authorized committee, by resolution, shall have delegated
such power or by hand-stamped impression in the name of the corporation.
ARTICLE VI
CERTIFICATES FOR STOCK AND THEIR TRANSFER
SECTION 50. CERTIFICATE FOR STOCK. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman or Vice Chairman of the Board or the President or
a Vice President and by the Chief Financial Officer or an assistant financial
officer or by the Secretary or an assistant secretary, certifying the number
of shares and the class or series of shares owned by the stockholder. Any or
all of the signatures on the certificate may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall
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have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same
effect as if such person were an officer, transfer agent or registrar at the
date of issue.
In the event that the corporation shall issue any shares as only partly
paid, the certificate issued to represent such partly paid shares shall have
stated thereon the total consideration to be paid for such shares and the
amount paid thereon.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware,
in lieu of the foregoing requirements, there may be set forth on the face or
back of the certificate 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, designations,
preferences and 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.
SECTION 51. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent (if any) of the corporation of a certificate for shares of the
corporation duly endorsed, with reasonable assurance that the endorsement is
genuine and effective, or accompanied by proper evidence of succession,
assignment or authority to transfer and upon compliance with applicable
federal and state securities laws and if the corporation has no statutory
duty to inquire into adverse claims or has discharged any such duty and if
any applicable law relating to the collection of taxes has been complied
with, it shall be the duty of the corporation, by its Secretary or transfer
agent, to cancel the old certificate, to issue a new certificate to the
person entitled thereto and to record the transaction on the books of the
corporation.
SECTION 52. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any
certificate for shares of the corporation alleged to have been lost,
destroyed or stolen shall notify the corporation by making a written
affidavit or affirmation of such fact. Upon receipt of said affidavit or
affirmation the Board of Directors, or its duly appointed and authorized
committee or any officer or officers authorized by the Board so to do, may
order the issuance of a new certificate for shares in the place of any
certificate previously issued by the corporation and which is alleged to have
been lost, destroyed or stolen. However, the Board of Directors or such
authorized committee, officer or officers may require the owner of the
allegedly lost, destroyed or stolen certificate, or such owner's legal
representative, to give the corporation a bond or other adequate security
sufficient to indemnify the corporation and its transfer agent and/or
registrar, if any, against any claim that may be made against it or them on
account of such allegedly lost, destroyed or stolen certificate or the
replacement thereof. Said bond or other security shall be in such amount, on
such terms and conditions and, in the case of a
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bond, with such surety or sureties as may be acceptable to the Board of
Directors or to its duly appointed and authorized committee or any officer or
officers authorized by the Board of Directors to determine the sufficiency
thereof. The requirement of a bond or other security may be waived in
particular cases at the discretion of the Board of Directors or its duly
appointed and authorized committee or any officer or officers authorized by
the Board of Directors so to do.
SECTION 53. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of
Directors may make such rules and regulations, not inconsistent with law or
with these bylaws, as it may deem advisable concerning the issuance, transfer
and registration of certificates for shares of the capital stock of the
corporation. The Board of Directors may appoint a transfer agent or registrar
of transfers, or both, and may require all certificates for shares of the
corporation to bear the signature of either or both.
ARTICLE VII
INSPECTION OF CORPORATE RECORDS
SECTION 54. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records,
and documents of every kind of the corporation and any of its subsidiaries
and to inspect the physical properties of the corporation and any of its
subsidiaries. Such inspection may be made by the director in person or by
agent or attorney, and the right of inspection includes the right to copy and
make extracts.
SECTION 55. INSPECTION BY STOCKHOLDERS.
(a) INSPECTION OF CORPORATE RECORDS. Any stockholder, 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 shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which 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 is
registered office in the State of Delaware or at its principal place of
business.
(b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be
kept as provided in Section 43 of these bylaws and shall be open to
inspection by the stockholders at all reasonable times during office hours. A
current copy of these bylaws shall be furnished to any stockholder upon
written request.
SECTION 56. WRITTEN FORM. If any record subject to inspection pursuant
to Section 55 above is not maintained in written form, a request for
inspection is not complied with unless and until the corporation at its
expense makes such record available in written form.
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ARTICLE VIII
MISCELLANEOUS
SECTION 57. FISCAL YEAR. Unless otherwise freed by resolution of the
Board of Directors, the fiscal year of the corporation shall end on the 31st
day of December in each calendar year.
SECTION 58. ANNUAL REPORT.
(a) Subject to the provisions of Section 58 (b) below, the Board of
Directors shall cause an annual report to be/sent to each stockholder of the
corporation in the manner provided in Section 8 of these bylaws not later
than 120 days after the close of the corporation's fiscal year. Such report
shall include a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal
year, accompanied by any report thereon of independent accountants or, if
there is no such report, the certificate of an authorized officer of the
corporation that such statements were prepared without audit from the books
and records of the corporation. Such report shall be sent to stockholders at
least 15 (or, if sent by third-class mail, 35) days prior to the next annual
meeting of stockholders after the end of the fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of record of the
corporation's shares, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.
SECTION 59. RECORD DATE. The Board of Directors may fix a time in the
future as a record date for the determination of the stockholders entitled to
notice of or to vote at any meeting or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of
shares or entitled to exercise any rights in respect of any other lawful
action. The record date so fixed shall not be more than 60 days nor less than
10 days prior to the date of the meeting nor more than 60 days prior to any
other action or event for the purpose of which it is fixed. If no record date
is fixed, the provisions of Section 14 of these bylaws shall apply with
respect to notice of meetings, votes, and contents and the record date for
determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopt the resolutions
relating thereto, or the 60th day prior to the date of such other action or
event, whichever is later.
Only stockholders of record at the close of business on the record date
shall be entitled to notice and to vote or to receive the dividend,
distribution or allotment of rights or to exercise the rights, 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
Certificate of Incorporation, by agreement or by law.
SECTION 60. BYLAW AMENDMENTS. In furtherance and not in limitation of
the powers conferred by law, the Board of Directors is expressly authorized
to make, alter,
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amend and repeal these bylaws subject to the power of the holders of capital
stock of the corporation to alter, amend or repeal the bylaws; provided,
however, that, with respect to the powers of holders of capital stock to
make, alter, amend and repeal bylaws of the corporation, notwithstanding any
other provision of these bylaws or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of
the holders of any particular class or series of the capital stock of the
corporation required by law, these bylaws or any preferred stock, the
affirmative vote of the holders of at least a majority of the combined voting
power of all of the then-outstanding shares entitled to vote generally in the
election of directors, voting together as a single class, shall be required
to make, alter, amend or repeal any provision of these bylaws.
SECTION 61. CONSTRUCTION AND DEFINITION. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions
contained in the Delaware General Corporation Law shall govern the
construction of these bylaws. Without limiting the foregoing, "shall" is
mandatory and "may" is permissive.
SECTION 62. 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, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
SECTION 63. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation,
if any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Before payment of any dividend, there may be set aside out of any funds
of the corporation available for dividends such sum of sums as the directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the corporation, or for such other purposes as
the directors shall think conducive to the interest of the corporation, and
the directors may modify or abolish any such reserve in the manner in which
it was created.
ARTICLE IX.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 64. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"),
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by reason of the fact that he or she is or was a director or an executive
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than such law permitted the corporation to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and
amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as
provided in Section 66 of this ARTICLE IX with respect to proceedings to
enforce rights to indemnification, the corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the corporation.
SECTION 65. RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in Section 64 of this ARTICLE IX shall include the
right to be paid by the corporation the expenses (including attorney's fees)
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal (hereinafter
a "final adjudication") that such indemnitee is not entitled to be
indemnified for such expenses under this Section 65 or otherwise. The rights
to indemnification and to the advancement of expenses conferred in Sections
64 and 65 of this ARTICLE IX shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators.
SECTION 66. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section
64 or 65 of this ARTICLE IX is not paid in full by the corporation within
sixty (60) days after a written claim has been received by the corporation,
except in the case of a claim for an advancement of expenses, in which case
the applicable period shall be twenty (20) days, the indemnitee may at any
time thereafter bring suit against the corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit, or
in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to
be paid also the expense of prosecuting or defending such suit. In (i) any
suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to
an advancement of expenses) it shall be a
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defense that, and (ii) in any suit brought by the corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the
corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not
met such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified, or
to such advancement of expenses, under this ARTICLE IX or otherwise shall be
on the corporation.
SECTION 67. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification
and to the advancement of expenses conferred in this ARTICLE IX shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the corporation's Certificate of Incorporation, bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 68. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of
the corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
SECTION 69. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of
expenses to any officer, employee or agent of the corporation to the fullest
extent of the provisions of this Article with respect to the indemnification
and advancement of expenses of directors and executive officers of the
corporation.
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HYBRID NETWORKS, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
April 30, 1997
<PAGE>
TABLE OF CONTENTS PAGE
1. Registration Rights ............................................. 2
1.1 Definitions ............................................... 3
1.2 Company Registration ...................................... 3
1.3 Obligations of the Company ................................ 3
1.4 Furnish Information ....................................... 4
1.5 Expenses of Company Registration .......................... 5
1.6 Underwriting Requirements ................................. 5
1.7 Delay of Registration ..................................... 5
1.8 Indemnification ........................................... 5
1.9 Reports Under Securities Exchange Act of 1934 ............. 7
1.10 Form S-3 Registration ..................................... 8
1.11 Assignment of Registration Rights ......................... 9
1.12 "Market Stand-Off" Agreement .............................. 9
1.13 Termination of Registration Rights ........................ 10
2. Covenants of the Company ........................................ 10
2.1 Delivery of Financial Statements .......................... 10
2.2 Termination and Assignment of Information Covenants ....... 10
2.3 Right of First Offer ...................................... 11
3. Miscellaneous ................................................... 13
3.1 Successors and Assigns .................................... 13
3.2 Governing Law ............................................. 13
3.3 Counterparts .............................................. 14
3.4 Titles and Subtitles ...................................... 14
3.5 Notices ................................................... 14
3.6 Expenses .................................................. 14
3.7 Amendments and Waivers .................................... 14
3.8 Severability .............................................. 14
3.9 Aggregation of Stock ...................................... 14
3.10 Entire Agreement; Amendment; Waiver ....................... 14
<PAGE>
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is entered into as of
April __, 1997 by and among Hybrid Networks, Inc., a Delaware corporation
(the "COMPANY"), the investors listed on Schedule A hereto (each of which is
herein referred to as a "SERIES A INVESTOR"), the investors listed on
Schedule B hereto (each of which is herein referred to as a "SERIES B
INVESTOR"), General Instrument Corporation of Delaware, a Delaware
corporation (the "SERIES C INVESTOR"), the investors listed on Schedule C
hereto (each of which is herein referred to as a "SERIES D INVESTOR"), Intel
Corporation ("INTEL"), Howard L. Strachman ("STRACHMAN"), Eduardo J. Moura
(Mr. Moura and Strachman are referred to collectively as the "FOUNDERS"), the
current holders of the Company's Series G Preferred Stock (each of which is
herein referred to as a "SERIES G INVESTOR"), Alex. Brown & Sons Incorporated
(the "AGENT"), ITOCHU Corporation ("ITOCHU") and London Pacific Life &
Annuity Company ("LONDON").
RECITALS
WHEREAS, the Company, the Series A Investors and the Founders entered into
the Investor Rights Agreement dated as of September 16, 1992 (the "AGREEMENT")
whereby, among other things, the Company granted rights thereunder to the Series
A Investors;
WHEREAS, the Agreement was amended in October and November 1994 whereby,
among other things, the Company granted rights thereunder to the Series B
Investors;
WHEREAS, the Agreement was further amended as of February 28, 1995
whereby, among other things, the Company granted certain registration rights
to the Series C Investor;
WHEREAS, the Agreement was further amended in May and June 1995 whereby,
among other things, the Company granted rights thereunder to the Series D
Investors;
WHEREAS, the Agreement was further amended in December 1995 whereby, among
other things, the Company granted rights thereunder to Intel (concurrently
therewith the Company and Intel entered into the Series E/F Preferred Stock
Purchase Agreement dated in December 1995 -- the "SERIES E/F AGREEMENT");
WHEREAS, the Agreement was further amended in February 1996 whereby, among
other things, the Company granted Strachman certain rights of first offer
thereunder;
WHEREAS, the parties to the Convertible Note and Warrant Purchase Agreement
among the Company and certain Series B Investors and Series D investors dated in
June 1996 (the "CONVERTIBLE NOTE AGREEMENT") and the parties to the Agreement
For Sale of Common Stock among the Company, the Founders and Certain Series D
Investors dated in June 1996 (the "COMMON STOCK AGREEMENT"), which parties
constituted the holders of at least a majority of the then Registrable
Securities (as defined below), acknowledged that the holders of the securities
issued pursuant to the Convertible Note Agreement and the shares of Common Stock
sold by Strachman pursuant to the Common Stock Agreement were entitled to
certain rights under this Agreement with respect to such securities and shares;
<PAGE>
WHEREAS, the Agreement was further amended in July 1996 whereby, among
other things, the Company granted rights thereunder to the Series G Investors
and the Agents;
WHEREAS, the Agreement was further amended in February 1997 whereby, among
other things, the Company granted rights thereunder to Itochu;
WHEREAS, the Company and London are parties to a Senior Secured Convertible
Debenture Purchase Agreement (the "DEBENTURE AGREEMENT") pursuant to which the
Company has issued to London the Company's Senior Secured Convertible Debenture
due 2002 (the "DEBENTURE"); and
WHEREAS, pursuant to the Agreement, the holders of a majority of the
Registrable Securities (as defined below) desire to amend the Agreement further
to provide for, among other things, the grant of rights thereunder to London as
required under the terms of the Debenture Agreement and to restate the Agreement
as amended by this amendment and to supersede all prior amendments so that the
Agreement as amended is set forth in its entirety in this Amended and Restated
Investor Rights Agreement, and London desires to obtain such rights and to enter
into this Amended and Restated Investor Rights Agreement.
NOW, THEREFORE, THE PARTIES HEREBY AGREE that this Amended and Restated
Investor Rights Agreement amends the Agreement and restates in its entirety and
supersedes all previous amendments to the Agreement so that the Agreement, as
amended hereby ("this AGREEMENT"), is set forth herein in its entirety, and
further agree as follows:
1. REGISTRATION RIGHTS. The Company covenants and agrees as follows:
1.1 DEFINITIONS. For purposes of this Section 1:
(a) The term "REGISTER," "REGISTERED," and "REGISTRATION" refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended
(the "ACT"), and the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "REGISTRABLE SECURITIES" means (1) shares of Common
Stock of the Company issuable or issued upon conversion of the Debenture or
shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock of the
Company (including, without limitation, shares of Series B Preferred Stock or
Series D Preferred Stock issuable or issued upon exercise of any warrants
issued or extended pursuant to the Convertible Note Agreement, the shares of
Series G Preferred Stock issued upon conversion of the convertible notes
issued pursuant to the Convertible Note Agreement, shares of Series B
Preferred Stock issuable or issued upon exercise of any warrants issued
pursuant to the Series E/F Agreement and shares of Series G Preferred Stock
issuable or issued upon exercise of the warrant issued to the Agent pursuant
to the engagement letter between the Company and the Agent relating to the
offer and sale of Series G Preferred Stock), and (2) any 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, such
Debenture, Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E
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Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock or Common Stock, excluding in all cases, however, any
Registrable Securities sold, transferred or otherwise assigned by a person or
entity in a transaction in which his rights under this Section 1 are not
assigned;
(c) The number of shares of "REGISTRABLE SECURITIES THEN
OUTSTANDING" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "HOLDER" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
Section 1.11 hereof; and
(e) The term "FORM S-3" means such form under the Act as in effect
on the date hereof or any registration form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which permits
inclusion of incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
1.2 COMPANY REGISTRATION.
(a) If (but without any obligation to do so) the Company proposes
to register (including for this purpose a registration effected by the
Company for stockholders other than the Holders) any of its Common Stock
under the Act in connection with the public offering of such securities
solely for cash (other than a registration relating solely to the sale of
securities to participants in a Company stock plan, a registration on Form
S-4 (or any successor form) or a registration on any form which does not
include substantially the same information (other than information as would
be required under Item 507 of Regulation S-K under the Act with respect to
selling stockholders) as would be required to be included in a registration
statement covering the sale of the Registrable Securities), the Company
shall, at such time, promptly give each Holder written notice of such
registration. Upon the written request of each Holder given within 20 days
after mailing of such notice by the Company in accordance with Section 3.5,
the Company shall, subject to the provisions of Section 1.6, cause to be
registered under the Act all of the Registrable Securities that each such
Holder has requested to be registered.
(b) Upon any sale by the Company of shares of its Common Stock to
the public in a firmly underwritten public offering, the Founders (and the
Series B Investors and Series D Investors, to the extent they purchased
shares of Common Stock from Strachman), on the date notice is provided to
each Holder pursuant to subsection 1.2(a), shall be entitled to include any
of their shares of Common Stock in any registration by the Company under this
Section 1.2, if such persons agree to be bound by all other provisions of
this Agreement and participate in any such registration on the same basis as
each Holder in accordance with all applicable provisions of this Agreement.
1.3 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1
to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
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(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 Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of
the Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a
result of which the prospectus 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 pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 1, if such securities
are being sold through underwriters, or, if such securities are not being
sold through underwriters, on the date that the registration statement with
respect to such securities becomes effective, (i) an opinion, dated such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters
in an underwritten public offering, addressed to the underwriters, if any,
and to the Holders requesting registration of Registrable Securities and (ii)
a letter dated such date, from the independent certified public accountants of
the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
1.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable
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Securities of any selling Holder that such Holder shall furnish to the
Company such information regarding itself, the Registrable Securities held by
it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
1.5 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.2 and Section 1.10 for each Holder (which right may be
assigned as provided in Section 1.11), including (without limitation) all
registration, filing, and qualification fees, printers and accounting fees
relating or apportionable thereto and the reasonable fees and disbursements
of one counsel for the selling Holders selected by them, but excluding
underwriting discounts and commissions relating to Registrable Securities.
1.6 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's Common Stock, the
Company shall not be required under Section 1.2 to include any of the
Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected
by it (or by other persons entitled to select the underwriters), and then
only in such quantity as the underwriters determine in their sole discretion
will not jeopardize the success of the offering by the Company. If the total
amount of securities, including Registrable Securities, requested by
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion will not jeopardize the success of the offering (the
securities so included to be first apportioned pro rata among the selling
stockholders other than the Founders according to the total amount of
securities entitled to be included therein owned by each selling stockholder
other than the Founders or in such other proportions as shall mutually be
agreed to by such selling stockholders, and the remaining securities, if any,
to be so apportioned between the Founders). As a result of the immediately
preceding sentence, no securities owned by a Founder shall be entitled to be
included in such offering unless the total amount of securities entitled to
be included therein owned by each selling stockholder other than the Founders
has not been reduced to less than the amount of Registrable Securities
requested by such selling stockholders to be included in such offering in
accordance with Section 1.2. For purposes of the preceding parenthetical
concerning apportionment, for any selling stockholder which is a holder of
Registrable Securities and which is a partnership or corporation, the
partners, retired partners and stockholders of such holder, or the estates
and family members of any such partners and retired partners and any trusts
for the benefit of any of the foregoing persons shall be deemed to be a
single "selling stockholder", and any pro-rata reduction with respect to such
"selling stockholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included
in such "selling stockholder," as defined in this sentence.
1.7 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
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1.8 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934, as
amended (the "1934 ACT"), against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Act, the 1934
Act or other federal or state law, insofar as such losses, claims, damages,
or liabilities (or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (collectively a
"VIOLATION"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein. or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law
or any rule or regulation promulgated under the Act, the 1934 Act or any
state securities law; and the Company will pay to each such Holder,
underwriter or controlling person, any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 1.8(a) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder, underwriter
or controlling person.
(b) To the extent permitted by law, each selling Holder will
severally indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the registration statement, each person,
if any, who controls the Company within the meaning of the Act, any
underwriter, any other Holder selling securities in such registration
statement and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages, or liabilities (joint or several) to
which any of the foregoing persons may become subject, under the Act, the
1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with
such registration; and each such Holder will pay any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.8(b) in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 1.8(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; provided, that, in no event
shall any indemnity under this subsection 1.8(b) exceed the gross proceeds
from the offering received by such Holder.
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(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.8,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party (together with all other indemnified parties which may be
represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 1.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
1.8
(d) If the indemnification provided for in this Section 1.8 is held
by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability. claim, damage, or expense referred
to therein, then the indemnifying party. in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this Section
1.8 shall survive the completion of any offering of Registrable Securities in
a registration statement under this Section 1, and otherwise.
1.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act
and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration
or pursuant to a registration on Form S-3, the Company agrees to:
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(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after 90 days after the
effective date of the first registration statement filed by the Company for
the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal
year in which the first registration statement filed by the Company for the
offering of its securities to the general public is declared effective:
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after
it has become subject to such reporting requirements), or that it qualifies
as a registrant whose securities may be resold pursuant to Form S-3 (at any
time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant
to such form.
1.10 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders who own, in the aggregate, at least 30% of the outstanding
shares of Registrable Securities, a written request or requests that the
Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned
by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within l 5 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.10:
(1) if Form S-3 is not available for such offering by the Holders; (2) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$500,000; (3) if the company shall furnish to the holders a certificate
signed by the President of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Form
8
<PAGE>
S-3 Registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than 120 days after receipt of the request
of the Holder or Holders under this Section 1.10; provided, however, that
the Company shall not utilize this right more than once in any l2-month
period; (4) if the Company has, within the 12-month period preceding the
date of such request, already effected one registration on Form S-3 for the
Holders pursuant to this Section 1.10: (5) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so
requested to be registered as soon as practicable after receipt of the
request or requests of the Holders.
Notwithstanding anything to the contrary in this Section 1.10, the Series
C Investor will have rights under this Section 1.10, and any Holder of any
shares of Series C Preferred Stock or any Registrable Securities issued with
respect thereto will have rights under this Section 1.10 with respect to such
shares or Registrable Securities, only for so long as the Series A Investors
and the Series B Investor have rights under this Section 1.10.
1.11 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Section 1 may be assigned
(but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, (i) after such assignment or transfer,
holds at least 50,000 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations and
other recapitalizations), and (ii) is not a person or entity deemed by the
Board of Directors of the Company in its best judgment, to be a competitor or
potential competitor of the Company; provided the Company is, within a
reasonable time after such transfer, furnished with written notice of the
name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Act. For the purposes of
determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership
(including spouses and ancestors, lineal descendants and siblings of such
partners or spouses who acquire Registrable Securities by gift, will or
interstate succession) shall be aggregated together and with the partnership;
provided that all assignees and transferees who would not qualify
individually for assignment of registration rights shall have a single
attorney-in-fact for the purpose of exercising any rights, receiving notices
or taking any action under this Section 1.
1.12 "MARKET STAND-OFF" AGREEMENT. Each signatory to this Amended
Investor Rights Agreement or any other amendment to the Agreement or hereto
hereby agrees that, during the period of duration specified by the Company
and an underwriter of Common Stock of the Company not to exceed 180 days
following the effective date of a registration statement of the Company filed
under the Act (unless otherwise required by an underwriter), such signatory
shall not, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase
or otherwise transfer or dispose of (other than to donees who agree to be
similarly bound) any securities of the Company held by it at any time during
9
<PAGE>
such period except Common Stock included in such registration and except to
the extent otherwise consented to by the Company and such underwriter. To the
extent that any officer or director of the Company has not entered into a
market stand-off agreement of equivalent duration and effect with respect to
any Company securities beneficially owned by such officer or director, the
Company shall use best efforts to require each officer and director of the
Company to enter into such an agreement.
In order to enforce the foregoing covenant, the Company may impose
stop-instructions with respect to the Registrable Securities of each Investor
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
1.13 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to
exercise any right provided for in this Section 1 after 6 years following the
consummation of the sale of securities pursuant to a registration statement
filed by the Company under the Act in connection with the initial firm
commitment underwritten offering of its securities to the general public.
Notwithstanding anything to the contrary in this Section 1, no Holder shall
be entitled to cause the Company to register the sale or other transfer of
Restricted Securities if and so long as the intended sale or other transfer
may then be effectuated by such Holder in compliance with Rule 144 under the
Act without violating the holding period, volume limitations or other
restrictions of Rule 144.
2. COVENANTS OF THE COMPANY.
2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each
Series A investor. Series B Investor, Series C Investor, Series D Investor,
Intel, Series G Investor, Itochu and London (each, for the purposes of this
Section 2.1, an "INVESTOR"):
(a) as soon as practicable, but in any event within 90 days after
the end of each fiscal year of the Company, an income statement and statement
of cash flows for such fiscal year, a balance sheet of the Company, and a
statement of stockholder's equity as of the end of such year, such year-end
financial reports to be in reasonable detail, prepared in accordance with
generally accepted accounting principles ("GAAP"), and audited and certified
by independent public accountants selected by the Company;
(b) as soon as practicable, but in any event within 45 days after
the end of each of the first 3 quarters of each fiscal year of the Company,
an unaudited profit or loss statement, statement of cash flows for such
fiscal quarter and an unaudited balance sheet as of the end of such fiscal
quarter;
(c) only to Investors who hold more than 350,000 shares of
Registrable Securities, within 30 days of the end of each month, an unaudited
income statement, a statement of cash flows and an unaudited balance sheet
for and as of the end of such month, prepared internally, in reasonable
detail;
(d) only to Investors who hold more than 350,000 shares of
Registrable Securities, as soon as practicable, but in any event 90 days
after the end of each fiscal year, a budget for the then current fiscal year,
prepared on a monthly basis, including balance sheets and statements of cash
flows for such months;
10
<PAGE>
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the
Chief Financial Officer or President of the Company certifying that such
financials fairly present the financial condition of the Company and its
results of operation for the period specified, subject to year-end audit
adjustment.
2.2 TERMINATION AND ASSIGNMENT OF INFORMATION COVENANTS. The covenants
set forth in Section 2.1 shall terminate and be of no further force or effect
when the sale of securities pursuant to a registration statement filed by the
Company under the Act in connection with the firm commitment underwritten
offering of its securities to the general public is consummated or when the
Company first becomes subject to the periodic reporting requirements of
Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
The information rights set forth in Section 2.1 may be assigned (but only
with all related obligations) by an Investor to a transferee or assignee of
Registrable Securities who, (a) after such assignment or transfer, holds at
least 350,000 shares of Registrable Securities (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalizations), and (b) is not a person or entity deemed by the Board of
Directors of the Company in its best judgment, to be a competitor or
potential competitor of the Company; provided the Company is, within a
reasonable time after such transfer, furnished with written notice of the
name and address of such transferee or assignee and the securities with
respect to which such information rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Act. For the purposes of
determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership
(including spouses and ancestors, lineal descendants and siblings of such
partners or spouses who acquire Registrable Securities by gift, will or
interstate succession) shall be aggregated together and with the partnership.
2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified
in this Section 2.3, the company hereby grants to each Series A Investor,
each Series B Investor, Intel, each Series D Investor, each Series G
Investor, Itochu, London and Strachman a right of first offer with respect to
future sales by the Company of its Shares (as hereinafter defined). For
purposes of this Section 2.3, the term "INVESTOR" includes each Series A
Investor, each Series B Investor, Intel, each Series D Investor, each Series
G Investor, Itochu, London, Strachman, and any general or limited partners
and affiliates of any Series A Investor, any Series B Investor, Intel or any
Series D Investor. Each Series A Investor. each Series B Investor, Intel,
each Series D Investor shall be entitled to apportion the right of first
offer hereby granted to such Investor among itself and its general or limited
partners and affiliates in such proportions as such Investor deems
appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("SHARES"), the Company shall first make an offering of such shares to
each Investor in accordance with the following provisions:
11
<PAGE>
(a) The Company shall deliver a written notice ("Notice") to the
Investors stating (i) its bona fide intention to offer such Shares, (ii) the
number of such Shares to be offered, and (iii) the price and terms, if any,
upon which it proposes to offer such Shares.
(b) Within 20 calendar days after receipt of the Notice, the
Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Debenture, Series A Preferred Stock, the
Series B Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock
or the Series H Preferred Stock then held, by such Investor bears to the
total number of shares of Common Stock of the Company then outstanding
(assuming full conversion of all convertible securities). The Company shall
promptly, in writing, inform each Investor which purchases all the shares
available to it ("FULLY-EXERCISING INVESTOR") of any other Investor's failure
to do likewise. During the 5-day period commencing after delivery of such
information to such Fully-Exercising Investor(s), each Fully-Exercising
Investor shall be entitled to obtain that portion of the Shares not
subscribed for by the Investors which is equal to the proportion that the
number of shares of Common Stock issued and held, or issuable upon
conversion of the Debenture, Series A Preferred Stock, Series B Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock, Series G Preferred Stock or Series H Preferred Stock, as the case may
be, then held, by such Fully-Exercising Investor bears to the total number of
shares of Common Stock issued and held, or issuable upon conversion of the
Debenture. Series A Preferred Stock, the Series B Preferred Stock, the Series
D Preferred Stock, the Series E Preferred Stock, the Series F Preferred
Stock, the Series G Preferred Stock or the Series H Preferred Stock, as the
case may be, then held, by all Fully-Exercising Investors who wish to
purchase some of the unsubscribed Shares.
(c) If all Shares which Investors are entitled to obtain pursuant to
subsection 2.3(b) are not elected to be obtained as provided in subsection
2.3(b) hereof, the Company may, during the 120-day period following the
expiration of the period provided in subsection 2.3(b) hereof, offer the
remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree, than
those specified in the Notice. If the Company does not enter into an
agreement for the sale of the Shares within such period, or if such agreement
is not consummated within 120 days of the execution thereof, the right
provided hereunder shall be deemed to be revived and such Shares shall not be
offered unless first reoffered to the Investors in accordance herewith.
(d) The rights of first offer in this Section 2.3 shall not be
applicable:
(i) to the issuance or sale of shares of the Company's Common
Stock (or options therefor) to service providers for the primary purpose of
soliciting or retaining their services as approved by the vote or written
consent of a majority of the Board of Directors.
(ii) to consummation of a bona fide, firmly underwritten public
offering of shares of common stock, registered under the Act pursuant to a
registration statement on Form S-l;
(iii) to the issuance of securities pursuant to the conversion or
exercise of convertible or exercisable securities;
12
<PAGE>
(iv) to securities of the Company issued pursuant to the
acquisition of (A) another corporation by the Company by merger or other
reorganization whereby the Company owns more than 50% of the voting power of
such other corporation, or (B) substantially all the assets of another
corporation;
(v) to the issuance of securities pursuant to transactions
involving technology licensing, research and development activities,
distribution or manufacture of the company's products, lease of equipment by
the Company, or any transactions with corporate partners, provided that each
of the foregoing transactions is primarily for non-equity financing purposes
and is approved by the Company's Board of Directors;
(vi) to shares of the Company's Common Stock or Preferred Stock
issued in connection with any stock split, stock dividend, recapitalization
and the like by the Company following approval by the Board of Directors; or
(vii) to the issuance of up to 255,000 shares of Common Stock to
service providers for services performed for the benefit of the Company,
which services were performed prior to the first issuance of the Series A
Preferred Stock.
(e) The rights of first offer in this Section 2.3 shall terminate
and be of no further force or effect when the sale of securities pursuant to
a registration statement filed by the Company under the Act in connection
with the firm commitment underwritten offering of its securities to the
general public is consummated or when the Company first becomes subject to
the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934
Act, whichever shall first occur.
(f) The rights of first offer in this Section 2.3 and/or the right
to register Registrable Securities pursuant to this Agreement or to register
shares of Common Stock subject to registration rights pursuant to Section
1.2(b) ("1.2(b) SHARES") may be assigned (but only with all related
obligations) by any Series A Investor, any Series B Investor, Intel, any
Series D Investor, Strachman, any Series G Investor, ltochu or London to a
transferee or assignee from such person of Registrable Securities or Section
1.2(b) Shares who, (i) after such assignment or transfer, holds at least
350,000 shares of Registrable Securities or Section 1.2(b) Shares (subject in
each case to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations), and (ii) is not a person or entity
deemed by the Board of Directors of the Company in its best judgment, to be a
competitor or potential competitor of the Company; provided the Company is,
within a reasonable time after such transfer, furnished with written notice
of the name and address of such transferee or assignee and the securities
with respect to which such rights are being assigned; and provided, further,
that such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act. For the purposes of determining the
number of Registrable Securities or Section 1.2 Shares held by a transferee
or assignee for the purposes of this Section 2.3(f), the holdings of
transferees and assignees of a partnership who are partners or retired
partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities or Section 1.2 Shares by gift, will or interstate succession)
shall be aggregated together and with the partnership.
13
<PAGE>
3. MISCELLANEOUS.
3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities or Section 1.2(b)
Shares). Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors
and assigns any rights, remedies, obligations, or liabilities under or by
reason of this Agreement, except as expressly provided in this Agreement.
3.2 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or
facsimile transmission to such party to the facsimile number for such party
on the signature page hereof (or, for parties not executing this Agreement,
the facsimile number of such party on the stock records of the Company) or
upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party on the signature page hereof (or, for
parties not executing this Agreement, the address of such party on the stock
records of the Company), or at such other facsimile number or address as such
party may designate by ten days' advance written notice to the other parties.
3.6 EXPENSES. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of a majority of the Registrable Securities then outstanding. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon
each holder of any Registrable Securities then outstanding, each future
holder of all such Registrable Securities, and the Company.
3.8 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
------------------------------------------
Carl S. Ledbetter, Chief Executive Officer
Address: 10161 Bubb Road
Cupertino, CA 95014-4167
Facsimile Number: (408) 725-2439
INVESTORS:
---------------------------------------------
Catherine P. Goodrich
(Executing this Agreement as a Series A
Investor)
Address: 3787 Woodside Road
Woodside, CA 94062
Facsimile Number: (415) 851-0726
J.F. SHEA CO., INC.,
(executing this Agreement as a Series A
Investor, Series B Investor, Series D
Investor and Series G Investor
By:
------------------------------------------
Edmund Shea, Jr.
Address: 655 Brea Canyon Road
P.O. Box 489
Walnut, CA 91789-0489
Facsimile Number: (909) 869-0840
15
<PAGE>
OSCCO III, L.P.
(executing this Agreement as a Series A
Investor, Series B Investor, Series D
Investor and Series G Investor)
By: /s/ Stephen E. Halprin
------------------------------------------
Stephen E. Halprin
Address: 3000 Sand Hill Road 1-29
Menlo Park, CA 94025
Facsimile Number: (415) 854-9010
/s/ Gary M. Lauder
---------------------------------------------
Gary M. Lauder
(Executing this Agreement as a Series B
Investor and as a Series G Investor)
Address: 88 Mercedes Lane
Atherton, CA 94027
Facsimile Number: (415) 323-2171
AT&T VENTURE COMPANY, L.P.
(Executing this Agreement as a Series D
Investor and a Series G Investor)
By: AT&T Venture Partners
Its: General Partner
By: /s/ Company Officer
-------------------------------------
Its: General Partner
------------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, CA 94025
Facsimile Number: (415) 854-4923
16
<PAGE>
SEQUOIA CAPITAL VI
(Executing this Agreement as a Series D
Investor and a Series G Investor)
By: /s/ Company Officer
------------------------------------------
Its:
-----------------------------------------
Address: 3000 Sand Hill Road.
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA TECHNOLOGY PARTNERS VI
(Executing this Agreement as a Series D
Investor and a Series G Investor)
By: /s/ Company Officer
------------------------------------------
Its:
-----------------------------------------
Address: 3000 Sand Hill Road.
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA 1995
(Executing this Agreement as a Series D
Investor and a Series G Investor)
By: /s/ Company Officer
------------------------------------------
Its:
-----------------------------------------
Address: 3000 Sand Hill Road.
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
17
<PAGE>
ACCEL IV L.P. ACCEL KEIRETSU L.P.
(Executing this Agreement as a Series (Executing this Agreement as a Series
D Investor and a Series G Investor) D Investor and a Series G Investor)
By: Accel IV Associates L.P. By: Accel Partners & Co., Inc.
Its: General Partner Its: General Partner
By: /s/ G. Carter Sednaoui By: /s/ G. Carter Sednaoui
----------------------------- -----------------------------
G. CARTER SEDNAOUI G. CARTER SEDNAOUI
Its: GENERAL PARTNER Its:
---------------------------- ----------------------------
CHIEF FINANCIAL OFFICER
Address: One Palmer Square Address: One Palmer Square
Princeton, NJ 08542 Princeton, NJ 08542
Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384
ACCEL INVESTORS '95 L.P. ELLMORE C. PATTERSON PARTNERS
(Executing this Agreement as a Series (Executing this Agreement as a Series
D Investor and a Series G Investor) D Investor and a Series G Investor)
By: /s/ G. Carter Sednaoui By: /s/ Company Officer
----------------------------- -----------------------------
Its: GENERAL PARTNER Its: GENERAL PARTNER
---------------------------- ----------------------------
Address: One Palmer Square Address: One Palmer Square
Princeton, NJ 08542 Princeton, NJ 08542
Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384
18
<PAGE>
AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
INTEL CORPORATION
By: /s/ Company Officer
------------------------------------------
Its:
-----------------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Facsimile Number: (408) 765-6038
/s/ Howard L. Strachman
---------------------------------------------
Howard L. Strachman
Address: 10075 Crescent Road
Cupertino, CA 95014
Facsimile Number: (408) 252-8360
---------------------------------------------
Eduardo J. Moura
Address: 10161 Bubb Road
Cupertino, CA 95014-4167
Facsimile Number: (408) 725-2439
ALEX. BROWN & SONS INCORPORATED
By:
------------------------------------------
Thomas R. Hitchner, Principal
Address: 135 E. Baltimore Street
Baltimore, MD 21202
Facsimile Number: (410) 234-3788
ITOCHU CORPORATION
By:
------------------------------------------
Its:
-----------------------------------------
Address: 5-1, Kita Aoyama 2 chome
Minato-ku, Tokoyo 107-77
Japan
Facsimile Number: 011 81-3 3497-3131
19
<PAGE>
LONDON PACIFIC LIFE & ANNUITY COMPANY
By: /s/ Susan Y. Gressel
------------------------------------------
Its: V.P. & Treasurer
-----------------------------------------
Address: 3109 Poplarwood Court, Suite 108
Raleigh, NC 27604
Facsimile Number: (919) 981-2797
20
<PAGE>
SCHEDULE A
HYBRID NETWORKS, INC.
SERIES A INVESTORS
Name # of Shares of Series A Preferred Stock
- ---- ---------------------------------------
Catherine P. Goodrich 63,090
J.F. Shea Co., Inc. 378,541
Subhash Bal 25,236
Stewart H. Greenfield 63,090
James Marver 25,236
Walter Baumgartner 63,090
The Cypress Fund
Alexander Cilento 63,090
Krivonos Fmly Lv Tst 50,472
IRA FBO Susan Harman Neithold 62,926
OSCCO III, L.P. 752,404
TOTAL 1,547,175
<PAGE>
SCHEDULE B
HYBRID NETWORKS, INC.
SERIES B PREFERRED INVESTORS
# of Shares of Series B Preferred Stock
---------------------------------------
Subject to Issuance on
Name Issued Exercise of Warrants
- ---- ------ -----------------------
Gary M. Lauder 442,857 171,429
OSCCO III, L.P. 72,426 16,213
J.F. Shea Co., Inc. 36,438 18,219
Intel 248,187 --
TOTAL 799,908 205,861
<PAGE>
SCHEDULE C
HYBRID NETWORKS, INC.
SERIES D INVESTORS
<TABLE>
<CAPTION>
# of Shares of Series D Preferred Stock
----------------------------------------------
Subject to
Subject to Issuance Issuance on # of Shares
on Exercise of Exercise of of Series G # of
Issued Original Warrants New Warrants Preferred Stock* 1.2(b) Shares
------ ------------------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C>
AT&T Venture Company, L.P. 571,428 285,714 71,355 130,548 58,015
Sequoia Capital VI 1,040,001 520,000 129,866 237,598 105,587
Sequoia Technology Partners VI 57,143 28,572 7,136 13,055 5,802
Sequoia 1995 45,714 22,857 5,708 10,444 4,641
Accel Investors '95 L.P. 49,153 24,571 6,137 11,227 4,989
Accel IV L.P. 1,046,858 523,429 130,722 239,164 106,283
Accel Keiretsu L.P. 21,714 10,857 2,711 4,961 2,205
Ellmore C. Patterson Partners 25,143 12,572 3,140 5,744 2,553
OSCCO III, L.P. 223,444 111,722 31,951 58,456 22,685
J.F. Shea Co., Inc. 112,414 56,207 18,587 34,007 11,413
Susan Harmon Niethold 7,000 3,500 874 1,599 710
Gary M. Lauder -- -- 42,813 78,329 --
TOTALS 3,200,002 1,600,001 451,000 825,132 324,883
</TABLE>
- -------------------------
* Issued upon conversion of convertible notes at the closing of the sale
of shares of Series G Preferred Stock to the purchasers pursuant to
the Series G Agreement.
<PAGE>
HYBRID NETWORKS, INC.
1993 EQUITY INCENTIVE PLAN
--------------------------
As Adopted October 25, 1993
As Amended April 19, 1995
As Amended December 20, 1995
As Amended July 8, 1996
As Amended March 25, 1997
1. PURPOSE. The purpose of the Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent,
Subsidiaries and Affiliates, by offering them an opportunity to participate in
the Company's future performance through awards of Options, Restricted Stock
and Stock Bonuses. Capitalized terms not defined in the text are defined in
Section 24.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and
18, the total number of Shares reserved and available for grant and issuance
pursuant to the Plan shall be 3,202,292 Shares. Subject to Sections 2.2 and
18, Shares shall again be available for grant and issuance in connection with
future Awards under the Plan that: (a) are subject to issuance upon exercise
of an Option but cease to be subject to such Option for any reason other than
exercise of such Option, (b) are subject to an Award granted hereunder but are
forfeited or are repurchased by the Company at the original issue price, or (c)
are subject to an Award that otherwise terminates without Shares being issued.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under the Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and
(c) the number of Shares subject to other outstanding Awards shall be
proportionately adjusted, subject to any required action by the Board or the
shareholders of the Company and compliance with applicable securities laws;
PROVIDED, HOWEVER, that fractions of a Share shall not be issued but shall
either be paid in cash at Fair Market Value or shall be rounded up to the
nearest Share, as determined by the Committee and PROVIDED, FURTHER, that the
Exercise Price of any Option may not be decreased to below the par value of the
Shares.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be
granted only to employees (including officers and directors who are also
employees) of the Company or of a Parent or Subsidiary of the Company. All
other Awards may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or any
<PAGE>
Parent, Subsidiary or Affiliate of the Company; PROVIDED such consultants,
contractors and advisors render bona fide services not in connection with the
offer and sale of securities in a capital-raising transaction. A person may
be granted more than one Award under the Plan.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. The Plan shall be administered by the
Committee or the Board acting as the Committee. Subject to the general
purposes, terms and conditions of the Plan, and to the direction of the Board,
the Committee shall have full power to implement and carry out the Plan. The
Committee shall have the authority to:
(a) construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(b) prescribe, amend and rescind rules and regulations relating to
the Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination,
in tandem with, in replacement of, or as alternatives to, other
Awards under the Plan or any other incentive or compensation
plan of the Company or any Parent, Subsidiary or Affiliate of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of the Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the
Committee with respect to any Award shall be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
the Plan or Award, at any later time, and such determination shall be final and
binding on the Company and all persons having an interest in any Award under
the Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under the Plan to Participants who are not
Insiders of the Company.
-2-
<PAGE>
4.3 EXCHANGE ACT REQUIREMENTS. If the Company is subject to
the Exchange Act, the Company will take appropriate steps to comply with the
disinterested director requirements of Section 16(b) of the Exchange Act,
including but not limited to, the appointment by the Board of a Committee
consisting of not less than two persons (who are members of the Board), each of
whom is a Disinterested Person.
5. OPTIONS. The Committee may grant Options to eligible persons
and shall determine whether such Options shall be Incentive Stock Options
within the meaning of the Code ("ISOS") or Nonqualified Stock Options
("NQSOS"), the number of Shares subject to the Option, the Exercise Price of
the Option, the period during which the Option may be exercised, and all other
terms and conditions of the Option, subject to the following:
5.1 FORM OF OPTION GRANT. Each Option granted under the Plan
shall be evidenced by an Award Agreement which shall expressly identify the
Option as an ISO or NQSO ("STOCK OPTION AGREEMENT"), and be in such form and
contain such provisions (which need not be the same for each Participant) as
the Committee shall from time to time approve, and which shall comply with and
be subject to the terms and conditions of the Plan.
5.2 DATE OF GRANT. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option,
unless otherwise specified by the Committee. The Stock Option Agreement and a
copy of the Plan will be delivered to the Participant within a reasonable time
after the granting of the Option.
5.3 EXERCISE PERIOD. Options shall be exercisable within the
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement; PROVIDED, HOWEVER, that (i) no Option shall be exercisable
after the expiration of ten (10) years from the date the Option is granted,
(ii) no Option granted to a person who directly or by attribution owns more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT
SHAREHOLDER") shall be exercisable after the expiration of five (5) years from
the date the Option is granted and (iii) the right to exercise any Option shall
vest at the rate of at least twenty percent (20%) per year over five (5) years
from the date the Option is granted. The Committee also may provide for
Options to become exercisable at one time or from time to time, periodically or
otherwise, in such number or percentage as the Committee determines, subject to
the foregoing limitations.
5.4 EXERCISE PRICE. The Exercise Price shall be determined by
the Committee when the Option is granted and may be not less than 85% of the
Fair Market Value of the Shares on the date of grant; provided that (i) the
Exercise Price of an ISO shall be not less than 100% of the Fair Market Value
of the Shares on the date of grant and (ii) the Exercise Price of any Option
granted to a Ten Percent Shareholder shall not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of the Plan.
5.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be
the same for each Participant), stating the
-3-
<PAGE>
number of Shares being purchased, the restrictions imposed on the Shares, if
any, and such representations and agreements regarding Participant's
investment intent and access to information and other matters, if any, as may
be required or desirable by the Company to comply with applicable securities
laws, together with payment in full of the Exercise Price for the number of
Shares being purchased.
5.6 TERMINATION. Notwithstanding the exercise periods set
forth in the Stock Option Agreement, exercise of an Option shall always be
subject to the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter time period
as may be specified in the Stock Option Agreement), but in any
event, no later than the expiration date of the Options.
(b) If the Participant is terminated because of death or Disability
(or the Participant dies within three months of such
termination), then Participant's Options may be exercised only
to the extent that such Options would have been exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the Termination
Date (or such shorter time period as may be specified in the
Stock Option Agreement), but in any event no later than the
expiration date of the Options.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year (under
the Plan or under any other incentive stock option plan of the Company or any
Affiliate, Parent or Subsidiary of the Company) shall not exceed $100,000. If
the Fair Market Value of Shares on the date of grant with respect to which ISOs
are exercisable for the first time by a Participant during any calendar year
exceeds $100,000, the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year shall be ISOs and the Options for the amount
in excess of $100,000 that become exercisable in that calendar year shall be
NQSOs. In the event that the Code or the regulations promulgated thereunder
are amended after the Effective Date of the Plan to provide for a different
limit on the Fair Market Value of Shares permitted to be subject to ISOs, such
different limit shall be automatically incorporated herein and shall apply to
any Options granted after the effective date of such amendment.
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may
modify,
-4-
<PAGE>
extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not,
without the written consent of Participant, impair any of Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered shall be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; PROVIDED, HOWEVER, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4 of
the Plan for Options granted on the date the action is taken to reduce the
Exercise Price. PROVIDED, FURTHER, that the Exercise Price shall not be reduced
below the par value of the Shares, if any.
5.10 NO DISQUALIFICATION. Notwithstanding any other provision
in the Plan, no term of the Plan relating to ISOs shall be interpreted, amended
or altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee shall determine to whom an offer will be made, the number of
Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"),
the restrictions to which the Shares shall be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 FORM OF RESTRICTED STOCK AWARD. All purchases under a
Restricted Stock Award made pursuant to the Plan shall be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that shall be in such form
(which need not be the same for each Participant) as the Committee shall from
time to time approve, and shall comply with and be subject to the terms and
conditions of the Plan. The offer of Restricted Stock shall be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase
Agreement along with full payment for the Shares to the Company within thirty
(30) days, then the offer shall terminate, unless otherwise determined by the
Committee.
6.2 PURCHASE PRICE. The Purchase Price of Shares sold pursuant
to a Restricted Stock Award shall be determined by the Committee and shall be
at least 85% of the Fair Market Value of the Shares on the date the Restricted
Stock Award is granted, except in the case of a sale to a Ten Percent
Shareholder, in which case the Purchase Price shall be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of the Plan.
6.3 RESTRICTIONS. Restricted Stock Awards shall be subject to
such restrictions as the Committee may impose. The Committee may provide for
the lapse of such restrictions in installments and may accelerate or waive such
restrictions, in whole or part, based
-5-
<PAGE>
on length of service, performance or such other factors or criteria as the
Committee may determine.
7. STOCK BONUSES.
7.1 AWARDS OF STOCK BONUSES. A Stock Bonus is an award of
Shares (which may consist of Restricted Stock) for services rendered to the
Company or any Parent, Subsidiary or Affiliate of the Company. A Stock Bonus
may be awarded for past services already rendered to the Company, or any
Parent, Subsidiary or Affiliate of the Company pursuant to an Award Agreement
(the "STOCK BONUS AGREEMENT") that shall be in such form (which need not be the
same for each Participant) as the Committee shall from time to time approve,
and shall comply with and be subject to the terms and conditions of the Plan.
A Stock Bonus may be awarded upon satisfaction of such performance goals as are
set out in advance in Participant's individual Award Agreement (the
"PERFORMANCE STOCK BONUS AGREEMENT") that shall be in such form (which need not
be the same for each Participant) as the Committee shall from time to time
approve, and shall comply with and be subject to the terms and conditions of
the Plan. Stock Bonuses may vary from Participant to Participant and between
groups of Participants, and may be based upon the achievement of the Company,
Parent, Subsidiary or Affiliate and/or individual performance factors or upon
such other criteria as the Committee may determine.
7.2 TERMS OF STOCK BONUSES. The Committee shall determine the
number of Shares to be awarded to the Participant and whether such Shares shall
be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction
of performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee shall determine: (a) the nature, length and starting date of any
period during which performance is to be measured (the "PERFORMANCE PERIOD")
for each Stock Bonus; (b) the performance goals and criteria to be used to
measure the performance, if any; (c) the number of Shares that may be awarded
to the Participant; and (d) the extent to which such Stock Bonuses have been
earned. Performance Periods may overlap and Participants may participate
simultaneously with respect to Stock Bonuses that are subject to different
Performance Periods and different performance goals and other criteria. The
number of Shares may be fixed or may vary in accordance with such performance
goals and criteria as may be determined by the Committee. The Committee may
adjust the performance goals applicable to the Stock Bonuses to take into
account changes in law and accounting or tax rules and to make such adjustments
as the Committee deems necessary or appropriate to reflect the impact of
extraordinary or unusual items, events or circumstances to avoid windfalls or
hardships.
7.3 FORM OF PAYMENT. The earned portion of a Stock Bonus may
be paid currently or on a deferred basis with such interest or dividend
equivalent, if any, as the Committee may determine. Payment may be made in the
form of cash, whole Shares, including Restricted Stock, or a combination
thereof, either in a lump sum payment or in installments, all as the Committee
shall determine.
7.4 TERMINATION DURING PERFORMANCE PERIOD. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
shall be entitled to
-6-
<PAGE>
payment (whether in Shares, cash or otherwise) with respect to the Stock
Bonus only to the extent earned as of the date of Termination in accordance
with the Performance Stock Bonus Agreement, unless the Committee shall
determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
8.1 PAYMENT. Payment for Shares purchased pursuant to the Plan
may be made in cash (by check) or, where expressly approved for the Participant
by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of Shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such Shares); or (2)
were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms
as may be approved by the Committee and bearing interest at a
rate sufficient to avoid imputation of income under Sections 483
and 1274 of the Code; PROVIDED, HOWEVER, that Participants who
are not employees of the Company shall not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
PROVIDED, FURTHER, that the portion of the Purchase Price equal
to the par value of the Shares, if any, must be paid in cash.
(d) by waiver of compensation due or accrued to Participant for
services rendered;
(e) by tender of property;
(f) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from Participant and a
broker-dealer that is a member of the National Association
of Securities Dealers (an "NASD DEALER") whereby the
Participant irrevocably elects to exercise the Option and
to sell a portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from Participant and an NASD
Dealer whereby Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the
NASD Dealer
-7-
<PAGE>
in a margin account as security for a loan from the NASD
Dealer in the amount of the Exercise Price, and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares
to forward the exercise price directly to the Company;
or
(g) by any combination of the foregoing.
8.2 LOAN GUARANTEES. The Committee may help the Participant
pay for Shares purchased under the Plan by authorizing a guarantee by the
Company of a third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in
satisfaction of Awards granted under the Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under the Plan,
payments in satisfaction of Awards are to be made in cash, such payment shall
be net of an amount sufficient to satisfy federal, state, and local withholding
tax requirements.
9.2 STOCK WITHHOLDING. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated
to pay the Company the amount required to be withheld, the Committee may allow
the Participant to satisfy the minimum withholding tax obligation by electing
to have the Company withhold from the Shares to be issued that number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be
determined (the "TAX DATE"). All elections by a Participant to have Shares
withheld for this purpose shall be made in writing in a form acceptable to the
Committee 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, then except as provided below, the election shall be
irrevocable as to the particular Shares as to which the election
is made;
(c) all elections shall be subject to the consent or disapproval of
the Committee;
(d) if the Participant is an Insider and if the Company is subject
to Section 16(b) of the Exchange Act: (1) the election may not
be made within six (6) months of the date of grant of the Award,
except as otherwise permitted by SEC Rule 16b-3(e) under the
Exchange Act, and (2) either (A) the election to use stock
withholding must be irrevocably made at least six (6) months
prior to the Tax Date (although such election may be
-8-
<PAGE>
revoked at any time at least six (6) months prior to the Tax
Date) or (B) the exercise of the Option or election to use
stock withholding must be made in the ten (10) day period
beginning on the third day following the release of the
Company's quarterly or annual summary statement of sales or
earnings; and
(e) in the event that the Tax Date is deferred until six (6) months
after the delivery of Shares under Section 83(b) of the Code,
the Participant shall receive the full number of Shares with
respect to which the exercise occurs, but such Participant shall
be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 VOTING AND DIVIDENDS. No Participant shall have any of the
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the
Participant shall be a shareholder and have all the rights of a shareholder
with respect to such Shares, including the right to vote and receive all
dividends or other distributions made or paid with respect to such Shares;
PROVIDED, that if such Shares are Restricted Stock, then any new, additional or
different securities the Participant may become entitled to receive with
respect to such Shares by virtue of a stock dividend, stock split or any other
change in the corporate or capital structure of the Company shall be subject to
the same restrictions as the Restricted Stock; PROVIDED, FURTHER, that the
Participant shall have no right to retain such stock dividends or stock
distributions with respect to Shares that are repurchased at the Participant's
original Purchase Price pursuant to Section 12.
10.2 FINANCIAL STATEMENTS. The Company shall provide financial
statements to each Participant prior to such Participant's purchase of Shares
under the Plan, and to each Participant annually during the period such
Participant has Awards outstanding; PROVIDED, HOWEVER, the Company shall not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under the Plan, and any
interest therein, shall not be transferable or assignable by Participant, and
may not be made subject to execution, attachment or similar process, otherwise
than by will or by the laws of descent and distribution. During the lifetime
of the Participant an Award shall be exercisable only by the Participant, and
any elections with respect to an Award, may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement (a)
a right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, and/or (b) a
right to repurchase ^ all Shares held by a Participant following such
Participant's Termination at any time within ninety (90) days after such
Termination Date, ^ for cash or cancellation of purchase money indebtedness,
at: (A) with respect to Shares that are "Vested" (as defined in the Award
Agreement), the higher of: (l) Participant's
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<PAGE>
original Purchase Price, or (2) the Fair Market Value of such Shares on
Participant's Termination Date, PROVIDED, such right of repurchase terminates
when the Company's securities become publicly traded; or (B) with respect to
Shares that are not "Vested" (as defined in the Award Agreement), at the
Participant's original Purchase Price, PROVIDED, that the right to repurchase
at the original Purchase Price lapses at the rate of at least 20% per year
over 5 years from the date the Shares were purchased, and if the right to
repurchase is assignable, the assignee must pay the Company, upon assignment
of the right to repurchase, cash equal to the excess of the Fair Market Value
of the Shares over the original Purchase Price.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under the Plan shall be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations and other requirements of the
SEC or any stock exchange or automated quotation system upon which the Shares
may be listed.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, ^ with the Company or an agent designated by
the Company to hold in escrow until such restrictions have lapsed or
terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates. Any Participant who is
permitted to execute a promissory note as partial or full consideration for the
purchase of Shares under the Plan shall be required to pledge and deposit with
the Company all or part of the Shares so purchased as collateral to secure the
payment of Participant's obligation to the Company under the promissory note;
PROVIDED, HOWEVER, that the Committee may require or accept other or additional
forms of collateral to secure the payment of such obligation and, in any event,
the Company shall have full recourse against the Participant under the
promissory note notwithstanding any pledge of the Participant's Shares or other
collateral. In connection with any pledge of the Shares, Participant shall be
required to execute and deliver a written pledge agreement in such form as the
Committee shall from time to time approve. The Shares purchased with the
promissory note may be released from the pledge on a prorata basis as the
promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time
or from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time
buy from a Participant an Award previously granted with payment in cash, Shares
(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant shall agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall
not be effective unless such Award is in compliance with all applicable federal
and state securities laws, rules and regulations of any governmental body, and
the requirements of any stock exchange or automated quotation system upon which
the Shares may then be listed, as they are in effect on the date of grant of
the Award and also on the date of exercise or other
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<PAGE>
issuance. Notwithstanding any other provision in the Plan, the Company shall
have no obligation to issue or deliver certificates for Shares under the Plan
prior to (a) obtaining any approvals from governmental agencies that the
Company determines are necessary or advisable, and/or (b) completion of any
registration or other qualification of such shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company shall be under no obligation to register
the Shares with the SEC or to effect compliance with the registration,
qualification or listing requirements of any state securities laws, stock
exchange or automated quotation system, and the Company shall have no
liability for any inability or failure to do so.
17. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award
granted under the Plan shall confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent, Subsidiary or Affiliate of the Company or
limit in any way the right of the Company or any Parent, Subsidiary or
Affiliate of the Company to terminate Participant's employment or other
relationship at any time, with or without cause.
18. CORPORATE TRANSACTIONS.
18.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the
event of (a) a merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders
of the Company and the Awards granted under the Plan are assumed or replaced by
the successor corporation, which assumption shall be binding on all
Participants), (b) a dissolution or liquidation of the Company, (c) the sale of
substantially all of the assets of the Company, or (d) any other transaction
which qualifies as a "corporate transaction" under Section 424(a) of the Code
wherein the shareholders of the Company give up all of their equity interest in
the Company (EXCEPT for the acquisition, sale or transfer of all or
substantially all of the outstanding shares of the Company), any or all
outstanding Awards may be assumed or replaced by the successor corporation (if
any), which assumption or replacement shall be binding on all Participants. In
the alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
shareholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant.
In the event such successor corporation (if any) refuses to
assume or substitute Options, as provided above, pursuant to a transaction
described in this Subsection 18.1, such Options shall expire on such
transaction at such time and on such conditions as the Board shall determine.
18.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 18, in
the event of the occurrence of
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any transaction described in Section 18.1, any outstanding Awards shall be
treated as provided in the applicable agreement or plan of merger,
consolidation, dissolution, liquidation, sale of assets or other "corporate
transaction."
18.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other
company or otherwise, by either (a) granting an Award under the Plan in
substitution of such other company's award, or (b) assuming such award as if it
had been granted under the Plan if the terms of such assumed award could be
applied to an Award granted under the Plan. Such substitution or assumption
shall be permissible if the holder of the substituted or assumed award would
have been eligible to be granted an Award under the Plan if the other company
had applied the rules of the Plan to such grant. In the event the Company
assumes an award granted by another company, the terms and conditions of such
award shall remain unchanged (EXCEPT that the exercise price and the number and
nature of Shares issuable upon exercise of any such option will be adjusted
appropriately pursuant to Section 424(a) of the Code). In the event the
Company elects to grant a new Option rather than assuming an existing option,
such new Option may be granted with a similarly adjusted Exercise Price.
19. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become
effective on the date that it is adopted by the Board (the "EFFECTIVE DATE").
The Plan shall be approved by the shareholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
months before or after the Effective Date. Upon the Effective Date, the Board
may grant Awards pursuant to the Plan; provided, however, that: (a) no Option
may be exercised prior to initial shareholder approval of the Plan; (b) no
Option granted pursuant to an increase in the number of Shares approved by the
Board shall be exercised prior to the time such increase has been approved by
the shareholders of the Company; and (c) in the event that shareholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be cancelled, any Shares issued pursuant to any Award shall be
cancelled and any purchase of Shares hereunder shall be rescinded. After the
Company becomes subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 (or its successor), as amended, with
respect to shareholder approval.
20. TERM OF PLAN. The Plan will terminate ten (10) years from the
Effective Date or, if earlier, the date of shareholder approval.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend the Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to the Plan; PROVIDED, HOWEVER, that the Board shall not, without the approval
of the shareholders of the Company, amend the Plan in any manner that requires
such shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or pursuant to the Exchange
Act or Rule 16b-3 (or its successor), as amended, thereunder.
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22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by
the Board, the submission of the Plan to the shareholders of the Company for
approval, nor any provision of the Plan shall be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under the Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. GOVERNING LAW. The Plan and all agreements, documents and
instruments entered into pursuant to the Plan shall be governed by, and
construed in accordance with, the laws of the State of California excluding
that body of law pertaining to conflict of laws.
24. DEFINITIONS. As used in the Plan, the following terms shall
have the following meanings:
"AFFILIATE" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct
or indirect, of the power to cause the direction of the management and policies
of the corporation, whether through the ownership of voting securities, by
contract or otherwise.
"AWARD" means any award under the Plan, including any Option,
Restricted Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer
the Plan, or if no committee is appointed, the Board.
"COMPANY" means Hybrid Networks, Inc., a corporation organized under
the laws of the State of Delaware, or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"DISINTERESTED PERSON" means a director who has not, during the
period that person is a member of the Committee and for one year prior to
service as a member of the Committee, been granted or awarded equity securities
pursuant to the Plan or any other plan of the Company or any Parent, Subsidiary
or Affiliate of the Company, except in accordance with the requirements set
forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as
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promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is
amended from time to time and as interpreted by the SEC.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of
the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the NASDAQ National
Market System, its last reported sale price on the NASDAQ
National Market System or, if no such reported sale takes place
on such date, the average of the closing bid and asked prices;
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, the last reported sale price
or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices on the principal
national securities exchange on which the Common Stock is listed
or admitted to trading;
(c) if such Common Stock is publicly traded but is not quoted on
the NASDAQ National Market System nor listed or admitted to
trading on a national securities exchange, the average of the
closing bid and asked prices on such date, as reported by The
Wall Street Journal, for the over-the-counter market; or
(d) if none of the foregoing is applicable, by the Board of
Directors of the Company in good faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to
Section 5.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if at the time of the
granting of an Award under the Plan, each of such corporations other than the
Company owns stock possessing 50%
or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under the Plan.
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<PAGE>
"PLAN" means this Hybrid Networks, Inc. 1993 Equity Incentive Plan,
as amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to
Section 6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock $0.001 par value,
as adjusted pursuant to Section 2, and any successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Award, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
"TERMINATION" or "TERMINATED" means, for purposes of the Plan with
respect to a Participant, that the Participant has ceased to provide services
as an employee, director, consultant, independent contractor or adviser, to the
Company or a Parent, Subsidiary or Affiliate of the Company, except in the case
of sick leave, military leave, or any other leave of absence approved by the
Committee, PROVIDED, that such leave is for a period of not more than ninety
(90) days, or reinstatement upon the expiration of such leave is guaranteed by
contract or statute. The Committee shall have sole discretion to determine
whether a Participant has ceased to provide services and the effective date on
which the Participant ceased to provide services (the "TERMINATION DATE").
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HYBRID NETWORKS, INC.
1996 EQUITY INCENTIVE PLAN
--------------------------
As Adopted December 18, 1996
As Amended May 20, 1997
1. PURPOSE. The purpose of the Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent,
Subsidiaries and Affiliates, by offering them an opportunity to participate in
the Company's future performance through awards of Options and Restricted
Stock. Capitalized terms not defined in the text are defined in Section 23.
This Plan is intended to be a written compensatory benefit plan within the
meaning of Rule 701 promulgated under the Securities Act.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and
17, the total number of Shares reserved and available for grant and issuance
pursuant to the Plan shall be 1,100,000 Shares. Subject to Sections 2.2 and
17, Shares shall again be available for grant and issuance in connection with
future Awards under the Plan that: (a) are subject to issuance upon exercise
of an Option but cease to be subject to such Option for any reason other than
exercise of such Option, or (b) are subject to an Award that otherwise
terminates without Shares being issued.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under the Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and
(c) the number of Shares subject to other outstanding Awards shall be
proportionately adjusted, subject to any required action by the Board or the
shareholders of the Company and compliance with applicable securities laws;
PROVIDED, HOWEVER, that fractions of a Share shall not be issued but shall
either be paid in cash at Fair Market Value or shall be rounded up to the
nearest Share, as determined by the Committee and PROVIDED, FURTHER, that the
Exercise Price of any Option may not be decreased to below the par value of the
Shares.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be
granted only to employees (including officers and directors who are also
employees) of the Company or of a Parent or Subsidiary of the Company. All
other Awards may be granted to employees, officers, directors, and consultants
of the Company or any Parent, Subsidiary or Affiliate of the Company; PROVIDED
such consultants render bona fide services not in connection with the offer and
sale of securities in a capital-raising transaction. A person may be granted
more than one Award under the Plan.
<PAGE>
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. The Plan shall be administered by the
Committee or the Board acting as the Committee. Subject to the general
purposes, terms and conditions of the Plan, and to the direction of the Board,
the Committee shall have full power to implement and carry out the Plan. The
Committee shall have the authority to:
(a) construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(b) prescribe, amend and rescind rules and regulations relating to
the Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination,
in tandem with, in replacement of, or as alternatives to, other
Awards under the Plan or any other incentive or compensation
plan of the Company or any Parent, Subsidiary or Affiliate of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of the Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the
Committee with respect to any Award shall be made in its sole discretion at the
time of grant of the Award or, unless in contravention of any express term of
the Plan or Award, at any later time, and such determination shall be final and
binding on the Company and all persons having an interest in any Award under
the Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under the Plan to Participants who are not
Insiders of the Company.
4.3 EXCHANGE ACT REQUIREMENTS. If the Company is subject to
the Exchange Act, the Company will take appropriate steps to comply with the
disinterested director requirements of Section 16(b) of the Exchange Act,
including but not limited to, the appointment by the Board of a Committee
consisting of not less than two persons (who are members of the Board), each of
whom is a Disinterested Person.
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5. OPTIONS. The Committee may grant Options to eligible persons
and shall determine whether such Options shall be Incentive Stock Options
within the meaning of the Code ("ISOS") or Nonqualified Stock Options
("NQSOS"), the number of Shares subject to the Option, the Exercise Price of
the Option, the period during which the Option may be exercised, and all other
terms and conditions of the Option, subject to the following:
5.1 FORM OF OPTION GRANT. Each Option granted under the Plan
shall be evidenced by an Award Agreement which shall expressly identify the
Option as an ISO or NQSO ("STOCK OPTION AGREEMENT"), and be in such form and
contain such provisions (which need not be the same for each Participant) as
the Committee shall from time to time approve, and which shall comply with and
be subject to the terms and conditions of the Plan.
5.2 DATE OF GRANT. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option,
unless otherwise specified by the Committee. The Stock Option Agreement and a
copy of the Plan will be delivered to the Participant within a reasonable time
after the granting of the Option.
5.3 EXERCISE PERIOD. Options shall be exercisable within the
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement; PROVIDED, HOWEVER, that (i) no Option shall be exercisable
after the expiration of ten (10) years from the date the Option is granted,
(ii) no Option granted to a person who directly or by attribution owns more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary of the Company ("TEN PERCENT
SHAREHOLDER") shall be exercisable after the expiration of five (5) years from
the date the Option is granted and (iii) the right to exercise any Option shall
vest at the rate of at least twenty percent (20%) per year over five (5) years
from the date the Option is granted. The Committee also may provide for
Options to become exercisable at one time or from time to time, periodically or
otherwise, in such number or percentage as the Committee determines, subject to
the foregoing limitations.
5.4 EXERCISE PRICE. The Exercise Price shall be determined by
the Committee when the Option is granted and may be not less than 85% of the
Fair Market Value of the Shares on the date of grant; provided that (i) the
Exercise Price of an ISO shall be not less than 100% of the Fair Market Value
of the Shares on the date of grant and (ii) the Exercise Price of any Option
granted to a Ten Percent Shareholder shall not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 7 of the Plan.
5.5 METHOD OF EXERCISE. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be
the same for each Participant), stating the number of Shares being purchased,
the restrictions imposed on the Shares, if any, and such representations and
agreements regarding Participant's investment intent and access to information
and other matters, if any, as may be required or desirable by the Company to
comply with applicable securities laws, together with payment in full of the
Exercise Price for the number of Shares being purchased.
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<PAGE>
5.6 TERMINATION. Notwithstanding the exercise periods set
forth in the Stock Option Agreement, exercise of an Option shall always be
subject to the following:
(a) If the Participant is Terminated for any reason except death or
Disability, then Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter time period
as may be specified in the Stock Option Agreement), but in any
event, no later than the expiration date of the Options.
(b) If the Participant is terminated because of death or Disability
(or the Participant dies within three months of such
termination), then Participant's Options may be exercised only
to the extent that such Options would have been exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the Termination
Date (or such shorter time period as may be specified in the
Stock Option Agreement), but in any event no later than the
expiration date of the Options.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISOS. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year (under
the Plan or under any other incentive stock option plan of the Company or any
Affiliate, Parent or Subsidiary of the Company) shall not exceed $100,000. If
the Fair Market Value of Shares on the date of grant with respect to which ISOs
are exercisable for the first time by a Participant during any calendar year
exceeds $100,000, the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year shall be ISOs and the Options for the amount
in excess of $100,000 that become exercisable in that calendar year shall be
NQSOs. In the event that the Code or the regulations promulgated thereunder
are amended after the Effective Date of the Plan to provide for a different
limit on the Fair Market Value of Shares permitted to be subject to ISOs, such
different limit shall be automatically incorporated herein and shall apply to
any Options granted after the effective date of such amendment.
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not,
without the written consent of Participant, impair any of Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered shall be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; PROVIDED,
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HOWEVER, that the Exercise Price may not be reduced below the minimum
Exercise Price that would be permitted under Section 5.4 of the Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
PROVIDED, FURTHER, that the Exercise Price shall not be reduced below the par
value of the Shares, if any.
5.10 NO DISQUALIFICATION. Notwithstanding any other provision
in the Plan, no term of the Plan relating to ISOs shall be interpreted, amended
or altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee shall determine to whom an offer will be made, the number of
Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"),
the restrictions to which the Shares shall be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 FORM OF RESTRICTED STOCK AWARD. All purchases under a
Restricted Stock Award made pursuant to the Plan shall be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that shall be in such form
(which need not be the same for each Participant) as the Committee shall from
time to time approve, and shall comply with and be subject to the terms and
conditions of the Plan. The offer of Restricted Stock shall be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase
Agreement along with full payment for the Shares to the Company within thirty
(30) days, then the offer shall terminate, unless otherwise determined by the
Committee.
6.2 PURCHASE PRICE. The Purchase Price of Shares sold pursuant
to a Restricted Stock Award shall be determined by the Committee and shall be
at least 85% of the Fair Market Value of the Shares on the date the Restricted
Stock Award is granted, or at the time the purchase is consummated, except in
the case of a sale to a Ten Percent Shareholder, in which case the Purchase
Price shall be 100% of such Fair Market Value. Payment of the Purchase Price
may be made in accordance with Section 7 of the Plan.
6.3 RESTRICTIONS. Restricted Stock Awards shall be subject to
such restrictions as the Committee may impose, provided such restrictions are
not inconsistent with Section 25102(o) of the California Corporations Code.
The Committee may provide for the lapse of such restrictions in installments
and may accelerate or waive such restrictions, in whole or part, based on
length of service, performance or such other factors or criteria as the
Committee may determine.
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7. PAYMENT FOR SHARE PURCHASES.
7.1 PAYMENT. Payment for Shares purchased pursuant to the Plan
may be made in cash (by check) or, where expressly approved for the Participant
by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of Shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such Shares); or (2)
were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms
as may be approved by the Committee and bearing interest at a
rate sufficient to avoid imputation of income under Sections 483
and 1274 of the Code; PROVIDED, HOWEVER, that Participants who
are not employees of the Company shall not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
PROVIDED, FURTHER, that the portion of the Purchase Price equal
to the par value of the Shares, if any, must be paid in cash.
(d) by waiver of compensation due or accrued to Participant for
services rendered;
(e) by tender of property;
(f) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from Participant and a
broker-dealer that is a member of the National Association
of Securities Dealers (an "NASD DEALER") whereby the
Participant irrevocably elects to exercise the Option and
to sell a portion of the Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from Participant and an NASD
Dealer whereby Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the
NASD Dealer in a margin account as security for a loan from
the NASD Dealer in the amount of the Exercise Price, and
whereby the NASD Dealer irrevocably commits upon receipt of
such Shares to forward the exercise price directly to the
Company;
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or
(g) by any combination of the foregoing.
7.2 LOAN GUARANTEES. The Committee may help the Participant
pay for Shares purchased under the Plan by authorizing a guarantee by the
Company of a third-party loan to the Participant.
8. WITHHOLDING TAXES.
8.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in
satisfaction of Awards granted under the Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under the Plan,
payments in satisfaction of Awards are to be made in cash, such payment shall
be net of an amount sufficient to satisfy federal, state, and local withholding
tax requirements.
8.2 STOCK WITHHOLDING. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated
to pay the Company the amount required to be withheld, the Committee may allow
the Participant to satisfy the minimum withholding tax obligation by electing
to have the Company withhold from the Shares to be issued that number of Shares
having a Fair Market Value equal to the minimum amount required to be withheld,
determined on the date that the amount of tax to be withheld is to be
determined (the "TAX DATE"). All elections by a Participant to have Shares
withheld for this purpose shall be made in writing in a form acceptable to the
Committee 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, then except as provided below, the election shall be
irrevocable as to the particular Shares as to which the election
is made;
(c) all elections shall be subject to the consent or disapproval of
the Committee;
(d) if the Participant is an Insider and if the Company is subject
to Section 16(b) of the Exchange Act: (1) the election may not
be made within six (6) months of the date of grant of the Award,
except as otherwise permitted by SEC Rule 16b-3(e) under the
Exchange Act, and (2) either (A) the election to use stock
withholding must be irrevocably made at least six (6) months
prior to the Tax Date (although such election may be revoked at
any time at least six (6) months prior to the Tax Date) or (B)
the exercise of the Option or election to use stock withholding
must be made in the ten (10) day period beginning on the third
day following the release of the Company's quarterly or annual
summary statement of sales or earnings; and
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(e) in the event that the Tax Date is deferred until six (6) months
after the delivery of Shares under Section 83(b) of the Code,
the Participant shall receive the full number of Shares with
respect to which the exercise occurs, but such Participant shall
be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
9. PRIVILEGES OF STOCK OWNERSHIP.
9.1 VOTING AND DIVIDENDS. No Participant shall have any of the
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the
Participant shall be a shareholder and have all the rights of a shareholder
with respect to such Shares, including the right to vote and receive all
dividends or other distributions made or paid with respect to such Shares;
PROVIDED, that if such Shares are Restricted Stock, then any new, additional or
different securities the Participant may become entitled to receive with
respect to such Shares by virtue of a stock dividend, stock split or any other
change in the corporate or capital structure of the Company shall be subject to
the same restrictions as the Restricted Stock; PROVIDED, FURTHER, that the
Participant shall have no right to retain such stock dividends or stock
distributions with respect to Shares that are repurchased at the Participant's
original Purchase Price pursuant to Section 11. The Company will comply with
Section 260.140.1 of Title 10 of the California Code of Regulations with
respect to the voting rights of Common Stock.
9.2 FINANCIAL STATEMENTS. The Company shall provide financial
statements to each Participant prior to such Participant's purchase of Shares
under the Plan, and to each Participant annually during the period such
Participant has Awards outstanding; PROVIDED, HOWEVER, the Company shall not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
10. TRANSFERABILITY. Awards granted under the Plan, and any
interest therein, shall not be transferable or assignable by Participant, and
may not be made subject to execution, attachment or similar process, otherwise
than by will or by the laws of descent and distribution. During the lifetime
of the Participant an Award shall be exercisable only by the Participant, and
any elections with respect to an Award, may be made only by the Participant.
11. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement (a)
a right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party unless
otherwise not permitted by Section 25102(o) of the California Corporations
Code, and/or (b) a right to repurchase ^ all Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after such Termination Date, ^ for cash or cancellation of purchase money
indebtedness, at: (A) with respect to Shares that are "Vested" (as defined in
the Award Agreement), the higher of: (l) Participant's original Purchase
Price, or (2) the Fair Market Value of such Shares on Participant's Termination
Date, PROVIDED, such right of repurchase terminates when the Company's
securities become publicly traded; or (B) with respect to Shares that are not
"Vested" (as defined in the Award Agreement), at the
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Participant's original Purchase Price, PROVIDED, that the right to repurchase
at the original Purchase Price lapses at the rate of at least 20% per year
over 5 years from the date the Shares were purchased, and if the right to
repurchase is assignable, the assignee must pay the Company, upon assignment
of the right to repurchase, cash equal to the excess of the Fair Market Value
of the Shares over the original Purchase Price.
12. CERTIFICATES. All certificates for Shares or other securities
delivered under the Plan shall be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations and other requirements of the
SEC or any stock exchange or automated quotation system upon which the Shares
may be listed.
13. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, ^ with the Company or an agent designated by
the Company to hold in escrow until such restrictions have lapsed or
terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates. Any Participant who is
permitted to execute a promissory note as partial or full consideration for the
purchase of Shares under the Plan shall be required to pledge and deposit with
the Company all or part of the Shares so purchased as collateral to secure the
payment of Participant's obligation to the Company under the promissory note;
PROVIDED, HOWEVER, that the Committee may require or accept other or additional
forms of collateral to secure the payment of such obligation and, in any event,
the Company shall have full recourse against the Participant under the
promissory note notwithstanding any pledge of the Participant's Shares or other
collateral. In connection with any pledge of the Shares, Participant shall be
required to execute and deliver a written pledge agreement in such form as the
Committee shall from time to time approve. The Shares purchased with the
promissory note may be released from the pledge on a prorata basis as the
promissory note is paid.
14. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time
or from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time
buy from a Participant an Award previously granted with payment in cash, Shares
(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant shall agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. This Plan is
intended to comply with Section 25102(o) of the California Corporations Code.
Any provision of the Plan which is inconsistent with Section 25102(o) shall,
without further act or amendment by the Company or the Board, be reformed to
comply with the requirements of Section 25102(o). An Award shall not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed, as they are in effect on the date of grant of the
Award and also on the date of exercise or other issuance. Notwithstanding any
other provision in the Plan, the Company shall
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<PAGE>
have no obligation to issue or deliver certificates for Shares under the Plan
prior to (a) obtaining any approvals from governmental agencies that the
Company determines are necessary or advisable, and/or (b) completion of any
registration or other qualification of such shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company shall be under no obligation to register
the Shares with the SEC or to effect compliance with the registration,
qualification or listing requirements of any state securities laws, stock
exchange or automated quotation system, and the Company shall have no
liability for any inability or failure to do so.
16. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award
granted under the Plan shall confer or be deemed to confer on any Participant
any right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent, Subsidiary or Affiliate of the Company or
limit in any way the right of the Company or any Parent, Subsidiary or
Affiliate of the Company to terminate Participant's employment or other
relationship at any time, with or without cause.
17. CORPORATE TRANSACTIONS.
17.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the
event of (a) a merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders
of the Company and the Awards granted under the Plan are assumed or replaced by
the successor corporation, which assumption shall be binding on all
Participants), (b) a dissolution or liquidation of the Company, (c) the sale of
substantially all of the assets of the Company, or (d) any other transaction
which qualifies as a "corporate transaction" under Section 424(a) of the Code
wherein the shareholders of the Company give up all of their equity interest in
the Company (EXCEPT for the acquisition, sale or transfer of all or
substantially all of the outstanding shares of the Company), any or all
outstanding Awards may be assumed or replaced by the successor corporation (if
any), which assumption or replacement shall be binding on all Participants. In
the alternative, the successor corporation may substitute equivalent Awards or
provide substantially similar consideration to Participants as was provided to
shareholders (after taking into account the existing provisions of the Awards).
The successor corporation may also issue, in place of outstanding Shares of the
Company held by the Participant, substantially similar shares or other property
subject to repurchase restrictions no less favorable to the Participant.
In the event such successor corporation (if any) refuses to
assume or substitute Options, as provided above, pursuant to a transaction
described in this Subsection 17.1, such Options shall expire on such
transaction at such time and on such conditions as the Board shall determine.
17.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 17, in
the event of the occurrence of any transaction described in Section 17.1, any
outstanding Awards shall be treated as provided in
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the applicable agreement or plan of merger, consolidation, dissolution,
liquidation, sale of assets or other "corporate transaction."
17.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other
company or otherwise, by either (a) granting an Award under the Plan in
substitution of such other company's award, or (b) assuming such award as if it
had been granted under the Plan if the terms of such assumed award could be
applied to an Award granted under the Plan. Such substitution or assumption
shall be permissible if the holder of the substituted or assumed award would
have been eligible to be granted an Award under the Plan if the other company
had applied the rules of the Plan to such grant. In the event the Company
assumes an award granted by another company, the terms and conditions of such
award shall remain unchanged (EXCEPT that the exercise price and the number and
nature of Shares issuable upon exercise of any such option will be adjusted
appropriately pursuant to Section 424(a) of the Code). In the event the
Company elects to grant a new Option rather than assuming an existing option,
such new Option may be granted with a similarly adjusted Exercise Price.
18. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become
effective on the date that it is adopted by the Board (the "EFFECTIVE DATE").
The Plan shall be approved by the shareholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
months before or after the Effective Date. Upon the Effective Date, the Board
may grant Awards pursuant to the Plan; provided, however, that: (a) no Option
may be exercised prior to initial shareholder approval of the Plan; (b) no
Option granted pursuant to an increase in the number of Shares approved by the
Board shall be exercised prior to the time such increase has been approved by
the shareholders of the Company; and (c) in the event that shareholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be canceled, any Shares issued pursuant to any Award shall be
canceled and any purchase of Shares hereunder shall be rescinded. After the
Company becomes subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 (or its successor), as amended, with
respect to shareholder approval.
19. TERM OF PLAN. The Plan will terminate ten (10) years from the
Effective Date or, if earlier, the date of shareholder approval.
20. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend the Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed pursuant
to the Plan; PROVIDED, HOWEVER, that the Board shall not, without the approval
of the shareholders of the Company, amend the Plan in any manner that requires
such shareholder approval pursuant to Section 25102(o) of the California
Corporations Code, the Code or the regulations promulgated thereunder as such
provisions apply to ISO plans or pursuant to the Exchange Act or Rule 16b-3 (or
its successor), as amended, thereunder.
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by
the Board, the submission of the Plan to the shareholders of the Company for
approval, nor
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any provision of the Plan shall be construed as creating any limitations on
the power of the Board to adopt such additional compensation arrangements as
it may deem desirable, including, without limitation, the granting of stock
options and bonuses otherwise than under the Plan, and such arrangements may
be either generally applicable or applicable only in specific cases.
22. GOVERNING LAW. The Plan and all agreements, documents and
instruments entered into pursuant to the Plan shall be governed by, and
construed in accordance with, the laws of the State of California excluding
that body of law pertaining to conflict of laws.
23. DEFINITIONS. As used in the Plan, the following terms shall
have the following meanings:
"AFFILIATE" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct
or indirect, of the power to cause the direction of the management and policies
of the corporation, whether through the ownership of voting securities, by
contract or otherwise.
"AWARD" means any award under the Plan, including any Option or
Restricted Stock.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer
the Plan, or if no committee is appointed, the Board.
"COMPANY" means Hybrid Networks, Inc., a corporation organized under
the laws of the State of Delaware, or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"DISINTERESTED PERSON" means a director who has not, during the
period that person is a member of the Committee and for one year prior to
service as a member of the Committee, been granted or awarded equity securities
pursuant to the Plan or any other plan of the Company or any Parent, Subsidiary
or Affiliate of the Company, except in accordance with the requirements set
forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as
promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is
amended from time to time and as interpreted by the SEC.
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<PAGE>
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of
the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the NASDAQ National
Market System, its last reported sale price on the NASDAQ
National Market System or, if no such reported sale takes place
on such date, the average of the closing bid and asked prices;
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, the last reported sale price
or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices on the principal
national securities exchange on which the Common Stock is listed
or admitted to trading;
(c) if such Common Stock is publicly traded but is not quoted on
the NASDAQ National Market System nor listed or admitted to
trading on a national securities exchange, the average of the
closing bid and asked prices on such date, as reported by The
Wall Street Journal, for the over-the-counter market; or
(d) if none of the foregoing is applicable, by the Board of
Directors of the Company in good faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to
Section 5.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if at the time of the
granting of an Award under the Plan, each of such corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under the Plan.
"PLAN" means this Hybrid Networks, Inc. 1996 Equity Incentive Plan,
as amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section
6.
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<PAGE>
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock $0.001 par value,
as adjusted pursuant to Section 2, and any successor security.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Award, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
"TERMINATION" or "TERMINATED" means, for purposes of the Plan with
respect to a Participant, that the Participant has ceased to provide services
as an employee, director or consultant to the Company or a Parent, Subsidiary
or Affiliate of the Company, except in the case of sick leave, military leave,
or any other leave of absence approved by the Committee, PROVIDED, that such
leave is for a period of not more than ninety (90) days, or reinstatement upon
the expiration of such leave is guaranteed by contract or statute. The
Committee shall have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
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<PAGE>
HYBRID NETWORKS, INC.
EXECUTIVE OFFICER INCENTIVE PLAN
As Adopted as of December 20, 1995
As Amended July 18, 1996
As Amended July 16, 1997
As Amended September 16, 1997
1. PURPOSE. The purpose of the Plan is to provide incentives to
attract, retain and motivate the Company's Chief Executive Officer and, at
the discretion of the Company's Board of Directors, other senior executive
officers of the Company, by offering them an opportunity to participate in
the Company's future performance through awards of Options. Capitalized
terms not defined in the text are defined in Section 22.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 16,
the total number of Shares reserved and available for grant and issuance
pursuant to the Plan shall be 2,079,000 Shares. Subject to Sections 2.2 and
16, Shares shall again be available for grant and issuance in connection with
future Awards under the Plan that: (a) are subject to issuance upon exercise
of an Option but cease to be subject to such Option for any reason other than
exercise of such Option or (b) are subject to an Award that otherwise
terminates without Shares being issued.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding Shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under the Plan and (b)
the Exercise Prices of and number of Shares subject to outstanding Options;
PROVIDED, HOWEVER, that fractions of a Share shall not be issued but shall
either be paid in cash at Fair Market Value or shall be rounded up to the
nearest Share, as determined by the Committee and PROVIDED, FURTHER, that the
Exercise Price of any Option may not be decreased to below the par value of
the Shares.
3. ELIGIBILITY. Only the Company's Chief Executive Officer and other
senior executive officers are eligible for the grants of Awards under the
Plan.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. The Plan shall be administered by the
Committee or the Board acting as the Committee, which Committee shall not
include any Participant. Subject to the general purposes, terms and
conditions of the Plan, and to the direction of the Board, the Committee
shall have full power to implement and carry out the Plan. The Committee
shall have the authority to:
<PAGE>
(a) construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(b) prescribe, amend and rescind rules and regulations relating to
the Plan;
(c) select eligible persons to receive Awards;
(d) determine the terms of Awards;
(e) determine the number of Shares subject to Awards;
(f) determine whether Awards will be granted singly, in
combination, in tandem with, in replacement of, or as
alternatives to, other Awards under the Plan or any other
incentive or compensation plan of the Company or any Parent,
Subsidiary or Affiliate of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of the Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the Committee
with respect to any Award shall be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of the
Plan or Award, at any later time, and such determination shall be final and
binding on the Company and all persons having an interest in any Award under
the Plan. The Committee may delegate to one or more officers of the Company
the authority to grant an Award under the Plan to Participants who are not
Insiders of the Company.
4.3 EXCHANGE ACT REQUIREMENTS. If the Company is subject to the
Exchange Act, the Company will take appropriate steps to comply with the
disinterested director requirements of Section 16(b) of the Exchange Act,
including but not limited to, the appointment by the Board of a Committee
consisting of not less than two persons (who are members of the Board), each
of whom is a Disinterested Person.
5. OPTIONS. The Committee may grant Options to eligible persons and
shall determine whether such Options shall be Incentive Stock Options within
the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the
number of Shares subject to the Option, the Exercise Price of the Option, the
period during which the Option may be exercised, and all other terms and
conditions of the Option, subject to the following:
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<PAGE>
5.1 FORM OF OPTION GRANT. Each Option granted under the Plan
shall be evidenced by an Award Agreement which shall expressly identify the
Option as an ISO or NQSO ("STOCK OPTION AGREEMENT"), and be in such form and
contain such provisions (which need not be the same for each Participant) as
the Committee shall from time to time approve, and which shall comply with
and be subject to the terms and conditions of the Plan.
5.2 DATE OF GRANT. The date of grant of an Option shall be the
date on which the Committee makes the determination to grant such Option,
unless otherwise specified by the Committee. The Stock Option Agreement and
a copy of the Plan will be delivered to the Participant within a reasonable
time after the granting of the Option.
5.3 EXERCISE PERIOD. Options shall be exercisable within the
times or upon the events determined by the Committee as set forth in the
Stock Option Agreement; PROVIDED, HOWEVER, that (i) no Option shall be
exercisable after the expiration of ten (10) years from the date the Option
is granted, (ii) no Option granted to a person who directly or by attribution
owns more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary of the Company
("TEN PERCENT SHAREHOLDER") shall be exercisable after the expiration of five
(5) years from the date the Option is granted and (iii) the right to exercise
any Option shall vest at the rate of at least twenty percent (20%) per year
over five (5) years from the date the Option is granted. The Committee also
may provide for Options to become exercisable at one time or from time to
time, periodically or otherwise, in such number or percentage as the
Committee determines, subject to the foregoing limitations.
5.4 EXERCISE PRICE. The Exercise Price shall be determined by the
Committee when the Option is granted and may be not less than 85% of the Fair
Market Value of the Shares on the date of grant; provided that (i) the
Exercise Price of an ISO shall be not less than 100% of the Fair Market Value
of the Shares on the date of grant and (ii) the Exercise Price of any Option
granted to a Ten Percent Shareholder shall not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of the Plan.
5.5 METHOD OF EXERCISE. Options may be exercised only by delivery
to the Company of a written stock option exercise agreement (the "EXERCISE
AGREEMENT") in a form approved by the Committee (which need not be the same
for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares, if any, and such representations and
agreements regarding Participant's investment intent and access to
information and other matters, if any, as may be required or desirable by the
Company to comply with applicable securities laws, together with payment in
full of the Exercise Price for the number of Shares being purchased.
5.6 TERMINATION. Notwithstanding the exercise periods set forth
in the Stock Option Agreement, exercise of an Option shall always be subject
to the following:
(a) If the Participant is Terminated for any reason except death
or Disability, then Participant may exercise such
Participant's Options only to the extent that such Options
would have been exercisable upon the Termination Date no
later than three (3) months after the
3
<PAGE>
Termination Date (or such shorter time period as may be
specified in the Stock Option Agreement), but in any event,
no later than the expiration date of the Options; it is
provided, however, that, notwithstanding anything to the
contrary in this Section 5.6 or in Section 5.3, in the event
that, during the term of your employment by the Company, the
Company enters into a "Change of Control Transaction" (as
defined below) and Participant's responsibilities and
position with the Company are materially diminished,
Participant's Options shall become exercisable on the date on
which such transaction is consummated and shall continue to
be exercisable for a period of one year commencing with the
date on which such transaction is consummated. As used
above, the term "Change of Control Transaction means (i) any
merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation
with a wholly-owned subsidiary, a reincorporation of the
Company in a different jurisdiction, or other transaction in
which there is no substantial change in the shareholders of
the Company) (ii) a dissolution or liquidation of the
Company, (iii) the sale of substantially all of the assets of
the Company, (iv) any sale of all or a majority of the
outstanding shares of the Company in any transaction or
series of transactions to any persons who, prior to the
transactions or series of transactions, were not Affiliates
of the Company and (v) any similar transactions or series of
transactions whereby a person or group of persons who were
not, prior thereto, Affiliates of the Company acquire control
of the Company.
(b) If the Participant is terminated because of death or Disability
(or the Participant dies within three months of such
termination), then Participant's Options may be exercised
only to the extent that such Options would have been
exercisable by Participant on the Termination Date and must
be exercised by Participant (or Participant's legal
representative or authorized assignee) no later than twelve
(12) months after the Termination Date (or such shorter time
period as may be specified in the Stock Option Agreement),
but in any event no later than the expiration date of the
Options.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of
an Option, provided that such minimum number will not prevent Participant
from exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 LIMITATIONS ON ISOs. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year
(under the Plan or under any other incentive stock option plan of the Company
or any Affiliate, Parent or Subsidiary of the Company) shall not exceed
$100,000. If the Fair Market Value of Shares on the date of grant with
respect to which ISOs are
4
<PAGE>
exercisable for the first time by a Participant during any calendar year
exceeds $100,000, the Options for the first $100,000 worth of Shares to
become exercisable in such calendar year shall be ISOs and the Options for
the amount in excess of $100,000 that become exercisable in that calendar
year shall be NQSOs. In the event that the Code or the regulations
promulgated thereunder are amended after the Effective Date of the Plan to
provide for a different limit on the Fair Market Value of Shares permitted to
be subject to ISOs, such different limit shall be automatically incorporated
herein and shall apply to any Options granted after the effective date of
such amendment.
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of Participant, impair any of Participant's rights under any
Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section
424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; PROVIDED, HOWEVER, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4 of
the Plan for Options granted on the date the action is taken to reduce the
Exercise Price. PROVIDED, FURTHER, that the Exercise Price shall not be
reduced below the par value of the Shares, if any.
5.10 NO DISQUALIFICATION. Notwithstanding any other provision in
the Plan, no term of the Plan relating to ISOs shall be interpreted, amended
or altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. PAYMENT FOR SHARE PURCHASES.
6.1 PAYMENT. Payment for Shares purchased pursuant to the Plan
may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of Shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid
for within the meaning of SEC Rule 144 (and, if such shares
were purchased from the Company by use of a promissory note,
such note has been fully paid with respect to such Shares);
or (2) were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing
interest at a rate sufficient to avoid imputation of income
under Sections 483 and 1274 of the Code; PROVIDED, HOWEVER,
that Participants who are not employees of the Company shall
not be entitled to purchase Shares
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with a promissory note unless the note is adequately secured
by collateral other than the Shares; PROVIDED, FURTHER, that
the portion of the exercise price equal to the par value of
the Shares, if any, must be paid in cash.
(d) by waiver of compensation due or accrued to Participant for
services rendered;
(e) by tender of property;
(f) provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from Participant and a
broker-dealer that is a member of the National Association of Securities
Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to
exercise the Option and to sell a portion of the Shares so purchased to pay
for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise Price directly to the Company;
or
(2) through a "margin" commitment from Participant and an NASD
Dealer whereby Participant irrevocably elects to exercise the Option and to
pledge the Shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon receipt of such Shares
to forward the exercise price directly to the Company;
or
(g) by any combination of the foregoing.
6.2 LOAN GUARANTEES. The Committee may help the Participant pay
for Shares purchased under the Plan by authorizing a guarantee by the Company
of a third-party loan to the Participant.
7. WITHHOLDING TAXES. When, under applicable tax laws, a Participant
incurs tax liability in connection with the exercise or vesting of any Award
that is subject to tax withholding and the Participant is obligated to pay
the Company the amount required to be withheld, the Committee may allow the
Participant to satisfy the minimum withholding tax obligation by electing to
have the Company withhold from the Shares to be issued that number of Shares
having a Fair Market Value equal to the minimum amount required to be
withheld, determined on the date that the amount of tax to be withheld is to
be determined (the "Tax Date"). All elections by a Participant to have
Shares withheld for this purpose shall be made in writing in a form
acceptable to the Committee 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, then except as provided below, the election shall
be irrevocable as to the particular Shares as to which the
election is made;
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(c) all elections shall be subject to the consent or disapproval
of the Committee;
(d) if the Participant is an Insider and if the Company is
subject to Section 16(b) of the Exchange Act: (1) the
election may not be made within six (6) months of the date
of grant of the Award, except as otherwise permitted by SEC
Rule 16b-3(e) under the Exchange Act, and (2) either (A) the
election to use stock withholding must be irrevocably made
at least six (6) months prior to the Tax Date (although such
election may be revoked at any time at least six (6) months
prior to the Tax Date) or (B) the exercise of the Option or
election to use stock withholding must be made in the ten
(10) day period beginning on the third day following the
release of the Company's quarterly or annual summary
statement of sales or earnings; and
(e) in the event that the Tax Date is deferred until six (6)
months after the delivery of Shares under Section 83(b) of
the Code, the Participant shall receive the full number of
Shares with respect to which the exercise occurs, but such
Participant shall be unconditionally obligated to tender
back to the Company the proper number of Shares on the Tax
Date.
8. PRIVILEGES OF STOCK OWNERSHIP.
8.1 VOTING AND DIVIDENDS. No Participant shall have any of the
rights of a shareholder with respect to any Shares until the Shares are
issued to the Participant. After Shares are issued to the Participant, the
Participant shall be a shareholder and have all the rights of a shareholder
with respect to such Shares, including the right to vote and receive all
dividends or other distributions made or paid with respect to such Shares;
PROVIDED, that if such Shares are subject to resale restrictions under
applicable federal, state or foreign securities laws ("RESTRICTED STOCK"),
then any new, additional or different securities the Participant may become
entitled to receive with respect to such Shares by virtue of a stock
dividend, stock split or any other change in the corporate or capital
structure of the Company shall be subject to the same restrictions as the
Restricted Stock.
8.2 FINANCIAL STATEMENTS. The Company shall provide financial
statements to each Participant prior to such Participant's purchase of Shares
under the Plan, and to each Participant annually during the period such
Participant has Awards outstanding; PROVIDED, HOWEVER, the Company shall not
be required to provide such financial statements to Participants whose
services in connection with the Company assure them access to equivalent
information.
9. TRANSFERABILITY. Awards granted under the Plan, and any interest
therein, shall not be transferable or assignable by Participant, and may not
be made subject to execution, attachment or similar process, otherwise than
by will or by the laws of descent and distribution. During the lifetime of
the Participant an Award shall be exercisable only by the Participant, and
any elections with respect to an Award, may be made only by the Participant.
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10. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement
(a) a right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party.
11. CERTIFICATES. All certificates for Shares or other securities
delivered under the Plan shall be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations and other requirements of
the SEC or any stock exchange or automated quotation system upon which the
Shares may be listed.
12. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit
all certificates representing Shares with the Company or an agent designated
by the Company to hold in escrow until such restrictions have lapsed or
terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates. Any Participant who is
permitted to execute a promissory note as partial or full consideration for
the purchase of Shares under the Plan shall be required to pledge and deposit
with the Company all or part of the Shares so purchased as collateral to
secure the payment of Participant's obligation to the Company under the
promissory note; PROVIDED, HOWEVER, that the Committee may require or accept
other or additional forms of collateral to secure the payment of such
obligation and, in any event, the Company shall have full recourse against
the Participant under the promissory note notwithstanding any pledge of the
Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant shall be required to execute and deliver a written
pledge agreement in such form as the Committee shall from time to time
approve. The Shares purchased with the promissory note may be released from
the pledge on a prorata basis as the promissory note is paid.
13. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time
buy from a Participant an Award previously granted with payment in cash,
Shares (including Restricted Stock) or other consideration, based on such
terms and conditions as the Committee and the Participant shall agree.
14. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not
be effective unless such Award is in compliance with all applicable federal
and state securities laws, rules and regulations of any governmental body,
and the requirements of any stock exchange or automated quotation system upon
which the Shares may then be listed, as they are in effect on the date of
grant of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in the Plan, the Company shall have no
obligation to issue or deliver certificates for Shares under the Plan prior
to (a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable, and/or (b) completion of any
registration or other qualification of such shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company shall be under no obligation to register
the Shares with the SEC or to effect compliance with the registration,
qualification or listing requirements of any state
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securities laws, stock exchange or automated quotation system, and the Company
shall have no liability for any inability or failure to do so.
15. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted
under the Plan shall confer or be deemed to confer on any Participant any
right to continue in the employ of, or to continue any other relationship
with, the Company or any Parent, Subsidiary or Affiliate of the Company or
limit in any way the right of the Company or any Parent, Subsidiary or
Affiliate of the Company to terminate Participant's employment or other
relationship at any time, with or without cause.
16. CORPORATE TRANSACTIONS.
16.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the
event of (a) a merger or consolidation in which the Company is not the
surviving corporation (other than a merger or consolidation with a
wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the shareholders of the Company and the Awards granted under the Plan are
assumed or replaced by the successor corporation, which assumption shall be
binding on all Participants), (b) a dissolution or liquidation of the
Company, (c) the sale of substantially all of the assets of the Company, or
(d) any other transaction which qualifies as a "corporate transaction" under
Section 424(a) of the Code wherein the shareholders of the Company give up
all of their equity interest in the Company (EXCEPT for the acquisition, sale
or transfer of all or substantially all of the outstanding shares of the
Company), any or all outstanding Awards may be assumed or replaced by the
successor corporation (if any), which assumption or replacement shall be
binding on all Participants. In the alternative, the successor corporation
may substitute equivalent Awards or provide substantially similar
consideration to Participants as was provided to shareholders (after taking
into account the existing provisions of the Awards).
In the event such successor corporation (if any) refuses to assume
or substitute Options, as provided above, pursuant to a transaction described
in this Subsection 16.1, such Options shall expire on such transaction at
such time and on such conditions as the Board shall determine.
16.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 16, in
the event of the occurrence of any transaction described in Section 16.1, any
outstanding Awards shall be treated as provided in the applicable agreement
or plan of merger, consolidation, dissolution, liquidation, sale of assets or
other "corporate transaction."
16.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time
to time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (a) granting an Award under the Plan in substitution of
such other company's award, or (b) assuming such award as if it had been
granted under the Plan if the terms of such assumed award could be applied to
an Award granted under the Plan. Such substitution or assumption shall be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under the Plan if the other company had
applied the rules of the Plan to such grant. In the event the
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Company assumes an award granted by another company, the terms and conditions
of such award shall remain unchanged (EXCEPT that the exercise price and the
number and nature of Shares issuable upon exercise of any such option will be
adjusted appropriately pursuant to Section 424(a) of the Code). In the event
the Company elects to grant a new Option rather than assuming an existing
option, such new Option may be granted with a similarly adjusted Exercise
Price.
17. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become effective
on the date that it is adopted by the Board (the "EFFECTIVE DATE"). The Plan
shall be approved by the shareholders of the Company (excluding Shares issued
pursuant to this Plan), consistent with applicable laws, within twelve months
before or after the Effective Date. Upon the Effective Date, the Board may
grant Awards pursuant to the Plan; provided, however, that: (a) no Option may
be exercised prior to initial shareholder approval of the Plan; (b) no Option
granted pursuant to an increase in the number of Shares approved by the Board
shall be exercised prior to the time such increase has been approved by the
shareholders of the Company; and (c) in the event that shareholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be cancelled, any Shares issued pursuant to any Award shall
be cancelled and any purchase of Shares hereunder shall be rescinded. After
the Company becomes subject to Section 16(b) of the Exchange Act, the Company
will comply with the requirements of Rule 16b-3 (or its successor), as
amended, with respect to shareholder approval.
18. TERM OF PLAN. The Plan will terminate ten (10) years from the
Effective Date or, if earlier, the date of shareholder approval.
19. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend the Plan in any respect, including without limitation
amendment of any form of Award Agreement or instrument to be executed
pursuant to the Plan; PROVIDED, HOWEVER, that the Board shall not, without
the approval of the shareholders of the Company, amend the Plan in any manner
that requires such shareholder approval pursuant to the Code or the
regulations promulgated thereunder as such provisions apply to ISO plans or
pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended,
thereunder.
20. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by
the Board, the submission of the Plan to the shareholders of the Company for
approval, nor any provision of the Plan shall be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under the Plan, and such
arrangements may be either generally applicable or applicable only in
specific cases.
21. GOVERNING LAW. The Plan and all agreements, documents and
instruments entered into pursuant to the Plan shall be governed by, and
construed in accordance with, the laws of the State of California excluding
that body of law pertaining to conflict of laws.
22. DEFINITIONS. As used in the Plan, the following terms shall have
the following meanings:
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"AFFILIATE" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the
terms "controlled by" and "under common control with") means the possession,
direct or indirect, of the power to cause the direction of the management and
policies of the corporation, whether through the ownership of voting
securities, by contract or otherwise.
"AWARD" means any Option granted under the Plan.
"AWARD AGREEMENT" means, with respect to each Award, the signed
Stock Option Agreement between the Company and the Participant setting forth
the terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company (excluding any
Participant).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board in
accordance with Section 4.1 to administer the Plan, or if no committee is
appointed, the Board.
"COMPANY" means Hybrid Networks, Inc., a corporation organized
under the laws of the State of Delaware, or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"DISINTERESTED PERSON" means a director who has not, during the
period that person is a member of the Committee and for one year prior to
service as a member of the Committee, been granted or awarded equity
securities pursuant to the Plan or any other plan of the Company or any
Parent, Subsidiary or Affiliate of the Company, except in accordance with the
requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation
thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act,
as such rule is amended from time to time and as interpreted by the SEC.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of
the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the NASDAQ National
Market System, its last reported sale price on the NASDAQ
National
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Market System or, if no such reported sale takes place on
such date, the average of the closing bid and asked prices;
(b) if such Common Stock is publicly traded and is then listed on
a national securities exchange, the last reported sale price
or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices on the principal
national securities exchange on which the Common Stock is
listed or admitted to trading;
(c) if such Common Stock is publicly traded but is not quoted on
the NASDAQ National Market System nor listed or admitted to
trading on a national securities exchange, the average of the
closing bid and asked prices on such date, as reported by The
Wall Street Journal, for the over-the-counter market; or
(d) if none of the foregoing is applicable, by the Board of
Directors of the Company in good faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
"OPTION" means an Award of an option to purchase Shares pursuant to
Section 5.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if at the time of the
granting of an Award under the Plan, each of such corporations other than the
Company owns stock possessing 50% or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under the Plan.
"PLAN" means this Hybrid Networks, Inc. Executive Officer Incentive
Plan, as amended from time to time.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock $0.001 par
value, as adjusted pursuant to Section 2, and any successor security.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Award, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
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"TERMINATION" or "TERMINATED" means, for purposes of the Plan with
respect to a Participant, that the Participant has ceased to provide services
as an employee, director, consultant, independent contractor or adviser, to
the Company or a Parent, Subsidiary or Affiliate of the Company, except in
the case of sick leave, military leave, or any other leave of absence
approved by the Committee, PROVIDED, that such leave is for a period of not
more than ninety (90) days, or reinstatement upon the expiration of such
leave is guaranteed by contract or statute. The Committee shall have sole
discretion to determine whether a Participant has ceased to provide services
and the effective date on which the Participant ceased to provide services
(the "TERMINATION DATE").
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HYBRID NETWORKS, INC.
1997 EQUITY INCENTIVE PLAN
As Adopted September 16, 1997
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 23.
2. SHARES SUBJECT TO THE PLAN.
2.1 NUMBER OF SHARES AVAILABLE. Subject to Sections 2.2 and 18,
the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 1,750,000 Shares. Subject to Sections 2.2 and
18, Shares that: (a) are subject to issuance upon exercise of an Option but
cease to be subject to such Option for any reason other than exercise of such
Option; (b) are subject to an Award granted hereunder but are forfeited or
are repurchased by the Company at the original issue price; or (c) are
subject to an Award that otherwise terminates without Shares being issued,
will again be available for grant and issuance in connection with future
Awards under this Plan. Any authorized shares not issued or subject to
outstanding grants under the Company's 1992 Stock Issuance Plan, the
Executive Officer Incentive Plan, the 1993 Equity Incentive Plan and the 1996
Equity Incentive Plan (the "PRIOR PLANS") on the Effective Date (as defined
below) and any shares that are issuable upon exercise of options granted
pursuant to the Prior Plans that expire or become unexercisable for any
reason without having been exercised in full, will no longer be available for
grant and issuance under the Prior Plans, but will be available for grant and
issuance under this Plan. In addition, any shares issued under the Prior
Plans which are repurchased or forfeited will be available for grant and
issuance under this Plan. On the first business day of each fiscal year of
the Company during the term of the Plan, the aggregate number of Shares
reserved and available for grant and issuance pursuant to this Plan will be
increased automatically by a number of Shares equal to five percent (5%) of
the total outstanding shares of the Company, unless the Board determines
prior to the commencement of any fiscal year that such increase shall not
occur for such fiscal year. At all times the Company shall reserve and keep
available a sufficient number of Shares as shall be required to satisfy the
requirements of all outstanding Options granted under this Plan and all other
outstanding but unvested Awards granted under this Plan. The sum of
Restricted Stock Awards and Stock Bonus Awards issued under this Plan shall
not exceed 300,000 Shares (adjusted in proportion to any adjustment under
Section 2.2 below) over the term of the Plan, and the total number of Shares
issued under the Plan upon exercise of ISOs will in no event exceed 2,750,000
Shares (adjusted in proportion to any adjustment under Section 2.2 below)
over the term of the Plan.
2.2 ADJUSTMENT OF SHARES. In the event that the number of
outstanding shares is changed by a stock dividend, recapitalization, stock
split, reverse stock split, subdivision, combination, reclassification or
similar change in the capital structure of the Company without consideration,
then (a) the number of Shares reserved for issuance under this Plan, (b) the
Exercise Prices of and number of Shares subject to outstanding Options, and (c)
the number of Shares subject to other outstanding Awards will be proportionately
adjusted, subject to any required action by the Board or the stockholders of the
Company and compliance with applicable securities laws; PROVIDED, HOWEVER, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company; PROVIDED
such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
<PAGE>
transaction. No person will be eligible to receive more than 700,000 Shares in
any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company), who are eligible to receive
up to a maximum of 1,000,000 Shares in the calendar year in which they commence
their employment. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
4.1 COMMITTEE AUTHORITY. This Plan will be administered by the
Committee or by the Board acting as the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan.
Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any other
agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to this
Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination with,
in tandem with, in replacement of, or as alternatives to, other Awards
under this Plan or any other incentive or compensation plan of the
Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any inconsistency
in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 COMMITTEE DISCRETION. Any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the authority
to grant an Award under this Plan to Participants who are not Insiders of the
Company.
5. OPTIONS. The Committee may grant Options to eligible persons and will
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
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5.1 FORM OF OPTION GRANT. Each Option granted under this Plan will
be evidenced by an Award Agreement which will expressly identify the Option as
an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 DATE OF GRANT. The date of grant of an Option will be the date
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 EXERCISE PERIOD. Options may be exercisable within the times or
upon the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option; PROVIDED, HOWEVER, that no Option will be
exercisable after the expiration of ten (10) years from the date the Option is
granted; and PROVIDED FURTHER that no ISO granted to a person who directly or by
attribution owns more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Parent or Subsidiary of the
Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of
five (5) years from the date the ISO is granted. The Committee also may provide
for Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4 EXERCISE PRICE. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may be not less than
85% of the Fair Market Value of the Shares on the date of grant; provided that:
(i) the Exercise Price of an ISO will be not less than 100% of the Fair Market
Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO
granted to a Ten Percent Stockholder will not be less than 110% of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased may be made in accordance with Section 8 of this Plan.
5.5 METHOD OF EXERCISE. Options may be exercised only by delivery to
the Company of a written stock option exercise agreement (the
"EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6 TERMINATION. Notwithstanding the exercise periods set forth in
the Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) If the Participant is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3) months
after the Termination Date (or such shorter or longer time period not
exceeding five (5) years as may be determined by the Committee, with
any exercise beyond three (3) months after the Termination Date deemed
to be an NQSO), but in any event, no later than the expiration date of
the Options.
(b) If the Participant is Terminated because of Participant's death or
Disability (or the Participant dies within three (3) months after a
Termination other than because of Participant's death or disability),
then Participant's Options may be exercised only to the extent that
such Options would have been exercisable by Participant on the
Termination Date and must be exercised by Participant (or
Participant's legal representative or authorized assignee) no later
than twelve (12) months after the Termination Date (or such shorter or
longer time
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period not exceeding five (5) years as may be determined by the
Committee, with any such exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any reason other than the
Participant's death or Disability, or (b) twelve (12) months after the
Termination Date when the Termination is for Participant's death or
Disability, deemed to be an NQSO), but in any event no later than the
expiration date of the Options.
(c) Notwithstanding the provisions in paragraph 5.6(a) above, if a
Participant is terminated for Cause, neither the Participant, the
Participant's estate nor such other person who may then hold the
Option shall be entitled to exercise any Option with respect to any
Shares whatsoever, after termination of service, whether or not after
termination of service the Participant may receive payment from the
Company or Subsidiary for vacation pay, for services rendered prior to
termination, for services rendered for the day on which termination
occurs, for salary in lieu of notice, or for any other benefits. In
making such determination, the Board shall give the Participant an
opportunity to present to the Board evidence on his behalf. For the
purpose of this paragraph, termination of service shall be deemed to
occur on the date when the Company dispatches notice or advice to the
Participant that his service is terminated.
5.7 LIMITATIONS ON EXERCISE. The Committee may specify a reasonable
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 LIMITATIONS ON ISO. The aggregate Fair Market Value (determined
as of the date of grant) of Shares with respect to which ISO are exercisable for
the first time by a Participant during any calendar year (under this Plan or
under any other incentive stock option plan of the Company, Parent or Subsidiary
of the Company) will not exceed $100,000. If the Fair Market Value of Shares on
the date of grant with respect to which ISO are exercisable for the first time
by a Participant during any calendar year exceeds $100,000, then the Options for
the first $100,000 worth of Shares to become exercisable in such calendar year
will be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
5.9 MODIFICATION, EXTENSION OR RENEWAL. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
PROVIDED, HOWEVER, that the Exercise Price may not be reduced below the minimum
Exercise Price that would be permitted under Section 5.4 of this Plan for
Options granted on the date the action is taken to reduce the Exercise Price.
5.10 NO DISQUALIFICATION. Notwithstanding any other provision in this
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the price to be paid (the "PURCHASE PRICE"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
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6.1 FORM OF RESTRICTED STOCK AWARD. All purchases under a Restricted
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of this
Plan. The offer of Restricted Stock will be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along with
full payment for the Shares to the Company within thirty (30) days, then the
offer will terminate, unless otherwise determined by the Committee.
6.2 PURCHASE PRICE. The Purchase Price of Shares sold pursuant to a
Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten Percent
Stockholder, in which case the Purchase Price will be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8
of this Plan.
6.3 TERMS OF RESTRICTED STOCK AWARDS. Restricted Stock Awards shall
be subject to such restrictions as the Committee may impose. These restrictions
may be based upon completion of a specified number of years of service with the
Company or upon completion of the performance goals as set out in advance in the
Participant's individual Restricted Stock Purchase Agreement. Restricted Stock
Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Restricted Stock Award, the Committee
shall: (a) determine the nature, length and starting date of any Performance
Period for the Restricted Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine the
number of Shares that may be awarded to the Participant. Prior to the payment
of any Restricted Stock Award, the Committee shall determine the extent to which
such Restricted Stock Award has been earned. Performance Periods may overlap
and Participants may participate simultaneously with respect to Restricted Stock
Awards that are subject to different Performance Periods and having different
performance goals and other criteria.
6.4 TERMINATION DURING PERFORMANCE PERIOD. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee will determine otherwise.
7. STOCK BONUSES.
7.1 AWARDS OF STOCK BONUSES. A Stock Bonus is an award of Shares
(which may consist of Restricted Stock) for services rendered to the Company or
any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS
AGREEMENT") that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses may
vary from Participant to Participant and between groups of Participants, and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Committee may
determine.
7.2 TERMS OF STOCK BONUSES. The Committee will determine the number
of Shares to be awarded to the Participant. If the Stock Bonus is being earned
upon the satisfaction of performance goals pursuant to a Performance Stock Bonus
Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant.
Prior to the payment of any Stock Bonus, the Committee shall determine the
extent to which such Stock
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Bonuses have been earned. Performance Periods may overlap and Participants may
participate simultaneously with respect to Stock Bonuses that are subject to
different Performance Periods and different performance goals and other
criteria. The number of Shares may be fixed or may vary in accordance with such
performance goals and criteria as may be determined by the Committee. The
Committee may adjust the performance goals applicable to the Stock Bonuses to
take into account changes in law and accounting or tax rules and to make such
adjustments as the Committee deems necessary or appropriate to reflect the
impact of extraordinary or unusual items, events or circumstances to avoid
windfalls or hardships.
7.3 FORM OF PAYMENT. The earned portion of a Stock Bonus may be paid
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash or
whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8. PAYMENT FOR SHARE PURCHASES.
8.1 PAYMENT. Payment for Shares purchased pursuant to this Plan may
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for within
the meaning of SEC Rule 144 (and, if such shares were purchased from
the Company by use of a promissory note, such note has been fully paid
with respect to such shares); or (2) were obtained by Participant in
the public market;
(c) by tender of a full recourse promissory note having such terms as may
be approved by the Committee and bearing interest at a rate sufficient
to avoid imputation of income under Sections 483 and 1274 of the Code;
PROVIDED, HOWEVER, that Participants who are not employees or
directors of the Company will not be entitled to purchase Shares with
a promissory note unless the note is adequately secured by collateral
other than the Shares;
(d) by waiver of compensation due or accrued to the Participant for
services rendered;
(e) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and a
broker-dealer that is a member of the National Association of
Securities Dealers (an "NASD DEALER") whereby the Participant
irrevocably elects to exercise the Option and to sell a portion
of the Shares so purchased to pay for the Exercise Price, and
whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD
Dealer whereby the Participant irrevocably elects to exercise the
Option and to pledge the Shares so purchased to the NASD Dealer
in a margin account as security for a loan from the NASD Dealer
in the amount of the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; or
(f) by any combination of the foregoing.
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8.2 LOAN GUARANTEES. The Committee may help the Participant pay for
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 WITHHOLDING GENERALLY. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding tax
requirements.
9.2 STOCK WITHHOLDING. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 VOTING AND DIVIDENDS. No Participant will have any of the rights
of a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a stockholder and have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; PROVIDED, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; PROVIDED, FURTHER, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 12.
10.2 FINANCIAL STATEMENTS. The Company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding; PROVIDED, HOWEVER, the Company will not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution or as determined by the Committee and
set forth in the Award Agreement with respect to Awards that are not ISOs.
During the lifetime of the Participant an Award will be exercisable only by the
Participant, and any elections with respect to an Award may be made only by the
Participant unless otherwise determined by the Committee and set forth in the
Award Agreement with respect to Awards that are not ISOs.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participant's Termination at any time within ninety (90) days
after the later of Participant's Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or
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cancellation of purchase money indebtedness, at the Participant's Exercise Price
or Purchase Price, as the case may be.
13. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; PROVIDED, HOWEVER, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, Shares (including
Restricted Stock) or other consideration, based on such terms and conditions as
the Committee and the Participant may agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure to
do so.
17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
cause.
18. CORPORATE TRANSACTIONS.
18.1 ASSUMPTION OR REPLACEMENT OF AWARDS BY SUCCESSOR. In the event
of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving
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corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders of
the Company or their relative stock holdings and the Awards granted under this
Plan are assumed, converted or replaced by the successor corporation, which
assumption will be binding on all Participants), (c) a merger in which the
Company is the surviving corporation but after which the stockholders of the
Company immediately prior to such merger (other than any stockholder that
merges, or which owns or controls another corporation that merges, with the
Company in such merger) cease to own their shares or other equity interest in
the Company, (d) the sale of substantially all of the assets of the Company, or
(e) the acquisition, sale, or transfer of more than 50% of the outstanding
shares of the Company by tender offer or similar transaction, any or all
outstanding Awards may be assumed, converted or replaced by the successor
corporation (if any), which assumption, conversion or replacement will be
binding on all Participants. In the alternative, the successor corporation may
substitute equivalent Awards or provide substantially similar consideration to
Participants as was provided to stockholders (after taking into account the
existing provisions of the Awards). The successor corporation may also issue,
in place of outstanding Shares of the Company held by the Participant,
substantially similar shares or other property subject to repurchase
restrictions no less favorable to the Participant. In the event such successor
corporation (if any) refuses to assume or substitute Awards, as provided above,
pursuant to a transaction described in this Subsection 18.1, such Awards will
expire on such transaction at such time and on such conditions as the Committee
will determine; provided, however, that the Committee may, in its sole
discretion, provide that the vesting of any or all Awards granted pursuant to
this Plan will accelerate. If the Committee exercises such discretion with
respect to Options, such Options will become exercisable in full prior to the
consummation of such event at such time and on such conditions as the Committee
determines, and if such Options are not exercised prior to the consummation of
the corporate transaction, they shall terminate at such time as determined by
the Committee.
18.2 OTHER TREATMENT OF AWARDS. Subject to any greater rights granted
to Participants under the foregoing provisions of this Section 18, in the event
of the occurrence of any transaction described in Section 18.1, any outstanding
Awards will be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets.
18.3 ASSUMPTION OF AWARDS BY THE COMPANY. The Company, from time to
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either; (a) granting an Award under this Plan in substitution of
such other company's award; or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(EXCEPT that the exercise price and the number and nature of Shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on
the date on which the registration statement filed by the Company with the SEC
under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "EFFECTIVE DATE").
This Plan shall be approved by the stockholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon
the Effective Date, the Committee may grant Awards pursuant to this Plan;
PROVIDED, HOWEVER, that: (a) no Option may be exercised prior to initial
stockholder approval of this Plan; (b) no Option granted pursuant to an increase
in the number of Shares subject to this Plan approved by the Board will be
exercised prior to the time such increase has been approved by the stockholders
of the Company; and (c) in the event that stockholder approval of such increase
is not obtained within the time period provided herein, all Awards granted
pursuant to such increase will be canceled, any Shares issued pursuant to any
Award granted pursuant to such increase will be canceled, and any purchase of
Shares pursuant to such increase will be rescinded.
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20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
or amend this Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to this Plan;
PROVIDED, HOWEVER, that the Board will not, without the approval of the
stockholders of the Company, amend this Plan in any manner that requires such
stockholder approval.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23. DEFINITIONS. As used in this Plan, the following terms will have the
following meanings:
"AWARD" means any award under this Plan, including any Option,
Restricted Stock or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means the commission of an act of theft, embezzlement, fraud,
dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Compensation Committee of the Board.
"COMPANY" means Hybrid Networks, Inc. or any successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Code, as
determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market, its
closing price on the Nasdaq National Market on the date of
determination as reported in THE WALL STREET JOURNAL;
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(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on which
the Common Stock is listed or admitted to trading as reported in THE
WALL STREET JOURNAL;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices
on the date of determination as reported in THE WALL STREET JOURNAL;
(d) in the case of an Award made on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in the
initial public offering of the Company's Common Stock pursuant to a
registration statement filed with the SEC under the Securities Act;
or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"INSIDER" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to
Section 5.
"PARENT" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations other
than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this Plan.
"PERFORMANCE FACTORS" means the factors selected by the Committee from
among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or earnings
before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total shareholder return and/or total shareholder return growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
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(k) Individual confidential business objectives.
"PERFORMANCE PERIOD" means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
"PLAN" means this Hybrid Networks, Inc. 1997 Equity Incentive Plan, as
amended from time to time.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section
6.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any
successor security.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case of
(i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not more
than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of any employee on an approved
leave of absence, the Committee may make such provisions respecting suspension
of vesting of the Award while on leave from the employ of the Company or a
Subsidiary as it may deem appropriate, except that in no event may an Option be
exercised after the expiration of the term set forth in the Option agreement.
The Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award
Agreement.
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<PAGE>
HYBRID NETWORKS, INC.
1997 DIRECTORS STOCK OPTION PLAN
As Adopted September 16, 1997
1. PURPOSE. This 1997 Directors Stock Option Plan (this "PLAN") is
established to provide equity incentives for certain nonemployee members of the
Board of Directors of Hybrid Networks, Inc.. (the "COMPANY"), who are described
in Section 6.1 below, by granting such persons options to purchase shares of
stock of the Company.
2. ADOPTION AND STOCKHOLDER APPROVAL. After this Plan is adopted by the
Board of Directors of the Company (the "BOARD"), this Plan will become effective
on the time and date (the "EFFECTIVE DATE") on which the registration statement
filed by the Company with the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), to register the
initial public offering of the Company's Common Stock is declared effective by
the SEC. This Plan shall be approved by the stockholders of the Company,
consistent with applicable laws, within twelve (12) months after the date this
Plan is adopted by the Board.
3. TYPES OF OPTIONS AND SHARES. Options granted under this Plan shall be
non-qualified stock options ("NQSOS"). The shares of stock that may be
purchased upon exercise of Options granted under this Plan (the "SHARES") are
shares of the Common Stock of the Company.
4. NUMBER OF SHARES. The maximum number of Shares that may be issued
pursuant to Options granted under this Plan (the "MAXIMUM NUMBER") is 100,000
Shares, subject to adjustment as provided in this Plan. If any Option is
terminated for any reason without being exercised in whole or in part, the
Shares thereby released from such Option shall be available for purchase under
other Options subsequently granted under this Plan. At all times during the
term of this Plan, the Company shall reserve and keep available such number of
Shares as shall be required to satisfy the requirements of outstanding Options
granted under this Plan; PROVIDED, HOWEVER that if the aggregate number of
Shares subject to outstanding Options granted under this Plan plus the aggregate
number of Shares previously issued by the Company pursuant to the exercise of
Options granted under this Plan equals or exceeds the Maximum Number, then
notwithstanding anything herein to the contrary, no further Options may be
granted under this Plan until the Maximum Number is increased or the aggregate
number of Shares subject to outstanding Options granted under this Plan plus the
aggregate number of Shares previously issued by the Company pursuant to the
exercise of Options granted under this Plan is less than the Maximum Number.
5. ADMINISTRATION. This Plan shall be administered by the Board or by a
committee of not less than two members of the Board appointed to administer this
Plan (the "COMMITTEE"). As used in this Plan, references to the Committee shall
mean either such Committee or the Board if no Committee has been established.
The interpretation by the Committee of any of the provisions of this Plan or any
Option granted under this Plan shall be final and binding upon the Company and
all persons having an interest in any Option or any Shares purchased pursuant to
an Option.
6. ELIGIBILITY AND AWARD FORMULA.
6.1 ELIGIBILITY. Options shall be granted only to directors of the
Company who are not employees of the Company or any Parent, Subsidiary or
Affiliate of the Company, as those terms are defined in Section 18 below (each
such person referred to as an "OPTIONEE").
<PAGE>
6.2 INITIAL GRANT. Each Optionee who on or after the Effective Date
becomes a member of the Board will automatically be granted an Option for 15,000
Shares (an "INITIAL GRANT") on the date such Optionee becomes a member of the
Board.
6.3 SUCCEEDING GRANTS. At each Annual Meeting of the Company
following the Effective Date, each Optionee will automatically be granted an
Option for 5,000 Shares (a "SUCCEEDING GRANT") provided the Optionee is a member
of the Board on the date of such Annual Meeting and has served continuously as a
member of the Board since the date of such Optionee's Initial Grant, or if such
Optionee was ineligible to receive an Initial Grant, since the Effective Date.
7. TERMS AND CONDITIONS OF OPTIONS. Subject to the following and to
Section 6 above:
7.1 FORM OF OPTION GRANT. Each Option granted under this Plan shall
be evidenced by a written Stock Option Grant ("GRANT") in such form (which need
not be the same for each Optionee) as the Committee shall from time to time
approve, which Grant shall comply with and be subject to the terms and
conditions of this Plan.
7.2 VESTING. The date an Optionee receives an Initial Grant or a
Succeeding Grant is referred to in this Plan as the "START DATE" for such
Option.
(a) INITIAL GRANTS. Each Initial Grant will vest as to
twenty-five percent (25%) of the Shares on each anniversary of the Start Date
for such Initial Grant, so long as the Optionee continuously remains a director
or consultant of the Company.
(b) SUCCEEDING GRANTS. Each Succeeding Grant will vest as to
twenty-five percent (25%) of the Shares on each anniversary of the Start Date
for such Succeeding Grant, so long as the Optionee continuously remains a
director or consultant of the Company.
7.3 EXERCISE PRICE. The exercise price of an Option shall be the
Fair Market Value (as defined in Section 18.4) of the Shares, at the time that
the Option is granted.
7.4 TERMINATION OF OPTION. Except as provided below in this Section,
each Option shall expire ten (10) years after its Start Date (the "EXPIRATION
DATE"). The Option shall cease to vest when the Optionee ceases to be a member
of the Board or a consultant of the Company provided, however that if the
Optionee ceases to be a member of the Board or consultant of the Company due to
death or total and permanent disability, the vesting of each Option shall
accelerate with respect to the number of shares that would have been vested on
the anniversary of the date of grant next following the Optionee's termination
date. The date on which the Optionee ceases to be a member of the Board or a
consultant of the Company shall be referred to as the "TERMINATION DATE". An
Option may be exercised after the Termination Date only as set forth below:
(a) TERMINATION GENERALLY. If the Optionee ceases to be a
member of the Board or consultant of the Company for any reason except death of
the Optionee or disability of the Optionee (whether temporary or permanent,
partial or total, as determined by the Committee), then each Option then held by
such Optionee, to the extent (and only to the extent) that it would have been
exercisable by the Optionee on the Termination Date, may be exercised by the
Optionee no later than six (6) months after the Termination Date, but in no
event later than the Expiration Date.
(b) DEATH OR DISABILITY. If the Optionee ceases to be a member
of the Board or consultant of the Company because of the death of the Optionee
or the disability of the Optionee (whether temporary or permanent, partial or
total, as determined by the Committee), then each Option then held by such
Optionee to the extent (and only to the extent) that it would have been
exercisable by the Optionee on the Termination Date, may be exercised by the
Optionee (or the Optionee's legal representative) no later than twelve (12)
months after the Termination Date, but in no event later than the Expiration
Date.
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<PAGE>
8. EXERCISE OF OPTIONS.
8.1 EXERCISE PERIOD. Subject to the provisions of Section 8.5 below,
Options shall be exercisable immediately (subject to repurchase pursuant to
Section 10 of the Plan).
8.2 NOTICE. Options may be exercised only by delivery to the Company
of an exercise agreement in a form approved by the Committee stating the number
of Shares being purchased, the restrictions imposed on the Shares and such
representations and agreements regarding the Optionee's investment intent and
access to information as may be required by the Company to comply with
applicable securities laws, together with payment in full of the exercise price
for the number of Shares being purchased.
8.3 PAYMENT. Payment for the Shares purchased upon exercise of an
Option may be made (a) in cash or by check; (b) by surrender of shares of Common
Stock of the Company that have been owned by the Optionee for more than six (6)
months (and which have been paid for within the meaning of SEC Rule 144 and, if
such shares were purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such shares) or were obtained by the
Optionee in the open public market, having a Fair Market Value equal to the
exercise price of the Option; (c) by waiver of compensation due or accrued to
the Optionee for services rendered; (d) provided that a public market for the
Company's stock exists, through a "same day sale" commitment from the Optionee
and a broker-dealer that is a member of the National Association of Securities
Dealers (an "NASD DEALER") whereby the Optionee irrevocably elects to exercise
the Option and to sell a portion of the Shares so purchased to pay for the
exercise price and whereby the NASD Dealer irrevocably commits upon receipt of
such Shares to forward the exercise price directly to the Company; (e) provided
that a public market for the Company's stock exists, through a "margin"
commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably
elects to exercise the Option and to pledge the Shares so purchased to the NASD
Dealer in a margin account as security for a loan from the NASD Dealer in the
amount of the exercise price, and whereby the NASD Dealer irrevocably commits
upon receipt of such Shares to forward the exercise price directly to the
Company; or (f) by any combination of the foregoing.
8.4 WITHHOLDING TAXES. Prior to issuance of the Shares upon exercise
of an Option, the Optionee shall pay or make adequate provision for any federal
or state withholding obligations of the Company, if applicable.
8.5 LIMITATIONS ON EXERCISE. Notwithstanding the exercise periods
set forth in the Grant, exercise of an Option shall always be subject to the
following limitations:
(a) An Option shall not be exercisable unless such exercise is
in compliance with the Securities Act and all applicable state securities laws,
as they are in effect on the date of exercise.
(b) The Committee may specify a reasonable minimum number of
Shares that may be purchased upon any exercise of an Option, provided that such
minimum number will not prevent the Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or by the Optionee's
guardian or legal representative, unless otherwise determined by the Committee.
No Option may be sold, pledged, assigned, hypothecated, transferred or disposed
of in any manner other than by will or by the laws of descent and distribution,
unless otherwise determined by the Committee.
10. RESTRICTIONS ON SHARES. The Company shall reserve to itself and/or
its assignee(s) in the Grant a right to repurchase all Shares held by an
Optionee which have not vested in accordance with the vesting schedule set forth
in Section 7.2 if the Optionee ceases to be a member of the Board or a
consultant of the Company. The Company shall exercise such repurchase right
within ninety (90) days after the Optionee's Termination Date for cash at the
Optionee's original exercise price.
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<PAGE>
11. PRIVILEGES OF STOCK OWNERSHIP. No Optionee shall have any of the
rights of a stockholder with respect to any Shares subject to an Option until
the Option has been validly exercised. No adjustment shall be made for
dividends or distributions or other rights for which the record date is prior to
the date of exercise, except as provided in this Plan. The Company shall
provide to each Optionee a copy of the annual financial statements of the
Company at such time after the close of each fiscal year of the Company as they
are released by the Company to its stockholders.
12. ADJUSTMENT OF OPTION SHARES. In the event that the number of
outstanding shares of Common Stock of the Company is changed by a stock
dividend, stock split, reverse stock split, combination, reclassification or
similar change in the capital structure of the Company without consideration,
the number of Shares available under this Plan and the number of Shares subject
to outstanding Options and the exercise price per share of such outstanding
Options shall be proportionately adjusted, subject to any required action by the
Board or stockholders of the Company and compliance with applicable securities
laws; PROVIDED, HOWEVER, that no fractional shares shall be issued upon exercise
of any Option and any resulting fractions of a Share shall be rounded up to the
nearest whole Share.
13. NO OBLIGATION TO CONTINUE AS DIRECTOR. Nothing in this Plan or any
Option granted under this Plan shall confer on any Optionee any right to
continue as a director of the Company.
14. COMPLIANCE WITH LAWS. The grant of Options and the issuance of Shares
upon exercise of any Options shall be subject to and conditioned upon compliance
with all applicable requirements of law, including without limitation compliance
with the Securities Act, compliance with all other applicable state securities
laws and compliance with the requirements of any stock exchange or national
market system on which the Shares may be listed. The Company shall be under no
obligation to register the Shares with the SEC or to effect compliance with the
registration or qualification requirement of any state securities laws, stock
exchange or national market system.
15. ACCELERATION OF OPTIONS ON CERTAIN CORPORATE TRANSACTIONS. In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (OTHER THAN
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the stockholders of the Company or their relative stock
holdings and the Options granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption, conversion or
replacement will be binding on all Optionees), (c) a merger in which the Company
is the surviving corporation but after which the stockholders of the Company
(other than any stockholder which merges (or which owns or controls another
corporation which merges) with the Company in such merger) cease to own their
shares or other equity interests in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, the vesting of all options granted pursuant to this Plan
will accelerate and the options will become exercisable in full prior to the
consummation of such event at such times and on such conditions as the Committee
determines, and must be exercised, if at all, within six months of the
consummation of such event. Any options not exercised within such six-month
period shall expire.
16. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate
or amend this Plan or any outstanding option, provided that the Board may not
terminate or amend the terms of any outstanding option without the consent of
the Optionee. In any case, no amendment of this Plan may adversely affect any
then outstanding Options or any unexercised portions thereof without the written
consent of the Optionee.
17. TERM OF PLAN. Options may be granted pursuant to this Plan from time
to time within a period of ten (10) years from the Effective Date.
18. CERTAIN DEFINITIONS. As used in this Plan, the following terms shall
have the following meanings:
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<PAGE>
18.1 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
18.2 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
18.3 "AFFILIATE" means any corporation that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
18.4 "FAIR MARKET VALUE" means, as of any date, the value of a share
of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National Market, its
closing price on the Nasdaq National Market on the date of
determination as reported in THE WALL STREET JOURNAL;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, its closing price on the date of
determination on the principal national securities exchange on which
the Common Stock is listed or admitted to trading as reported in THE
WALL STREET JOURNAL;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices
on the date of determination as reported in THE WALL STREET JOURNAL;
(d) in the case of an Option granted on the Effective Date, the price per
share at which shares of the Company's Common Stock are initially
offered for sale to the public by the Company's underwriters in the
initial public offering of the Company's Common Stock pursuant to a
registration statement filed with the SEC under the Securities Act;
or
(e) if none of the foregoing is applicable, by the Committee in good
faith.
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<PAGE>
HYBRID NETWORKS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
As Adopted September, 1997
1. ESTABLISHMENT OF PLAN. Hybrid Networks, Inc. (the "COMPANY") proposes
to grant options for purchase of the Company's Common Stock to eligible
employees of the Company and its Participating Subsidiaries (as hereinafter
defined) pursuant to this Employee Stock Purchase Plan (this "PLAN"). For
purposes of this Plan, "PARENT CORPORATION" and "SUBSIDIARY" (collectively,
"PARTICIPATING SUBSIDIARIES") shall have the same meanings as "parent
corporation" and "subsidiary corporation" in Sections 424(e) and 424(f),
respectively, of the Internal Revenue Code of 1986, as amended (the "CODE").
"PARTICIPATING SUBSIDIARIES" are Parent Corporations or Subsidiaries that the
Board of Directors of the Company (the "BOARD") designates from time to time as
corporations that shall participate in this Plan. The Company intends this Plan
to qualify as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments to or replacements of such Section), and this Plan
shall be so construed. Any term not expressly defined in this Plan but defined
for purposes of Section 423 of the Code shall have the same definition herein.
A total of 225,000 shares of the Company's Common Stock is reserved for
issuance under this Plan. Such number shall be subject to adjustments effected
in accordance with Section 14 of this Plan.
2. PURPOSE. The purpose of this Plan is to provide eligible employees of
the Company and Participating Subsidiaries with a convenient means of acquiring
an equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Participating Subsidiaries, and to provide an incentive for continued
employment.
3. ADMINISTRATION. This Plan shall be administered by the Compensation
Committee of the Board (the "COMMITTEE"). Subject to the provisions of this
Plan and the limitations of Section 423 of the Code or any successor provision
in the Code, all questions of interpretation or application of this Plan shall
be determined by the Committee and its decisions shall be final and binding upon
all participants. Members of the Committee shall receive no compensation for
their services in connection with the administration of this Plan, other than
standard fees as established from time to time by the Board for services
rendered by Board members serving on Board committees. All expenses incurred in
connection with the administration of this Plan shall be paid by the Company.
4. ELIGIBILITY. Any employee of the Company or the Participating
Subsidiaries is eligible to participate in an Offering Period (as hereinafter
defined) under this Plan except the following:
(a) employees who are not employed by the Company or Participating
Subsidiaries ten (10) days before the beginning of such Offering Period, except
that employees who are employed on the effective date of the registration
statement filed by the Company with the Securities and Exchange Commission
("SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT")
registering the initial public offering of the Company's Common Stock shall be
eligible to participate in the first Offering Period under the Plan;
(b) employees who are customarily employed for twenty (20) hours or
less per week;
(c) employees who are customarily employed for five (5) months or
less in a calendar year;
(d) employees who, together with any other person whose stock would
be attributed to such employee pursuant to Section 424(d) of the Code, own stock
or hold options to purchase stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Company or
any of its Participating Subsidiaries or who, as a result of being granted an
option under this Plan with respect to such Offering Period, would own stock or
hold options to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or any of
its Participating Subsidiaries; and
<PAGE>
Hybrid Networks, Inc.
1997 Employee Stock Purchase Plan
(e) individuals who provide services to the Company or any of its
Participating Subsidiaries as independent contractors who are reclassified as
common law employees for any reason EXCEPT FOR federal income and employment tax
purposes.
5. OFFERING DATES. The offering periods of this Plan (each, an "OFFERING
PERIOD") shall be of twenty-four (24) months duration commencing on February 1
and August 1 of each year and ending on January 31 and July 31 of each year;
PROVIDED, HOWEVER, that notwithstanding the foregoing, the first such Offering
Period shall commence on the first business day on which price quotations for
the Company's Common Stock are available on the Nasdaq National Market (the
"FIRST OFFERING DATE") and shall end on July 31, 1999. Except for the first
Offering Period, each Offering Period shall consist of four (4) six-month
purchase periods (individually, a "PURCHASE PERIOD") during which payroll
deductions of the participants are accumulated under this Plan. The first
Offering Period shall consist of no fewer than three Purchase Periods, any of
which may be greater or less than six months as determined by the Committee.
The first business day of each Offering Period is referred to as the "OFFERING
DATE". The last business day of each Purchase Period is referred to as the
"PURCHASE DATE". The Committee shall have the power to change the duration of
Offering Periods or Purchase Periods with respect to offerings without
stockholder approval if such change is announced at least fifteen (15) days
prior to the scheduled beginning of the first Offering Period or Purchase Period
to be affected.
6. PARTICIPATION IN THIS PLAN. Eligible employees may become
participants in an Offering Period under this Plan on the first Offering Date
after satisfying the eligibility requirements by delivering a subscription
agreement to the Company's treasury department (the "TREASURY DEPARTMENT") not
later than five (5) days before such Offering Date unless a later time for
filing the subscription agreement authorizing payroll deductions is set by the
Committee for all eligible employees with respect to a given Offering Period.
An eligible employee who does not deliver a subscription agreement to the
Treasury Department by such date after becoming eligible to participate in such
Offering Period shall not participate in that Offering Period or any subsequent
Offering Period unless such employee enrolls in this Plan by filing a
subscription agreement with the Treasury Department not later than five (5) days
preceding a subsequent Offering Date. Once an employee becomes a participant in
an Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws or is deemed to withdraw from this Plan or
terminates further participation in the Offering Period as set forth in Section
11 below. Such participant is not required to file any additional subscription
agreement in order to continue participation in this Plan.
7. GRANT OF OPTION ON ENROLLMENT. Enrollment by an eligible employee in
this Plan with respect to an Offering Period will constitute the grant (as of
the Offering Date) by the Company to such employee of an option to purchase on
the Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing (a) the amount accumulated in such employee's payroll
deduction account during such Purchase Period by (b) the lower of
(i) eighty-five percent (85%) of the fair market value of a share of the
Company's Common Stock on the Offering Date (but in no event less than the par
value of a share of the Company's Common Stock), or (ii) eighty-five percent
(85%) of the fair market value of a share of the Company's Common Stock on the
Purchase Date (but in no event less than the par value of a share of the
Company's Common Stock), PROVIDED, HOWEVER, that the number of shares of the
Company's Common Stock subject to any option granted pursuant to this Plan
shall not exceed the lesser of (a) the maximum number of shares set by the
Committee pursuant to Section 10(c) below with respect to the applicable
Purchase Date, or (b) the maximum number of shares which may be purchased
pursuant to Section 10(b) below with respect to the applicable Purchase Date.
The fair market value of a share of the Company's Common Stock shall be
determined as provided in Section 8 hereof.
8. PURCHASE PRICE. The purchase price per share at which a share of
Common Stock will be sold in any Offering Period shall be eighty-five percent
(85%) of the lesser of:
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date.
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<PAGE>
Hybrid Networks, Inc.
1997 Employee Stock Purchase Plan
For purposes of this Plan, the term "FAIR MARKET VALUE" means, as of any
date, the value of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on
the date of determination as reported in THE WALL STREET
JOURNAL;
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, its closing price on the
date of determination on the principal national securities
exchange on which the Common Stock is listed or admitted to
trading as reported in THE WALL STREET JOURNAL;
(c) if such Common Stock is publicly traded but is not quoted
on the Nasdaq National Market nor listed or admitted to
trading on a national securities exchange, the average of
the closing bid and asked prices on the date of
determination as reported in THE WALL STREET JOURNAL; or
(d) if none of the foregoing is applicable, by the Board in good
faith, which in the case of the First Offering Date will be
the price per share at which shares of the Company's Common
Stock are initially offered for sale to the public by the
Company's underwriters in the initial public offering of the
Company's Common Stock pursuant to a registration statement
filed with the SEC under the Securities Act.
9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF
SHARES.
(a) The purchase price of the shares is accumulated by regular
payroll deductions made during each Offering Period. The deductions are made
as a percentage of the participant's compensation in one percent (1%)
increments not less than two percent (2%), nor greater than fifteen percent
(15%) or such lower limit set by the Committee. Compensation shall mean base
salary, commissions, bonuses and shift premiums not to exceed $250,000 per
calendar year, provided however, that for purposes of determining a
participant's compensation, any election by such participant to reduce his or
her regular cash remuneration under Sections 125 or 401(k) of the Code shall
be treated as if the participant did not make such election. Payroll
deductions shall commence on the first payday of the Offering Period and
shall continue to the end of the Offering Period unless sooner altered or
terminated as provided in this Plan.
(b) A participant may decrease or increase the rate of payroll
deductions during an Offering Period by filing with the Treasury Department a
new authorization for payroll deductions, in which case the new rate shall
become effective for the next payroll period commencing more than fifteen (15)
days after the Treasury Department's receipt of the authorization and shall
continue for the remainder of the Offering Period unless changed as described
below. Such change in the rate of payroll deductions may be made at any time
during an Offering Period, but not more than one (1) change may be made
effective during any Offering Period. A participant may increase or decrease
the rate of payroll deductions for any subsequent Offering Period by filing with
the Treasury Department a new authorization for payroll deductions not later
than fifteen (15) days before the beginning of such Offering Period.
(c) All payroll deductions made for a participant are credited to his
or her account under this Plan and are deposited with the general funds of the
Company. No interest accrues on the payroll deductions. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate such payroll
deductions.
(d) On each Purchase Date, so long as this Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date which notifies the Company that the participant
wishes to withdraw from that Offering Period under this Plan and have all
payroll deductions accumulated in the account maintained on behalf of the
participant as of that date returned to the participant, the Company shall
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<PAGE>
Hybrid Networks, Inc.
1997 Employee Stock Purchase Plan
apply the funds then in the participant's account to the purchase of whole
shares of Common Stock reserved under the option granted to such participant
with respect to the Offering Period to the extent that such option is
exercisable on the Purchase Date. The purchase price per share shall be as
specified in Section 8 of this Plan. Any cash remaining in a participant's
account after such purchase of shares shall be refunded to such participant in
cash, without interest; provided, however that any amount remaining in such
participant's account on a Purchase Date which is less than the amount necessary
to purchase a full share of Common Stock of the Company shall be carried
forward, without interest, into the next Purchase Period or Offering Period, as
the case may be. In the event that this Plan has been oversubscribed, all funds
not used to purchase shares on the Purchase Date shall be returned to the
participant, without interest. No Common Stock shall be purchased on a
Purchase Date on behalf of any employee whose participation in this Plan has
terminated prior to such Purchase Date.
(e) As promptly as practicable after the Purchase Date, the Company
shall issue shares for the participant's benefit representing the shares
purchased upon exercise of his or her option.
(f) During a participant's lifetime, such participant's option to
purchase shares hereunder is exercisable only by him or her. The participant
will have no interest or voting right in shares covered by his or her option
until such option has been exercised.
10. LIMITATIONS ON SHARES TO BE PURCHASED.
(a) No participant shall be entitled to purchase stock under this
Plan at a rate which, when aggregated with his or her rights to purchase stock
under all other employee stock purchase plans of the Company or any Subsidiary,
exceeds $25,000 in fair market value, determined as of the Offering Date (or
such other limit as may be imposed by the Code) for each calendar year in which
the employee participates in this Plan. The Company shall automatically suspend
the payroll deductions of any participant as necessary to enforce such limit
provided that when the Company automatically resumes such payroll deductions,
the Company must apply the rate in effect immediately prior to such suspension.
(b) No more than two hundred percent (200%) of the number of shares
determined by using eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date as the denominator may
be purchased by a participant on any single Purchase Date.
(c) No participant shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase Date. Not less
than thirty (30) days prior to the commencement of any Offering Period, the
Committee may, in its sole discretion, set a maximum number of shares which may
be purchased by any employee at any single Purchase Date (hereinafter the
"MAXIMUM SHARE AMOUNT"). Until otherwise determined by the Committee, there
shall be no Maximum Share Amount. In no event shall the Maximum Share Amount
exceed the amounts permitted under Section 10(b) above. If a new Maximum Share
Amount is set, then all participants must be notified of such Maximum Share
Amount prior to the commencement of the next Offering Period. Once the Maximum
Share Amount is set, it shall continue to apply with respect to all succeeding
Purchase Dates and Offering Periods unless revised by the Committee as set forth
above.
(d) If the number of shares to be purchased on a Purchase Date by all
employees participating in this Plan exceeds the number of shares then available
for issuance under this Plan, then the Company will make a pro rata allocation
of the remaining shares in as uniform a manner as shall be reasonably
practicable and as the Committee shall determine to be equitable. In such
event, the Company shall give written notice of such reduction of the number of
shares to be purchased under a participant's option to each participant affected
thereby.
(e) Any payroll deductions accumulated in a participant's account
which are not used to purchase stock due to the limitations in this Section 10
shall be returned to the participant as soon as practicable after the end of the
applicable Purchase Period, without interest.
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<PAGE>
Hybrid Networks, Inc.
1997 Employee Stock Purchase Plan
11. WITHDRAWAL.
(a) Each participant may withdraw from an Offering Period under this
Plan by signing and delivering to the Treasury Department a written notice to
that effect on a form provided for such purpose. Such withdrawal may be elected
at any time at least fifteen (15) days prior to the end of an Offering Period.
(b) Upon withdrawal from this Plan, the accumulated payroll
deductions shall be returned to the withdrawn participant, without interest, and
his or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his or
her participation in this Plan during the same Offering Period, but he or she
may participate in any Offering Period under this Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth above for initial participation in
this Plan.
(c) If the purchase price on the first day of any current Offering
Period in which a participant is enrolled is higher than the purchase price on
the first day of any subsequent Offering Period, the Company will automatically
enroll such participant in the subsequent Offering Period. Any funds
accumulated in a participant's account prior to the first day of such subsequent
Offering Period will be applied to the purchase of shares on the Purchase Date
immediately prior to the first day of such subsequent Offering Period. A
participant does not need to file any forms with the Company to automatically be
enrolled in the subsequent Offering Period
12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment
for any reason, including retirement, death or the failure of a participant to
remain an eligible employee of the Company or of a Participating Subsidiary,
immediately terminates his or her participation in this Plan. In such event,
the payroll deductions credited to the participant's account will be returned to
him or her or, in the case of his or her death, to his or her legal
representative, without interest. For purposes of this Section 12, an employee
will not be deemed to have terminated employment or failed to remain in the
continuous employ of the Company or of a Participating Subsidiary in the case of
sick leave, military leave, or any other leave of absence approved by the Board;
PROVIDED that such leave is for a period of not more than ninety (90) days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
13. RETURN OF PAYROLL DEDUCTIONS. In the event a participant's interest
in this Plan is terminated by withdrawal, termination of employment or
otherwise, or in the event this Plan is terminated by the Board, the Company
shall promptly deliver to the participant all payroll deductions credited to
such participant's account. No interest shall accrue on the payroll deductions
of a participant in this Plan.
14. CAPITAL CHANGES. Subject to any required action by the stockholders
of the Company, the number of shares of Common Stock covered by each option
under this Plan which has not yet been exercised and the number of shares of
Common Stock which have been authorized for issuance under this Plan but have
not yet been placed under option (collectively, the "RESERVES"), as well as the
price per share of Common Stock covered by each option under this Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock of the
Company resulting from a stock split or the payment of a stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of any
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
Committee, whose determination shall be final, binding and conclusive. Except
as expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Committee. The Committee may,
in the exercise of its sole discretion in such instances, declare that this Plan
shall terminate as of a date fixed by the Committee and give each participant
the right to purchase shares under this Plan prior to such termination. In the
event of (i) a merger or consolidation in which the Company is not the surviving
corporation
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<PAGE>
Hybrid Networks, Inc.
1997 Employee Stock Purchase Plan
(other than a merger or consolidation with a wholly-owned subsidiary, a
reincorporation of the Company in a different jurisdiction, or other transaction
in which there is no substantial change in the stockholders of the Company or
their relative stock holdings and the options under this Plan are assumed,
converted or replaced by the successor corporation, which assumption will be
binding on all participants), (ii) a merger in which the Company is the
surviving corporation but after which the stockholders of the Company
immediately prior to such merger (other than any stockholder that merges, or
which owns or controls another corporation that merges, with the Company in such
merger) cease to own their shares or other equity interest in the Company,
(iii) the sale of substantially all of the assets of the Company or (iv) the
acquisition, sale, or transfer of more than 50% of the outstanding shares of the
Company by tender offer or similar transaction, the Plan shall continue for the
remainder of all Offering Periods which began prior to the transaction,
provided, however, that the Committee may declare that this Plan shall terminate
as of a date fixed by the Committee and give each participant the right to
purchase stock under this Plan prior to such termination. If the Committee
allows participants to purchase stock in the event of a merger, consolidation or
sale of assets, the Committee shall notify the participant that the stock may be
purchased for a certain period, and this Plan will terminate upon the expiration
of such period.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, or in the event of the Company being consolidated with or merged into any
other corporation.
15. NONASSIGNABILITY. 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 this 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 22 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be void and
without effect.
16. REPORTS. Individual accounts will be maintained for each participant
in this Plan. Each participant shall receive promptly after the end of each
Purchase Period a report of his or her account setting forth the total payroll
deductions accumulated, the number of shares purchased, the per share price
thereof and the remaining cash balance, if any, carried forward to the next
Purchase Period or Offering Period, as the case may be.
17. NOTICE OF DISPOSITION. Each participant shall notify the Company if
the participant disposes of any of the shares purchased in any Offering Period
pursuant to this Plan if such disposition occurs within two (2) years from the
Offering Date or within one (1) year from the Purchase Date on which such shares
were purchased (the "NOTICE PERIOD"). Unless such participant is disposing of
any of such shares during the Notice Period, such participant shall keep the
certificates representing such shares in his or her name (and not in the name of
a nominee) during the Notice Period. The Company may, at any time during the
Notice Period, place a legend or legends on any certificate representing shares
acquired pursuant to this Plan requesting the Company's transfer agent to notify
the Company of any transfer of the shares. The obligation of the participant to
provide such notice shall continue notwithstanding the placement of any such
legend on the certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of
any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Participating Subsidiary, or restrict the right of
the Company or any Participating Subsidiary to terminate such employee's
employment.
19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal
rights and privileges with respect to this Plan so that this Plan qualifies as
an "employee stock purchase plan" within the meaning of Section 423 or any
successor provision of the Code and the related regulations. Any provision of
this Plan which is inconsistent with Section 423 or any successor provision of
the Code shall, without further act or amendment by the Company, the Committee
or the Board, be reformed to comply with the requirements of Section 423. This
Section 19 shall take precedence over all other provisions in this Plan.
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<PAGE>
20. NOTICES. All notices or other communications by a participant to the
Company under or in connection with this 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.
21. TERM; STOCKHOLDER APPROVAL. After this Plan is adopted by the Board,
this Plan will become effective on the date that is the First Offering Date (as
defined above). This Plan shall be approved by the stockholders of the Company,
in any manner permitted by applicable corporate law, within twelve (12) months
before or after the date this Plan is adopted by the Board. No purchase of
shares pursuant to this Plan shall occur prior to such stockholder approval.
This Plan shall continue until the earlier to occur of (a) termination of this
Plan by the Board (which termination may be effected by the Board at any time),
(b) issuance of all of the shares of Common Stock reserved for issuance under
this Plan, or (c) ten (10) years from the adoption of this Plan by the Board.
22. 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
this Plan in the event of such participant's death subsequent to the end of an
Purchase Period but prior to delivery to him 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 this Plan in the event
of such participant's death prior to a Purchase Date.
(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 this Plan who is living
at the time of such participant's death, the Company shall deliver such shares
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 or cash to the
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE 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, the Securities Exchange Act of 1934, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or automated quotation system 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.
24. APPLICABLE LAW. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of California.
25. AMENDMENT OR TERMINATION OF THIS PLAN. The Board may at any time
amend, terminate or extend the term of this Plan, except that any such
termination cannot affect options previously granted under this Plan, nor may
any amendment make any change in an option previously granted which would
adversely affect the right of any participant, nor may any amendment be made
without approval of the stockholders of the Company obtained in accordance with
Section 21 hereof within twelve (12) months of the adoption of such amendment
(or earlier if required by Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this Plan;
or
(b) change the designation of the employees (or class of employees)
eligible for participation in this Plan.
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<PAGE>
HYBRID NETWORKS, INC.
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of _________________, is made by and
between Hybrid Networks, Inc., a Delaware corporation (the "COMPANY"), and
_________________, a director and/or officer of the Company (the
"INDEMNITEE").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors or officers of corporations
unless they are protected by comprehensive liability insurance and/or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that
the exposure frequently bears no reasonable relationship to the compensation
of such directors and officers;
B. Based upon their experience as business managers, the Board of
Directors of the Company (the "BOARD") has concluded that, to retain and
attract talented and experienced individuals to serve as officers and
directors of the Company, and to encourage such individuals to take the
business risks necessary for the success of the Company, it is necessary for
the Company to contractually indemnify officers and directors, and to assume
for itself maximum liability for expenses and damages in connection with
claims against such officers and directors in connection with their service
to the Company;
C. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("SECTION 145"), empowers the Company to indemnify
by agreement its officers, directors, employees and agents, and persons who
serve, at the request of the Company, as directors, officers, employees or
agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive; and
D. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director or officer of the Company free from undue
concern for claims for damages arising out of or related to such services to
the Company.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
<PAGE>
1. DEFINITIONS.
1.1 AGENT. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director or officer of the Company
or a subsidiary of the Company; or is or was serving at the request of, for
the convenience of, or to represent the interest of the Company or a
subsidiary of the Company as a director or officer of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise
or an affiliate of the Company; or was a director or officer of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, including, without limitation, Premisys
Communications Holdings, Inc., a California corporation and Hybrid Networks,
Inc., a California corporation, or was a director or officer of another
enterprise or affiliate of the Company at the request of, for the convenience
of, or to represent the interests of such predecessor corporation. The term
"enterprise" includes any employee benefit plan of the Company, its
subsidiaries, affiliates and predecessor corporations.
1.2 EXPENSES. For purposes of this Agreement, "expenses" includes
all direct and indirect costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements and other
out-of-pocket costs) actually and reasonably incurred by the Indemnitee in
connection with the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification or advancement of
expenses under this Agreement, Section 145 or otherwise; provided, however,
that expenses shall not include any judgments, fines, ERISA excise taxes or
penalties or amounts paid in settlement of a proceeding.
1.3 PROCEEDING. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, investigative or any other type
whatsoever.
1.4 SUBSIDIARY. For purposes of this Agreement, "subsidiary" means
any corporation of which more than 50% of the outstanding voting securities
is owned directly or indirectly by the Company, by the Company and one or
more other subsidiaries, or by one or more other subsidiaries.
2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue
to serve as an agent of the Company, at the will of the Company (or under
separate agreement, if such agreement exists), in the capacity Indemnitee
currently serves as an agent of the Company, faithfully and to the best of
his ability so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the charter documents of the
Company or any subsidiary of the Company; provided, however, that Indemnitee
may at any time and for any reason resign from such position (subject to any
contractual obligation that Indemnitee may have assumed apart from this
Agreement) and that the Company or any subsidiary shall have no obligation
under this Agreement to continue Indemnitee in any such position.
3. DIRECTORS' AND OFFICERS' INSURANCE. The Company shall, to the
extent that the Board determines it to be economically reasonable, maintain a
policy of directors' and officers'
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<PAGE>
liability insurance ("D&O Insurance"), on such terms and conditions as may be
approved by the Board.
4. MANDATORY INDEMNIFICATION. Subject to Section 9 below, the Company
shall indemnify the Indemnitee:
4.1 THIRD PARTY ACTIONS. If the Indemnitee is a person who was or
is a party or is threatened to be made a party to any proceeding (other than
an action by or in the right of the Company) by reason of the fact that he is
or was an agent of the Company, or by reason of anything done or not done by
him in any such capacity, against any and all expenses and liabilities of any
type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) actually and
reasonably incurred by him in connection with the investigation, defense,
settlement or appeal of such proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful; and
4.2 DERIVATIVE ACTIONS. If the Indemnitee is a person who was or
is a party or is threatened to be made a party to any proceeding by or in the
right of the Company to procure a judgment in its favor by reason of the fact
that he is or was an agent of the Company, or by reason of anything done or
not done by him in any such capacity, against any amounts paid in settlement
of any such proceeding and all expenses actually and reasonably incurred by
him in connection with the investigation, defense, settlement, or appeal of
such proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company; except
that no indemnification under this subsection shall be made in respect of any
claim, issue or matter as to which such person shall have been finally
adjudged to be liable to the Company by a court of competent jurisdiction due
to willful misconduct of a culpable nature in the performance of his duty to
the Company, unless and only to the extent that the Court of Chancery or the
court in which such proceeding was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the Court of Chancery or such other court
shall deem proper; and
4.3 EXCEPTION FOR AMOUNTS COVERED BY INSURANCE. Notwithstanding
the foregoing, the Company shall not be obligated to indemnify the Indemnitee
for expenses or liabilities of any type whatsoever (including, but not
limited to, judgments, fines, ERISA excise taxes or penalties, and amounts
paid in settlement) to the extent such have been paid directly to Indemnitee
by D&O Insurance.
5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes or penalties, and
amounts paid in settlement) incurred by him in the investigation, defense,
settlement or appeal of a proceeding but not entitled, however, to
indemnification for all of the total amount thereof, the Company shall
nevertheless indemnify the Indemnitee for such total
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<PAGE>
amount except as to the portion thereof to which the Indemnitee is not
entitled to the indemnification.
6. MANDATORY ADVANCEMENT OF EXPENSES.
6.1 ADVANCEMENT. Subject to Section 9 below, the Company shall
advance all expenses incurred by the Indemnitee in connection with the
investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Company or by reason of
anything done or not done by him in any such capacity. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that the Indemnitee is not entitled to be
indemnified by the Company under the provisions of this Agreement, the
Certificate of Incorporation or Bylaws of the Company, the General
Corporation Law of Delaware or otherwise. The advances to be made hereunder
shall be paid by the Company to the Indemnitee within thirty (30) days
following delivery of a written request therefor by the Indemnitee to the
Company.
6.2 EXCEPTION. Notwithstanding the foregoing provisions of this
Section 6, the Company shall not be obligated to advance any expenses to
Indemnitee to the extent such arise from a lawsuit filed directly by the
Company against the Indemnitee if an absolute majority of the members of the
Board of Directors reasonably determines in good faith, within thirty (30)
days of Indemnitee's request to be advanced expenses, that the facts known to
them at the time such determination is made demonstrate clearly and
convincingly that the Indemnitee acted in bad faith. If such a determination
is made, Indemnitee may have such decision reviewed by another forum, in the
manner set forth in Sections 8.3, 8.4 and 8.5 hereof, with all references
therein to "indemnification" being deemed to refer to "advancement of
expenses", and the burden of proof shall be on the Company to demonstrate
clearly and convincingly that, based on the facts known at the time, the
Indemnitee acted in bad faith. The Company may not avail itself of this
Section 6.2 as to a given lawsuit if, at any time after the occurrence of the
activities or omissions that are the primary focus of the lawsuit, the
Company has undergone a change in control. For this purpose a change in
control shall mean a given shareholder or group of affiliated shareholders
increasing their beneficial ownership interest in the Company by at least 20
percentage points without advance Board approval.
7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.
7.1 Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the
Indemnitee shall, if the Indemnitee believes that indemnification with
respect thereto may be sought from the Company under this Agreement, notify
the Company of the commencement or threat of commencement thereof.
7.2 If, at the time of the receipt of a notice of the commencement
of a proceeding pursuant to Section 7.1 hereof, the Company has D&O Insurance
in effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter
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<PAGE>
take all necessary or desirable action to cause such insurers to pay, on
behalf of the Indemnitee, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
7.3 In the event the Company shall be obligated to advance the
expenses for any proceeding against the Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such proceeding, with
counsel approved by the Indemnitee, upon the delivery to the Indemnitee of
written notice of its election to do so. After delivery of such notice,
approval of such counsel by the Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to the Indemnitee under this
Agreement for any fees of counsel subsequently incurred by the Indemnitee
with respect to the same proceeding, provided that (a) the Indemnitee shall
have the right to employ his own counsel in any such proceeding at the
Indemnitee's expense; (b) the Indemnitee shall have the right to employ his
own counsel in connection with any such proceeding, at the expense of the
Company, if such counsel serves in a review, observer, advice and counseling
capacity and does not otherwise materially control or participate in the
defense of such proceeding; and (c) if (i) the employment of counsel by the
Indemnitee has been previously authorized by the Company, (ii) the Indemnitee
shall have reasonably concluded that there may be a conflict of interest
between the Company and the Indemnitee in the conduct of any such defense or
(iii) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
8. DETERMINATION OF RIGHT TO INDEMNIFICATION.
8.1 To the extent the Indemnitee has been successful on the merits
or otherwise in defense of any proceeding referred to in Section 4.1 or 4.2
of this Agreement or in the defense of any claim, issue or matter described
therein, the Company shall indemnify the Indemnitee against expenses actually
and reasonably incurred by him in connection with the investigation, defense
or appeal of such proceeding, or such claim, issue or matter, as the case may
be.
8.2 In the event that Section 8.1 is inapplicable, or does not
apply to the entire proceeding, the Company shall nonetheless indemnify the
Indemnitee unless the Company shall prove by clear and convincing evidence to
a forum listed in Section 8.3 below that the Indemnitee has not met the
applicable standard of conduct required to entitle the Indemnitee to such
indemnification.
8.3 The Indemnitee shall be entitled to select the forum in which
the validity of the Company's claim under Section 8.2 hereof that the
Indemnitee is not entitled to indemnification will be heard from among the
following:
(a) A quorum of the Board consisting of directors who are not
parties to the proceeding for which indemnification is being sought;
(b) The stockholders of the Company;
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<PAGE>
(c) Legal counsel selected by the Indemnitee, and reasonably
approved by the Board, which counsel shall make such determination in a
written opinion; or
(d) A panel of three arbitrators, one of whom is selected by
the Company, another of whom is selected by the Indemnitee, and the last of
whom is selected by the first two arbitrators so selected.
8.4 As soon as practicable, and in no event later than 30 days
after written notice of the Indemnitee's choice of forum pursuant to Section
8.3 above, the Company shall, at its own expense, submit to the selected
forum in such manner as the Indemnitee or the Indemnitee's counsel may
reasonably request, its claim that the Indemnitee is not entitled to
indemnification; and the Company shall act in the utmost good faith to assure
the Indemnitee a complete opportunity to defend against such claim.
8.5 If the forum listed in Section 8.3 hereof selected by
Indemnitee determines that Indemnitee is entitled to indemnification with
respect to a specific proceeding, such determination shall be final and
binding on the Company. If the forum listed in Section 8.3 hereof selected
by Indemnitee determines that Indemnitee is not entitled to indemnification
with respect to a specific proceeding, the Indemnitee shall have the right to
apply to the Court of Chancery of Delaware, the court in which that
proceeding is or was pending or any other court of competent jurisdiction,
for the purpose of determining whether Indemnitee is entitled to
indemnification and enforcing the Indemnitee's right to indemnification
pursuant to the Agreement.
8.6 Notwithstanding any other provision in this Agreement to the
contrary, the Company shall indemnify the Indemnitee against all expenses
incurred by the Indemnitee in connection with any hearing or proceeding under
this Section 8 involving the Indemnitee and against all expenses incurred by
the Indemnitee in connection with any other proceeding between the Company
and the Indemnitee involving the interpretation or enforcement of the rights
of the Indemnitee under this Agreement unless a court of competent
jurisdiction finds that each of the material claims and/or defenses of the
Indemnitee in any such proceeding was frivolous or not made in good faith.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
9.1 CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to the Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense, except with
respect to proceedings specifically authorized by the Board of Directors or
brought to establish or enforce a right to indemnification and/or advancement
of expenses under this Agreement, the charter documents of the Company or any
subsidiary, or any statute or law or otherwise, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if
the Board of Directors finds it to be appropriate; or
6
<PAGE>
9.2 UNAUTHORIZED SETTLEMENTS. To indemnify the Indemnitee
hereunder for any amounts paid in settlement of a proceeding unless the
Company consents in advance in writing to such settlement, which consent
shall not be unreasonably withheld; or
9.3 SECURITIES LAW ACTIONS. To indemnify the Indemnitee on account
of any suit in which judgment is rendered against Indemnitee for an
accounting of profits made from the purchase or sale by Indemnitee of
securities of the Company pursuant to the provisions of 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or similar provisions
of any federal, state or local statutory law; or
9.4 UNLAWFUL INDEMNIFICATION. To indemnify the Indemnitee if a
final decision by a court having jurisdiction in the matter shall determine
that such indemnification is not lawful. In this respect, the Company and
the Indemnitee have been advised that the Securities and Exchange Commission
takes the position that indemnification for liabilities arising under the
federal securities law is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication.
10. NON-EXCLUSIVITY. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both
as to action in Indemnitee's official capacity and to action in another
capacity while occupying his position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the
heirs, executors and administrators of the Indemnitee.
11. GENERAL PROVISIONS
11.1 INTERPRETATION OF AGREEMENT. It is understood that the
parties hereto intend this Agreement to be interpreted and enforced so as to
provide indemnification and advancement of expenses to the Indemnitee to the
fullest extent now or hereafter permitted by law, except as expressly limited
herein.
11.2 SEVERABILITY. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any
reason whatsoever, (a) the validity, legality and enforceability of the
remaining provisions of the Agreement (including, without limitation, all
portions of any paragraphs of this Agreement containing any such provision
held to be invalid, illegal or unenforceable, that are not themselves
invalid, illegal or unenforceable) shall not in any way be affected or
impaired thereby, and (b) to the fullest extent possible, the provisions of
this Agreement (including, without limitation, all portions of any paragraphs
of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that are not themselves invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable and to give effect to
Section 11.1 hereof.
7
<PAGE>
11.3 MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
11.4 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 or desirable to secure such
rights and to enable the Company effectively to bring suit to enforce such
rights.
11.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, which shall together constitute one agreement.
11.6 SUCCESSORS AND ASSIGNS. The terms of this Agreement shall
bind, and shall inure to the benefit of, the successors and assigns of the
parties hereto.
11.7 NOTICE. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed
duly given (a) if delivered by hand and receipted for by the party addressee
or (b) if mailed by certified or registered mail with postage prepaid, on the
third business day after the mailing date. Addresses for notice to either
party are as shown on the signature page of this Agreement, or as
subsequently modified by written notice.
11.8 GOVERNING LAW. This Agreement shall be governed exclusively
by and construed according to the laws of the State of Delaware, as applied
to contracts between Delaware residents entered into and to be performed
entirely with Delaware.
11.9 CONSENT TO JURISDICTION. The Company and the 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.
8
<PAGE>
The parties hereto have entered into this Indemnity Agreement effective
as of the date first written above.
HYBRID NETWORKS, INC.
Address: 10161 Bubb Road
Cupertino, CA 95014
By:______________________________
Its:_____________________________
INDEMNITEE:
________________________________
Address: ________________________________
________________________________
9
<PAGE>
INDEX
NET LEASE
Page
1. Summary of Lease Provisions. . . . . . . . . . . . . . . . . . . . 1
2. Property Leased . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . . 3
6. Use of Premises . . . . . . . . . . . . . . . . . . . . . . . . . 3
7. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
8. Insurance; Indemnity; Waiver . . . . . . . . . . . . . . . . . . . 5
9. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
10. Repairs and Maintenance . . . . . . . . . . . . . . . . . . . . . 6
11. Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . 7
13. Alterations and Improvements . . . . . . . . . . . . . . . . . . . 7
14. Default and Remedies . . . . . . . . . . . . . . . . . . . . . . . 8
15. Damage or Destruction. . . . . . . . . . . . . . . . . . . . . . . 9
16. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
18. Landlord's Right of Access of Premises . . . . . . . . . . . . . . 10
19. Landlord's Right to Perform Tenant's Covenants . . . . . . . . . . 10
20. Lender Requirements . . . . . . . . . . . . . . . . . . . . . . . 10
21. Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
22. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
23. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 11
24. Assignment, Subletting and Hypothecation . . . . . . . . . . . . . 11
25. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
26. Landlord Default; Mortgage Protection. . . . . . . . . . . . . . . 13
27. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
28. Surrender of Lease Not Merger . . . . . . . . . . . . . . . . . . 13
29. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
30. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
31. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
32. Landlord as Party Defendant. . . . . . . . . . . . . . . . . . . . 14
33. Landlord Not a Trustee . . . . . . . . . . . . . . . . . . . . . . 14
34. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
35. Surrender of Premises. . . . . . . . . . . . . . . . . . . . . . . 14
36. No Partnership or Joint Venture. . . . . . . . . . . . . . . . . . 14
37. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 14
38. Submission of Lease. . . . . . . . . . . . . . . . . . . . . . . . 14
39. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . 14
40. Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
41. Building Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 15
42. Addendum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
43. Leased Premises. . . . . . . . . . . . . . . . . . . . . . . . . . 16
44. Option to Extend . . . . . . . . . . . . . . . . . . . . . . . . . 16
45. Rent During Extended Term. . . . . . . . . . . . . . . . . . . . . 17
46. Antenna/Microwave Dish Installation Rights . . . . . . . . . . . . 18
47. Parking Lot. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
48. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
49. Sublease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
NET LEASE AGREEMENT
For and in consideration of the rentals, covenants, and conditions
hereinafter set forth, Landlord hereby leases to Tenant, and Tenant hereby
rents from Landlord, the herein described Premises for the term, at the
rental and subject to and upon all of the terms, covenants and agreements
set forth in this Net Lease Agreement, including Landlord's right to
recover the Premises pursuant to Paragraph 24 below ("Lease"):
SUMMARY OF
LEASE
PROVISIONS
1. 1.1 Tenant: Hybrid Networks, Inc.,
---------------------------------------------------------
a Delaware Corporation
-----------------------------------------------("Tenant")
1.2 Landlord: Devcon/Bubb Road Investors
---------------------------------------------------------
a California limited partnership
---------------------------------------------("Landlord")
1.3 Date of Lease, for reference purposes only: May 25 ,19 95
--------------- -----
1.4 Premises: That certain building located in the city of Cupertino
----------
County of Santa Clara , State of California, shown cross-hatched
------------
on the site plan attached hereto as Exhibit "A", and commonly
referred to as 10161 Bubb Road
---------------------------------------------------
together with certain rights appurtenant thereto. (Paragraph 2.1)
* Subject to
Paragraph 44
1.5 Term: Thirty-six (36) months*
----------------------------------------------(Paragraph 3)
1.6 Commencement Date: June 1, 1995 , subject to the provisions
-------------------
of Paragraph 3 below. (Paragraph 3)
1.7 Ending Date: May 31, 1998 , unless sooner terminated
----------------------------
pursuant to the terms of this Lease.
1.8 Rent: (Paragraph 4)
The base monthly rent shall be due and payable on or before
the first day of each and every month of the lease term in the
amounts as follows:
Months Rental Rate per Month
------ ---------------------
01-06 $10,000.00
07-12 $15,000.00
13-36 $18,500.00
Receipt of the first month's Rent is hereby acknowledged by
Landlord.
1.9 Use of Premises: Research and development of components for
--------------------------------------------------
networking systems, sales, marketing, engineering, light
----------------------------------------------------(Paragraph 6)
manufacturing and testing or for any other lawful purpose.
-----------------------------------------------------------------
1.10 Security Deposit:
------------------------------------------------
Eighteen Thousand Five Hundred Dollars ($18,500.00)
----------------------------------------------------(Paragraph 5)
1.11 Addresses for Notices:
To Landlord: Devcon/Bubb Road Investors
------------------------------------------------------
c/o Devcon Investments, @ 535 Los Coches Street
------------------------------------------------------
Milpitas, California 95035
------------------------------------------------------
To Tenant: To the Premises, with a courtesy copy to:
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1.12 Non-Exclusive Right to Use No More than Fifty-nine (59) ( )
--------------------------
parking spaces within the Common Area. (Paragraph 2.1)
1.13 SUMMARY PROVISIONS IN GENERAL Parenthetical references in this
Paragraph 1 to other paragraphs in this Lease are for convenience of
reference, and designate some of the other Lease paragraphs where
applicable provisions are set forth. All of the terms and
conditions of each such referenced paragraph shall be construed to
be incorporated within and made a part of each of the above
referring Summary of Lease Provisions. In the event of any conflict
between any Summary of Lease Provision as set forth above and the
balance of the Lease, the latter shall control.
<PAGE>
PROPERTY
LEASED
2. 2.1 PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord, upon the terms and conditions herein
set forth, that certain building ("Premises") referred to in
Paragraph 1.4 above, shown cross-hatched on the site plan
attached hereto as Exhibit "A". In addition, Tenant shall
have the following rights with respect to the real property
more particularly described in the legal description attached
as Exhibit "B" hereto (if applicable) and outlined in red on
Exhibit "A" ("Common Area"): (i) the exclusive right to use
no more than the number of parking spaces set forth in
Paragraph 1.12 above, as shown on Exhibit "A", the location
of which may be redesignated from time to time by Landlord;
(ii) the nonexclusive right to use any other parking spaces
within the Common Area not allocated for the exclusive use of
another tenant of Landlord; and (iii) such other rights as
are necessary and convenient to Tenant's possession of the
Premises or performances of Tenant's obligations under this
Lease. (Notwithstanding the number of parking spaces
designated for Tenant's exclusive use, in the event by reason
of any rule, regulation, order, law, statute, ordinance or
other requirement of any governmental or quasi-governmental
authority now or hereafter in effect (collectively "Laws")
relating to or affecting parking on the Common Area, or any
other cause beyond Landlord's reasonable control, Landlord is
required to reduce the number of parking spaces on the Common
Area, Landlord shall have the right to proportionately reduce
the number of parking spaces designated herein for Tenant's
exclusive use.) In addition, Landlord grants to Tenant a
non-exclusive assessment for vehicular ingress and egress in
and over the paved roadways in the Common Area and pedestrian
ingress and egress in and over the Common Area.
Landlord reserves the right to grant to tenants of the
buildings or improvements which now exist or may hereafter be
constructed upon the Common Area or upon real property owned
by Landlord adjacent to the Common Area, and to the agents,
employees, servants, invitees, contractors, guests, customers
and representatives of such tenants or to any other user
authorized by Landlord, the non-exclusive right to use the
Common Area for pedestrian and vehicular ingress and egress
and vehicular parking and the exclusive right to use parking
spaces on the Common Area (excluding only that portion of the
Common Area designated herein for Tenant's exclusive use for
vehicular parking).
* in Paragraph
43
2.2 IMPROVEMENTS. The improvements to be constructed by Landlord for
Tenant's use in the Premises are set forth in detail in Paragraph 43.
In the event of changes to any of the work set forth in Paragraph 43
(whether such changes are required by any set public agency, or by
reason of any error or omission in plans because of information
provided to Landlord by Tenant, or because requested in
writing by Tenant and accepted in writing by Landlord).
Tenant shall pay to Landlord Landlord's costs related to such
changes before work in regard to such changes is commenced;
provided, however, in no event shall Landlord's failure to
demand such payment before commencement of work in regard to
such changes, or Tenant's failure to pay for the same before
commencement of work in regard to such changes be deemed to
be a waiver of Landlord's right to require or enforce
collection of such payment for changes at any time
thereafter. Landlord's costs related to the changes shall
include, without limitation, all architectural, contractor,
and engineering expenses, and the cost of all building and
other permits and inspection fees. Tenant acknowledges that
Landlord or a person or entity related to Landlord and/or
controlled by Landlord may serve as Landlord's architect,
engineer and/or contractor in regard to the above-described
work and in the event of any changes, Landlord's costs shall
be deemed to include architect, engineering and/or contractor
expenses at the rates charged to third parties by Landlord
and/or such related person or entity for such services,
unless otherwise expressly provided in this Lease. Since any
construction work on the Premises by Tenant prior to
substantial completion of the work required of Landlord
pursuant to this Paragraph 2.2 may interfere with the work
required of Landlord or with Landlord's ability to obtain a
Certificate of Occupancy therefor, any such work by Tenant
shall be subject to the provisions of Paragraph 13.1 hereof,
and Landlord may in its sole discretion withhold its consent
to any such work by Tenant.
2.3 ACCEPTANCE OF PREMISES. By taking possession of the Premises,
Tenant shall be deemed to have accepted the Premises as being
in good and sanitary order, condition and repair and to have
accepted the Premises in their condition existing as of the
date Tenant takes possession of the Premises subject to all
applicable laws, covenants, conditions, restrictions,
easements and other matters of public record and the rules
and regulations from time to time promulgated by Landlord
governing the use of the Premises and Common Area, and
further, to have accepted tenant improvements to be
constructed by Landlord (if any) as being completed in
accordance with the plans and specifications for such
improvements, subject only to completion of items on
Landlord's punch list. Tenant acknowledges that neither
Landlord nor Landlord's agents have made any representation or
warranty as to the suitability of the Premises for the
conduct of Tenant's business, the condition of the Premises,
or the use of occupancy which may be made thereof and Tenant
has independently investigated and is satisfied that the
Premises are suitable for Tenant's intended use and that the
Premises meets all governmental requirements for such
intended use.
TERM
3 3.1 COMMENCEMENT DATE. The term of this Lease ("Lease Term") shall be
for the period specified in Paragraph 1.5 above, commencing
on the date set forth in Paragraph 1.6 ("Commencement Date");
The expiration of the Lease Term or sooner termination of
this Lease is referred to herein as the "Lease Termination".
3.3 EARLY OCCUPANCY. If Tenant takes possession of the
Premises prior to the Commencement Date, Tenant shall do so
subject to all of the terms and conditions hereof and shall
pay the Rentals provided for herein.
3.4 TENANT TO PHYSICALLY OCCUPY PREMISES. Tenant shall, no
later than thirty (30) days after the Commencement Date, go
into actual physical occupancy of the Premises and open the
Premises for business in accordance with the uses specified
in Paragraph 6 below; provided, however, the date of
Tenant's physical occupancy of the Premises shall in no event
extend the Commencement Date, the Lease Termination date or
the date the payment of Rentals hereunder commences. Time is
of the essence.
<PAGE>
RENT
4. 4.1 RENT. Tenant shall pay to Landlord as rent for the Premises
("Rent"), in advance, on the first day of each calendar month,
commencing on the date specified in Paragraph 1.6 and continuing
throughout the Lease Term (until adjusted pursuant to Paragraph 4.4
below) the Rent set forth in Paragraph 1.8 above. Rent shall be
prorated, based on thirty (30) days per month for any partial month
during the Lease Term. Rent shall be payable without deduction,
offset, prior notice or demand in lawful money of the United States
to Landlord at the address herein specified for the purposes of
notice or to such other persons or such other places as Landlord
may designate in writing.
4.2 LATE CHARGE. Landlord agrees to waive a late charge for the first
time Tenant makes a late payment. This is a one-time waiver by
Landlord of the late charge. Tenant hereby acknowledges that late
payment by Tenant to Landlord of Rent will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which
will be extremely difficult to ascertain. Such costs include, but
are not limited to, processing and accounting charges, and late
charges which may be imposed on Landlord by the terms of any
mortgage or deed of trust covering the Premises. Accordingly,
Tenant shall pay to Landlord, as Additional Rent (as defined in
Paragraph 4.3 below), without the necessity of prior notice or
demand, a late charge equal to ten percent (10%) of any installment
of Rent which is not received by Landlord within ten (10) days
after the due date for such installment. The parties hereby agree
that such late charge represents a fair and reasonable estimate of
the costs Landlord will incur by reason of late payment by Tenant.
In no event shall this provision for a late charge be deemed to
grant to Tenant a grace period or extension of time within which to
pay an installment of Rent or prevent Landlord from exercising any
right or remedy available to Landlord upon Tenant's failure to pay
such installment of Rent when due, including without limitation the
right to terminate this Lease. In the event any installment of Rent
is not received by Landlord by the thirtieth (30th) day after the
due date for such installment, such installment shall bear interest
at the annual rate set forth in Paragraph 34 below, commencing on
the thirty-first (31st) day after the due date for such installment
and continuing until such installment is paid in full.
4.3 ADDITIONAL RENT. All taxes, charges, costs and expenses and other
sums which Tenant is required to pay hereunder (together with all
interest and charges that may accrue thereon in the event of
Tenant's failure to pay the same), and all damages, costs and
expenses which Landlord may incur by reason of any Default by
Tenant shall be deemed to be additional rent hereunder ("Additional
Rent"). Additional Rent shall accrue commencing on the Commencement
Date. In the event of nonpayment by Tenant of any Additional Rent,
Landlord shall have all the rights and remedies with respect
thereto as Landlord has for the nonpayment of Rent. The term
"Rentals" as used in this Lease shall mean Rent and Additional Rent.
SECURITY DEPOSIT
5. Concurrently with Tenant's execution of this Lease, Tenant shall
deposit with Landlord a security deposit ("Security Deposit") in
the amount set forth in Paragraph 1.10 above. The Security Deposit
shall be held by Landlord as security for the faithful performance
by Tenant of each and every term, covenant and condition of this
Lease applicable to Tenant, and not as prepayment of Rent. If
Tenant shall at any time fail to keep or perform any term, covenant
or condition of this Lease applicable to Tenant, including, without
limitation, the payment of Rentals or those provisions requiring
Tenant to repair damage to the Premises caused by Tenant or to
surrender the Premises in the condition required pursuant to
Paragraph 35 below, Landlord may, but shall not be obligated to and
without waiving or releasing Tenant from any obligation under this
Lease, use, apply or retain the whole or any part of the Security
Deposit reasonably necessary for the payment of any amount which
Landlord may spend by reason of Tenant's default or as necessary to
compensate Landlord for any loss or damage which Landlord may
suffer by reason of Tenant's default. In the event Landlord uses or
applies any portion of the Security Deposit, Tenant shall, within
five (5) days after written demand by Landlord, remit to Landlord
sufficient funds to restore the Security Deposit to its original
sum. Failure by Tenant to so remit funds shall be a Default by
Tenant. Should Tenant comply with all of the terms, covenants and
conditions of this Lease applicable to Tenant, the balance of the
Security Deposit shall be returned to Tenant within fourteen (14)
days after Lease Termination and surrender of the Premises by
Tenant; provided, however, if any portion of the Security Deposit
is to be applied to repair damages to the Premises caused by Tenant
or Tenant's agents, to clean the Premises, or to remove alterations
and restore the Premises pursuant to Paragraph 13.2 below, then the
balance of the Security Deposit shall be returned to Tenant no
later than thirty (30) days after the date Landlord receives
possession of the Premises.
USE OF PREMISES
6. 6.1 PERMITTED USES. Tenant shall use the Premises and the Common Area
only in conformance with applicable Laws for the purposes set forth
in Paragraph 1.9 above, and for no other purpose without the prior
written consent of Landlord, which consent Landlord may withhold in
its sole discretion. Any change in use of the Premises or the
Common Area without the prior written consent of Landlord shall be
a Default by Tenant. Tenant and Tenant's agents shall comply with
the provisions of any Declaration of Covenants, Conditions, and
Restrictions affecting the Premises and the Common Area.
6.2 TENANT TO COMPLY WITH LEGAL REQUIREMENTS. Tenant shall, at
its sole cost, promptly comply with all Laws relating to or
affecting the use, occupational safety, occupancy or condition of
the Premises or the Common Area, now in force, or which may
hereafter be in force, including without limitation those relating
to utility usage and load or number of permissible occupants or
users of the Premises, whether or not the same are now contemplated
by the parties; with the provisions of all recorded documents
affecting the Premises or the Common Area insofar as the same
relate to or affect the use, occupational safety, occupancy, or
condition of the Premises or the Common Area; and with the
requirements of any board of fire underwriters (or similar body now
or hereafter constituted) relating to or affecting the use,
occupational safety, occupancy or condition of the Premises or the
Common Area. Tenant's obligations pursuant to this Paragraph 6.2
shall include without limitation maintaining or restoring the
Premises and the Common Area and making structural and
non-structural alterations and additions in compliance and
conformity with all Laws and recorded documents relating to the
use, occupational safety, occupancy or condition of the Premises or
the Common Area during the Lease Term; provided, however, that
Landlord shall make any alteration or addition required to bring
the Premises or the Common Area into compliance with legal
requirements in effect at the time the Premises, any improvements
installed therein by Landlord, or the Common Area, respectively,
were originally constructed. At Landlord's option, Landlord may
make the required alteration, addition or change, and Tenant shall
pay the cost thereof as Additional Rent. With respect to any
structural alterations or additions as may be hereafter required
due to a change in Laws and unrelated to Tenant's specific use of
the Premises or the Common Area, Tenant shall be required to pay a
pro rata portion of the cost thereof, which amount shall be
determined by multiplying the total cost by a fraction, the
numerator of which is the number of months remaining in the Lease
Term at the time of the alteration or addition, and the denominator
of which is the number of months in the useful life of the
alteration or addition. Tenant shall obtain prior to taking
possession of the Premises any permits, licenses or other
authorizations required for the lawful operation of its business at
the Premises. The judgment of any court of competent jurisdiction
or the admission of Tenant in any action or proceeding against
Tenant, regardless of whether Landlord is a party
3
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thereto or not, that Tenant has violated such Law or recorded
document relating to the use, occupational safety, occupancy or
condition of the Premises or the Common Area shall be conclusive of
the fact of such violation by Tenant. Any alterations or additions
undertaken by Tenant pursuant to this Paragraph 6.2 shall be
subject to the requirements of Paragraph 13.1 below.
6.3 PROHIBITED USES. Tenant and Tenant's agents shall not commit
or suffer to be committed any waste upon the Premises. Tenant and
Tenant's agents shall not do or permit anything to be done in or
about the Premises or Common Area which will in any way obstruct or
interfere with the rights of any authorized users of the Common
Area or occupants of neighboring property, or injure or annoy them.
Tenant shall not conduct or permit any auction or sale open to the
public to be held or conducted on or about the Premises or Common
Area. Tenant and Tenant's agents shall not use or allow the
Premises to be used for any unlawful, immoral or hazardous purpose
or any purpose not permitted by this Lease, nor shall Tenant or
Tenant's agents cause, maintain, or permit any nuisance in, on or
about the Premises. Tenant and Tenant's agents shall not do or
permit anything to be done in or about the Premises or Common Area
nor bring or keep anything in the Premises or Common Area which
will in any way increase the rate of any insurance upon the
Premises or Common Area or any part thereof or any of its contents,
or cause a cancellation of any insurance policy covering the
Premises or Common Area or any part thereof or any of its contents,
nor shall Tenant or Tenant's agents keep, use or sell or permit to
be kept, used or sold in or about the Premises any articles which
may be prohibited by a standard form policy of fire insurance. In
the event the rate of any insurance upon the Premises or Common
Area or any part thereof or any of its contents is increased
because of the acts or omissions of Tenant or Tenant's agents,
Tenant shall pay, as Additional Rent, the full cost of such
increase; provided, however this provision shall in no event be
deemed to constitute a waiver of Landlord's right to declare a
default hereunder by reason of such increase or of any other rights
or remedies of Landlord in connection with such increase. Tenant
and Tenant's agents shall not place any loads upon the floor, walls
or ceiling of the Premises which would endanger the Premises or the
structural elements thereof, nor place any harmful liquids in the
drainage system of the Premises. No waste materials or refuse shall
be dumped upon or permitted to remain upon any part of the Premises
or Common Area except in enclosed trash containers. No materials,
supplies, equipment, finished products (or semi-finished products),
raw materials, or other articles of any nature shall be stored
upon, or be permitted to remain on, any portion of the Common Area.
Tenant shall not allow any activity which in the reasonable opinion
of Landlord is detrimental to the operation of the Common Area or
to Tenants of Landlord in other buildings located on the Common
Area or upon real property owned by Landlord adjacent to the Common
Area, including but not limited to any picketing, work stoppage, or
other concerted activity. Landlord shall have the right to require
Tenant, at Tenant's own expense and within a reasonable period of
time, to use Tenant's best efforts to terminate or control any such
picketing, work stoppage or other concerted activity to the extent
necessary to eliminate any interference with the operation of the
Common Area or such tenants. Failure by Tenant to use its best
efforts to do so shall be a Default by Tenant. Nothing contained in
this paragraph shall be construed as placing Landlord in an
employer-employee relationship with any of Tenant's employees or
with any other employees who may be involved in such activity.
6.4 HAZARDOUS MATERIALS. Landlord will not hold Tenant responsible
for any existing contamination of the Premises caused by Hazardous
Materials. Neither Tenant nor Tenant's agents shall permit the
introduction, placement, use, storage, manufacture, transportation,
release or disposition (collectively "Release") of any Hazardous
Material(s) (defined below) on or about any portion of the Premises
or Common Area without the prior written consent of Landlord, which
consent may be withheld in the sole and absolute discretion of
Landlord without any requirement of reasonableness in the exercise
of that discretion. Notwithstanding the immediately preceding
sentence to the contrary, Tenant may use de minimis quantities of
the types of materials which are technically classified as
Hazardous Materials but commonly used in domestic or office use to
the extent not in an amount, which, either individually or
cumulatively, would be a "reportable quantity" under any applicable
Law. Tenant covenants that, at its sole cost and expense, Tenant
will comply with all applicable Laws with respect to the Release of
such permitted Hazardous Materials. Any Release beyond the scope
allowed in this paragraph shall be subject to Landlord's prior
consent, which may be withheld in Landlord's sole and absolute
discretion, and shall require an amendment to the Lease in the
event Landlord does consent which shall set forth the materials,
scope of use, indemnification and any other matter required by
Landlord in Landlord's sole and absolute discretion. Tenant shall
indemnify, defend and hold Landlord and Landlord's agents harmless
from and against any and all claims, losses, damages, liabilities,
or expenses arising in connection with the Release of Hazardous
Materials by Tenant, Tenant's agents or any other person using the
Premises. Tenant's obligation to defend, hold harmless and
indemnify pursuant to this Paragraph 6.4 shall survive Lease
Termination.
As used in this Lease, the term "Hazardous Materials" means any
chemical, substance, waste or material which has been or is
hereafter determined by any federal, state or local governmental
authority to be capable of posing risk of injury to health or
safety, including without limitation, those substances included
within the definitions of "hazardous substances," "hazardous
materials," "toxic substances," or "solid waste" under the
Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, the Resource Conservation and Recovery Act of 1976,
and the Hazardous Materials Transportation Act, as amended, and in
the regulations promulgated pursuant to said laws; those substances
defined as "hazardous wastes" in section 25117 of the California
Health & Safety Code, or as "hazardous substances" in section 25316
of the California Health & Safety Code, as amended, and in the
regulations promulgated pursuant to said laws; those substances
listed in the United States Department of Transportation Table (49
CFR 172.101 and amendments thereto) or designated by the
Environmental Protection Agency (or any successor agency) as
hazardous substances (see, e.g., 40 CFR Part 302 and amendments
thereto); such other substances, materials and wastes which are or
become regulated or become classified as hazardous or toxic under
any Laws, including without limitation the California Health &
Safety Code, Division 20, and Title 26 of the California Code of
Regulations; and any material, waste or substance which is (i)
petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv)
designated as a "hazardous substance" pursuant to section 311 of
the Clean Water Act of 1977, 33 U.S.C. section 1251 et seq. (33
U.S.C. Section 1321) or listed pursuant to section 307 of the Clean
Water Act of 1977 (33 U.S.C. Section 1317), as amended; (v)
flammable explosives; (vi) radioactive materials; or (vii) radon
gas.
TAXES
7. 7.1 PERSONAL PROPERTY TAXES. Tenant shall cause Tenant's trade
fixtures, equipment, furnishings, furniture, merchandise,
inventory, machinery, appliances and other personal property
installed or located on the Premises (collectively the "personal
property") to be assessed and billed separately from the Premises.
Tenant shall pay before delinquency any and all taxes, assessments
and public charges levied, assessed or imposed upon or against
Tenant's personal property. If any of Tenant's personal property
shall be assessed with the real property comprising the Common Area
or with the Premises, Tenant shall pay to Landlord, as Additional
Rent, the amounts attributable to Tenant's personal property within
ten (10) days after receipt of a written statement from Landlord
setting forth the amount of such taxes, assessments and public
charges attributable to Tenant's personal property. Tenant shall
comply with the provisions of any Law which requires Tenant to file
a report of Tenant's personal property located on the Premises.
7.2 OTHER TAXES PAYABLE SEPARATELY BY TENANT. Tenant shall pay (or
reimburse Landlord, as Additional Rent, if Landlord is assessed),
prior to delinquency or within ten (10) days after receipt of
Landlord's statement thereof, any and all taxes, levies,
assessments or surcharges payable by Landlord or Tenant (other than
Landlord's net income, succession, transfer, gift, franchise,
estate or inheritance taxes, and Taxes, as that term is defined in
Paragraph 7.3 (a) below, payable as an Operating Expense), whether
or not now customary or within the contemplation of the parties
hereto, whether or not now in force or which may hereafter become
effective, including but not limited to taxes:
(a) Upon, allocable to, or measured by the area of the Premises or
the Rentals payable hereunder, including without limitation any
gross income, gross receipts, excise, or other tax levied by the
state, any political subdivision thereof, city or federal government
with respect to the receipt of such Rentals;
(b) Upon or with respect to the use, possession, occupancy, leasing,
operation and management of the Premises or any portion thereof;
(c) Upon this transaction or any document to which Tenant is a party
creating or transferring an interest or an estate in the Premises; or
(d) Imposed as a means of controlling or abating environmental
pollution or the use of energy or any natural resource (including
without limitation gas, electricity or water), including, without
limitation, any parking taxes, levies or charges of vehicular
4
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regulations imposed by any governmental agency. Tenant shall also
pay, prior to delinquency, all privilege, sales, excise, use,
business, occupation, or other taxes, assessments, license fees, or
changes levied, assessed or imposed upon Tenant's business operations
conducted at the Premises.
In the event any such taxes are payable by Landlord and it shall
not be lawful for Tenant to reimburse Landlord for such taxes, then
the Rentals payable hereunder shall be increased to net Landlord
the same net Rental after imposition of any such tax upon Landlord
as would have been payable to Landlord prior to the imposition of
any such tax.
7.3 COMMON TAXES.
(a) DEFINITION OF TAXES. The term "Taxes" as used in this Lease
shall collectively mean (to the extent any of the following are
not paid by Tenant pursuant to Paragraphs 7.1 and 7.2 above) all
real estate taxes; personal property taxes; taxes based on
vehicles utilizing parking areas on the Common Area; taxes
computed or based on rental income or on the square footage of the
Premises (including without limitation any municipal business tax
but excluding federal, state and municipal net income taxes);
environmental surcharges; excise taxes; gross receipts taxes;
sales and/or use taxes; employee taxes; water and sewer taxes,
levies, assessments and other charges in the nature of taxes or
assessments (including, but not limited to, assessments for public
improvements or benefit); and all other governmental,
quasi-governmental or special district impositions of any kind and
nature whatsoever, regardless of whether now customary or within
the contemplation of the parties hereto and regardless of whether
resulting from increased rate and/or valuation, or whether
extraordinary or ordinary, general or special, unforeseen or
foreseen, or similar or dissimilar to any of the foregoing and
which during the Lease Term are laid, levied, asessed or imposed
upon Landlord and/or become a lien upon or chargeable against the
Premise and/or Common Area under or by virtue of any present or
future laws, statutes, ordinances, regulations, or other
requirements of any governmental, quasi-governmental or special
district authority whatsoever. The term "environmental
surcharges" shall include any and all expenses, taxes, charges or
penalities imposed by the Federal Department of Energy, Federal
Environmental Protection Agency, the Federal Clean Air Act, or any
regulations promulgated thereunder, or imposed by any other local,
state or federal governmental agency or entity now or hereafter
vested with the power to impose taxes, assessments or other types
of surcharges as a means of controlling or abating environmental
pollution or the use of energy or any natural resource in regard
to the use, operation or occupancy of the Premises and/or the
Common Area. The term "Taxes" shall include (to the extent the
same are not paid by Tenant pursuant to Paragraphs 7.1 and 7.2
above), without limitation, all taxes, assessments, levies, fees
impositions or charges levied, imposed, assessed, measured, or
based in any manner whatsoever upon or with respect to the use,
possession, occupancy, leasing, operation or management of the
Premises and/or Common Area or in lieu of or equivalent to any
Taxes set forth in this Paragraph 7.3 (a). In the event any such
Taxes are payable by Landlord and it shall not be lawful for
Tenant to reimburse Landlord for such Taxes, then the Rentals
payable hereunder shall be increased to net Landlord the same net
Rental after imposition of any such tax upon Landlord as would
have been payable to Landlord prior to the imposition of any such
Tax.
(b) OPERATING EXPENSE. All Taxes which are levied or assessed or
which become a lien upon the Premises and/or Common Area or which
become due or accrue during the Lease Term shall be an Operating
Expense, and Tenant shall pay as Additional Rent each month during
the Lease Term 1/12th of such Taxes, based on Landlord's estimate
thereof, pursuant to Paragraph 12 below. Taxes during any partial
tax fiscal year(s) within the Lease Term shall be prorated
according to the ratio which the number of days during the Lease
Term or of actual occupancy of the Premises by Tenant, whichever
is greater, during such year bears to 365.
INSURANCE;
IDEMNITY;
WAIVER
8. 8.1 INSURANCE BY LANDLORD.
(a) Landlord shall, during the Lease Term, procure and keep in
force the following insurance, the cost of which shall be an
Operating Expense, payable by Tenant pursuant to Paragraph 12
below:
(i) Property Insurance. "All risk" property insurance,
including, without limitation, coverage for earthquake and flood;
boiler and machinery (if applicable); sprinkler damage;
vandalism; malicious mischief; full converage plate glass
insurance; and demolition, increased cost of construction and
contingent liability from change in building laws on the
Premises and Common Area, including any improvements or
fixtures constructed or installed on the Premises and Common
Area by Landlord. Such insurance shall be in the full amount
of the replacement cost of the foregoing, with reasonable
deductible amounts, which deductible amounts shall be an
Operating Expense, payable by Tenant pursuant to Paragraph 12.
Such insurance shall also include rental income insurance,
insuring that one hundred percent (100%) of the Rentals (as the
same may be adjusted hereunder) will be paid to Landlord for a
period of up to twelve (12) months if the Premises are
destroyed or damaged, or such longer period as may be rquired by
any beneficiary of a deed of trust or any mortgagee or any
mortgage affecting the Premises. Such insurance shall not
cover any leasehold improvements installed in the Premises by
Tenant at its expense, or Tenant's equipment, trade fixtures,
inventory, fixtures or personal property located on or in the
Premises;
(ii) Liability Insurance. Comprehensive general liability
(lessor's risk) insurance against any and all claims for
personal injury, death or property damage occurring in or
about the Premises or Common Area. Such insurance shall have
a combined single limit of not less than Three Million Dollars
($3,000,000) per occurrence and Five Million Dollars
($5,000,000) aggregate; and
(iii) Other. Such other insurance as Landlord deems necessary
and prudent.
8.2 INSURANCE BY TENANT. Tenant shall, during the Lease Term, at
Tenant's sole cost and expense, procure and keep in force the
following insurance:
(a) PERSONAL PROPERTY INSURANCE. "All risk" property insurance,
including, without limitation, coverage for earthquake and flood;
boiler and machinery (if applicable); sprinkler damage; vandalism;
malicious mischief; and demolition, increased cost of construction
and contingent liability from changes in building laws on all
leasehold improvements installed in the Premises by Tenant at its
expense (if any) and on all equipment, trade fixtures, inventory,
fixtures and personal property located on or in the Premises,
including improvements or fixtures hereinafter constructed or
installed on the Premises. Such insurance shall be in an amount
equal to the full replacement cost of the aggregate of the
foregoing and shall provide coverage comparable to the coverage in
the standard ISO all risk form, when such form is supplemented
with the coverages required above.
(b) LIABILITY INSURANCE. Commercial general liability insurance
for the mutual benefit of Landlord and Tenant, against any and all
claims for personal injury, death or property damage occurring in
or about the Premises and Common Area, or arising out of Tenant's
or Tenant's agent's use of the Common Area, use or occupancy of
the Premises or Tenant's operations on the Premises. Such
insurance shall have a combined single limit of not less than One
Million Dollars ($1,000,000) per occurrence and Two Million
Dollars ($2,000,000) aggregate. Such insurance shall contain a
cross-liability (severability of interests) clause and an extended
("broad form") liability endorsement, including blanket
contractual coverage. The minimum limits specified above are the
minimum amounts required by Landlord, and may be revised by
Landlord from time to time to meet changed circumstances,
including without limitation to reflect (i) changes in the
purchasing power of the dollar, (ii) changes indicated by the
amount of plaintiffs' verdicts in personal injury actions in the
State of California, or (iii) changes consistent with the
standards required by other landlords in the county in which the
Premises are located. Such liability insurance shall be primary
and not contributing to any insurance available to Landlord, and
Landlord's insurance (if any) shall be in excess thereto. Such
insurance shall specifically insure Tenant's performance of the
indemnity, defense and hold harmless agreements contained in
Paragraph 8.4, although Tenant's obiligations pursuant to
Paragraph 8.4 shall not be limited to the amount of any insurance
required of or carried by Tenant under this Paragraph 8.2(b).
Tenant shall be responsible for insuring that the amount of
insurance maintained by Tenant is sufficient for Tenant's purposes.
(c) OTHER. Such other insurance as required by law, including
without limitation, workers' compensation insurance.
(d) FORM OF THE POLICIES. The policies required to be maintained
by Tenant pursuant to Paragraphs 8.2(a), (b), and (c) above shall
be with companies, on forms, with deductible amounts (if any), and
loss payable clauses satisfactory to Landlord, shall include
Landlord and the beneficiary or mortgages of any deed of trust or
mortgage encumbering the Premises and/or the real property
comprising the Common Area as additional insureds, and shall
provide that such parties may, although addi-
<PAGE>
tional insureds, recover for any loss suffered by Tenant's
negligence. Certified copies of policies or certificates of
insurance shall be delivered to Landlord prior to the Commencement
Date; a new policy or cerificate shall be delivered to Landlord at
least 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 Tenant as required by this Lease.
Tenant shall obtain a written obligation on the part of Tenant's
insurer(s) to notify Landlord and any beneficiary or mortgagee of a
deed of trust or mortgage encumbering the Premises and/or the real
property comprising the Common Area in writing of any deliquency
in premmium payments and at least thirty (30) days prior to any
cancellation or modification of any policy. Tenants's policies
shall provide coverage on an occurence basis and not on a claims
made basis. In no event shall the limits of any policies
maintained by Tenant be considered as limiting the liability of
Tenant under the Lease.
8.3 FAILURE BY TENANT TO OBTAIN INSURANCE. If Tenant does not
take out the insurance required pursuant to Paragraph 8.2 or keep
the same in full force and effect, Landlord may, but shall not be
obligated to, take out the necessary insurance and pay the premium
therefor, and 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 attorney's fees) and
damages which Landlord may sustain by reason of the failure of
Tenant to obtain and maintain such insurance, it being expressly
declared that the expenses and damages of Landlord shall not be
limited to the amount of the premiums thereon.
8.4 INDEMNIFICATION. Tenant shall idemnify, hold harmless, and
defend Landlord (except for Landlord's active negligence or willful
misconduct) against all claims, losses, damages, expenses or
liabilities for injury or death to any person or for damage to or
loss of use of any property arising out of any occurence in, on or
about the Premises or Common Area, if caused or contributed to by
Tenant or Tenant's agents, or arising out of any occurence in, upon
or at the Premises or on account of the use, condition,
occupational safety or occupancy of the Premises. It is the intent
of the parties hereto that the indemnity contained in this
Paragraph 8.4 shall not be limited or barred by reason of any
passive negligence on the part of the Landlord or Landlord's
agents, except as expressly provided herein. Tenant's
indemnification, defense and hold harmless obligations under this
Lease shall include and apply to attorney's fees, investigation
costs, and other costs actually incurred by Landlord. Tenant shall
further indemnify, defend and hold harmless Landlord from and
against any and all claims, losses, damages, liabilities or
expenses arising from any breach or default in the performance of
any obligation on Tenant's part to be performed under the terms of
this Lease. The provisions of this Paragraph 8.4 shall survive
Lease Termination with respect to any damage, injury, death, breach
or default occurring prior to such termination. This Lease is made
on the express condition that Landlord shall not be liable for, or
suffer loss by reason of, injury to person or property, from
whatever cause, in any way connected with the condition, use,
occupational safety or occupancy of the Premises specifically
including, without limitation, any liability for injury to the
person or property of Tenant or Tenant's agents.
8.5 CLAIMS BY TENANT. Landlord shall not be liable to Tenant, and
Tenant waives all claims against Landlord, for injury or death to
any person, damage to any property, or loss of use of any property
in the Premises or Common Area by and from all causes, including
without limitation, any defect in the premises or Common Area
and/or damage or injury resulting from fire, steam, electricity,
gas, water or rain, which may leak or flow from or into any part of
the Premises, or from breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, whether the damage or injury
results from conditions arising upon the Premises or Common Area or
from other sources. Landlord shall not be liable for any damages
arising from any act or neglect of any other user of the Common
Area. Tenant or Tenant's agents shall immediately notify Landlord
in writing of any known defect in the Premises or Common Area. The
provisions of this Paragraph 8.5 shall not apply to any damage or
injury caused by Landlord's willful misconduct or sole negligence.
8.6 MUTUAL WAIVER OF SUBROGATION. Landlord hereby releases Tenant
and Tenant hereby releases Landlord, and their respective officers,
agents, employees and servants, from any and all claims or demands
of damages, loss, expense or injury to the Premises or the Common
Area, or to the furnishings, fixtures, equipment, inventory or
other property of either Landlord or Tenant in, about or upon the
Premises or the Common Area, which is caused by or results from
perils, events or happenings which are the subject of insurance
carried by the respective parties pursuant to this Paragraph 8 and
in force at the time of any such loss, whether due to the
negligence of the other party or its agents and regardless of cause
or origin; provided, however, that such waiver shall be effective
only to the extent permitted by the insurance covering such loss,
to the extent such insurance is not prejudiced thereby, and to the
extent insured against.
UTILITIES
9. Tenant shall pay during the Lease Term and prior to delinquency
all charges for water, gas, light, heat, power, electricity,
telephone or other communication service, janitorial service, trash
pick-up, sewer and all other services supplied to or consumed on
the Premises (collectively the "Services") and all taxes, levies,
fees or surchages therefor. Tenant shall arrange for Services to
be supplied to the Premises and shall contract for all of the
Services in Tenant's name prior to the Commencement Date. The
Commencement Date shall not be delayed by reason of any failure by
Tenant to so contract for Services. In the event that any of the
Services cannot be separately billed or metered to the Premises, or
if any of the Services are not separately metered as of the
Commencement Date, the cost of such Services shall be an Operating
Expense and Tenant shall pay such cost to Landlord as Additional
Rent, as provided in Paragraph 12 below, except that Tenant's
proportionate share of such Services shall be the percentage
obtained by dividing the gross leaseable square footage contained
in the Premises by the total gross leasable square footage located
in all buildings utilizing such Services. The lack or shortage of
any Services due to any cause whatsoever shall not affect any
obligation of tenant hereunder, and Tenant shall faithfully keep
and observe all the terms, conditions and convenants of this Lease
and pay all Rentals due hereunder, all without diminution, credit
or deduction.
REPAIRS AND
MAINTENANCE
10. 10.1 LANDLORD'S RESPONSIBILITIES. Subject to the provisions of
Paragraph 15 below, Landlord shall maintain in reasonably good
order and repair the structual roof and roof surface, structual and
exterior walls (including painting therof) and foundations of the
Premises, except for any repairs required because of the wrongful
act of Tenant or Tenant's agents, which repairs shall be made at
the expense of Tenant and as Additional Rent. In addition,
Landlord shall maintain the heating and air conditioning systems of
the Premises. Tenant shall give prompt written notice to Landlord
of any known maintenance work required to be made by Landlord
pursuant to the Paragraph 10.1. The costs of repairs and
maintenance which are the obligation of Landlord hereunder or which
Landlord elects to perform hereunder shall be an Operating Expense
and Tenant shall pay such costs to Landlord as Additional Rent as
provided in Paragraph 12 below.
To the extent any labor dispute in which Tenant is involved or of
which Tenant is the object interferes with the performance of
Landlord's duties hereunder, Landlord shall be excused from the
performance of such duties and Tenant hereby waives any and all
claims against Landlord for damages or losses in regard to such
duties.
10.2 TENANT'S RESPONSIBILITIES. Except as expressly provided in
Paragraph 10.1 above, Tenant shall, at its sole cost, maintain the
entire Premises and every part thereof, including without
limitation, windows, skylights, window frames, plate glass, freight
docks, doors and related hardware, interior walls and partitions,
and the electrical, plumbing, lighting, heating and air
conditioning systems (unless Landlord has elected to keep and
maintain the heating and air conditioning systems pursuant to
Paragraph 10.1 above) in good order, condition and repair. If
Tenant fails to make repairs or perform maintenance work required
of Tenant hereunder within five (5) days after notice from Landlord
specifying the need for such repairs or maintenance work, Landlord
or Landlord's agents may, in addition to all other rights and
remedies available hereunder or by law and without waiving any
alternative remedies, enter into the Premises and make such repairs
and/or perform such maintenance work. If Landlord makes such
repairs and/or performs such maintenance work, Tenant shall
reimburse Landlord upon demand and as Additional Rent for the costs
of such repairs and/or maintenance work. Landlord shall have no
liability to Tenant for any damage, inconvenience or interference
with the use of the Premises by Tenant or Tenant's agents as a
result of Landlord performing any such repairs or maintenance.
Tenant shall reimburse Landlord, on demand and as Additional Rent,
for the cost of damage to the Premises.
<PAGE>
and/or Common Area caused by Tenant or Tenant's agents. Tenant
expressly waives the benefits of any statute now or hereafter in
effect (including without limitation the provisions of subsection 1
of Section 1932, Section 1941 and Section 1942 of the California
Civil Code and any similar law, statute or ordinance now or
hereafter in effect) which would otherwise afford Tenant the right
to make repairs at Landlord's expense (or to deduct the cost of
such repairs from Rentals due hereunder) or to terminate this Lease
because of Landlord's failure to keep the Premises in good and
sanitary order.
COMMON AREA
11. 11.1 IN GENERAL. Subject to the terms and conditions of this Lease
and such rules and regulations as Landlord may from time to time
prescribe, Tenant and Tenant's agents shall have the nonexclusive
right to use during the Lease Term the access roads, sidewalks,
landscaped areas and other facilities on the Common Area. This
right to use the Common Area shall terminate upon Lease
Termination. Neither Tenant nor Tenant's agents shall at any time
park or permit the parking of their vehicles in any portion of the
Common Area not designated by Landlord as a parking area.
Landlord reserves the right from time to time to make changes in
the shape, size, location, amount and extent of the Common Area.
Landlord further reserves the right to promulgate such reasonable
rules and regulations relating to the use of all or any portion of
the Common Area and to amend such rules and regulations from time
to time, with or without advance notice, as Landlord may deem
appropriate. Any amendments to the rules and regulations shall be
effective as to Tenant, and binding on Tenant, upon delivery of a
copy of such rules and regulations to Tenant. Tenant and Tenant's
agents shall observe such rules and regulations and any failure by
Tenant or Tenant's agents to observe and comply with the rules and
regulations shall be a Default by Tenant. Landlord shall not be
responsible for the nonperformance of the rules and regulations by
any tenants or occupants of the buildings or improvements which now
exist or may hereafter be constructed upon the Common Area or upon
the real property owned by Landlord adjacent to the Common Area or
by any other user authorized by Landlord.
Landlord furthermore reserves the right, after having given Tenant
reasonable notice, to have any vehicles owned by Tenant or Tenant's
agents which are parked in violation of the provisions of this
Paragraph 11.1 or in violation of Landlord's rules and regulations
relating to parking, to be towed away at Tenant's cost.
Landlord shall have the right to close, at reasonable times, all or
any portion of the Common Area for any reasonable purpose,
including without limitation, the prevention of a dedication
thereof, or the accrual of rights of any person or public therein.
11.2 MAINTENANCE BY LANDLORD. Landlord shall operate, manage and
maintain the Common Area. The manner in which the Common Area
shall be maintained and the expenditures for such maintenance shall
be at the sole discretion of Landlord. The cost of such
maintenance, operation and management, shall be an "Operating
Expense", and Tenant shall pay such costs to Landlord, as
Additional Rent, as provided in Paragraph 12 below. Alternatively,
Landlord may elect at any time, at its option, to require Tenant to
operate, manage and maintain all or any portion of the Common Area.
If Landlord so elects, Tenant shall operate, manage and maintain
that portion of the Common Area designated by Landlord at Tenant's
sole cost and expense.
OPERATING EXPENSES
12. 12.1 DEFINITION. "Operating Expense" or "Operating Expenses" as used
in this Lease shall mean and include all items identified in other
paragraphs of this Lease as an Operating Expense and the total cost
paid or incurred by Landlord for the operation, maintenance,
repair, and management of the Premises and Common Area, which costs
shall include, without limitation: the cost of Services and
utilities supplied to the Premises and Common Area (to the extent
the same are not separately charged or metered to Tenant); water;
sewage; fuel; electricity; lighting systems; professional
management fee (not to exceed three percent (3%) of the Premises'
gross rental income); fire protection systems; storm drainage and
sanitary sewer systems; HVAC including air conditioning (to the
extent the heating and air conditioning systems in the Premises are
not maintained by Tenant at Tenant's sole cost and expense);
repairing the roof structure and roof surface; maintenance and
repair of the structural parts of the Premises (including
foundation, floor slab and load bearing walls); property and
liability insurance covering the Premises and any other insurance
carried by Landlord pursuant to Paragraph 8 above; cleaning,
sweeping, striping, resurfacing of parking and driveway areas;
cleaning the Common Area following storms and other severe weather;
cleaning and repairing of sidewalks, curbs, stairways; costs
related to irrigation systems; the cost of complying with Laws,
including, without limitation, maintenance, alterations and repairs
required in connection herewith; costs related to landscape
maintenance; and the cost of contesting the validity or
applicability of any governmental enactments which may affect
Operating Expenses. If the Common Area is used by more than one
(1) building at any time during the Lease Term, then the term
"Operating Expenses" shall mean and include all of the Operating
Expenses allocable to the Premises and a proportionate share (based
on the square footage of gross leaseable area in the Premises as a
percentage of the total of square footage of gross leaseable area
of the buildings utilizing the Common Area at the time in question)
of all Operating Expenses which are related to such buildings in
general and are not allocated to any one building utilizing the
Common Area. Operating Expenses shall also include an accounting
fee equal to five percent (5%) of the total Operating Expenses.
The specific examples of Operating Expenses stated in this
Paragraph 12.1 are in no way intended to and shall not limit the
costs comprising Operating Expenses, nor shall such examples be
deemed to obligate Landlord to incur such costs or to provide such
services or to take such actions except as Landlord may be
expressly required in other portions of this Lease, or except as
Landlord, in its sole discretion, may elect. All costs incurred by
Landlord in good faith for the operation, maintenance, repair and
management of the Premises and Common Area shall be deemed
conclusively binding on Tenant.
12.2 PAYMENT OF OPERATING EXPENSES BY TENANT. Tenant shall pay
the Operating Expenses to Landlord as Additional Rent without
deduction or offset. Payment of Operating Expenses by Tenant shall
be made by whichever of the following methods is from time to time
designated by Landlord, and Landlord may change the method of
payment at any time. Operating Expenses actually incurred or paid
by Landlord but not theretofore billed to Tenant, as invoiced by
Landlord, shall be payable by Tenant within ten (10) days after
receipt of Landlord's invoice, but not more often than once each
calendar month. Alternatively, Tenant's payment of Operating
Expenses shall be based upon Landlord's estimate of Operating
Expenses and shall be payable in equal monthly installments in
advance on the first day of each calendar month commencing with the
month following receipt of Landlord's estimate (and subject to
Landlord's right to change the method of payment). Within ninety
(90) days after the end of each calendar year (or at Lease
Termination) Landlord shall furnish Tenant a statement showing the
actual Operating Expenses for the period to which Landlord's
estimate pertains and shall concurrently either bill Tenant for the
balance due (payable upon demand by Landlord) or credit Tenant's
account for the excess previously paid. Tenant shall have the
right to audit Landlord's statement of operating expense at its
sole cost.
ALTERATIONS AND IMPROVEMENTS
13. 13.1 IN GENERAL. Tenant shall not make, or permit to be made, any
alterations, changes, enlargements, improvements or additions
(collectively "Alterations") in, on, about or to the Premises, or
any part thereof, including Alterations required pursuant to
Paragraph 6.2, without the reasonable prior written consent of
Landlord and without acquiring and complying with the conditions of
all permits required for such Alterations by any governmental
authority having jurisdiction thereof. The term "Alterations" as
used in this Paragraph 13 shall also include all heating, lighting,
electrical (including all wiring, conduit, outlets, drops, buss
ducts, main and subpanels), air conditioning, and partitioning in
the Premises made by Tenant, regardless of how affixed to the
Premises. As a condition to the giving of its consent, Landlord
may impose such requirements as Landlord may deem necessary in its
sole discretion, including without limitation, the manner in which
the work is done; a right of approval of the contractor by whom the
work is to be performed; the requirement that Tenant post a
completion bond in an amount and form satisfactory to Landlord; and
the requirement that Tenant reimburse Landlord, as Additional Rent,
for Landlord's actual costs incurred in reviewing any proposed
Alteration, whether or not Landlord's consent is granted. In the
event Landlord consents to the making of any Alterations by Tenant,
the same shall be made by Tenant at Tenant's sole cost and expense,
in accordance with the plans and specifications approved by
Landlord. Tenant shall give written notice to Landlord five (5)
days prior to employing any laborer or contractor to perform
services related to, or receiving materials for use upon the
Premises, and prior to the commencement of any work of improvement
on the Premises. Any Alterations to the Premises made by Tenant
shall be made in accordance with applicable Laws and in a
first-class workmanlike manner. In making any such Alterations,
Tenant shall, at Tenant's sole cost and expense, file for and
secure and comply with any and all permits or approvals required by
any governmental departments or authorities having jurisdiction
thereof and any utility company having an interest therein. In no
event shall Tenant make any structural changes to the Premises or
make any changes to the Premises which would weaken or impair the
structural integrity of the Premises.
13.2 REMOVAL UPON LEASE TERMINATION. At the time Tenant requests
Landlord's consent, Tenant shall request a decision from Landlord
in writing as to whether Landlord will require Tenant, at Tenant's
expense, to remove any such Alterations and restore Premises to
their prior condition at Lease Termination. Landlord may defer
such decision until Tenant's request for
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such decision prior to the expiration of the Lease Term as
described below. In the event Tenant fails to earlier obtain
Landlord's written decision as to whether Tenant will be required
to remove any Alteration, or in the event Landlord elects to defer
such decision, then no less than ninety (90) nor more than one
hundred twenty (120) days prior to the expiration of the Lease Term
Tenant by written notice to Landlord shall request Landlord to
inform Tenant whether or not Landlord desires to have any
Alterations made to the Premises by Tenant removed at Lease
Termination. Following receipt of such notice, Landlord may elect
to have all or a portion of Tenant's Alterations removed at Lease
Termination, and Tenant shall, at its sole cost and expense, remove
at Lease Termination such Alterations designated by Landlord for
removal and repair all damage to the Premises and Common Area
arising from such removal. In the event Tenant fails to so request
Landlord's decision or fails to remove any Alterations designated
by Landlord for removal, Landlord may remove any Alterations made
to the Premises by Tenant and repair all damage to the Premises and
Common Area arising from such removal, and may recover from Tenant
all costs and expenses incurred thereby. Tenant's obligation to
pay such costs and expenses to Landlord shall survive Lease
Termination. Unless Landlord elects to have Tenant remove (or,
upon Tenant's failure to obtain Landlord's decision, Landlord
removes) any such Alterations, all such Alterations, except for
moveable furniture and trade fixtures of Tenant not affixed to the
Premises, shall become the property of Landlord upon Lease
Termination (without any payment therefor) and remain upon and be
surrendered with the Premises at Lease Termination.
13.3 LANDLORD'S IMPROVEMENTS. All fictures, improvements or
equipment which are installed, constructed on or attached to the
Premises or Common Area by Landlord shall be a part of the realty
and belong to the Landlord.
DEFAULT AND REMEDIES
14. 14.1 EVENTS OF DEFAULT. The term "Default by Tenant" as used in this
Lease shall mean the occurrence of any of the following events:
(a) Tenant's failure to pay when due any Rentals;
(b) Tenant's vacation or abandonment of the Premises;
(c) Commencement and continuation for at least thirty (30) days of
any case, action or proceeding by, against or concerning Tenant
under any federal or state bankruptcy, insolvency or other debtor's
relief law, including without limitation, (i) a case under Title 11
of the United States Code concerning Tenant, whether under Chapter
7, 11 or 13 of such Title or under any other Chapter, or (ii) a
case, action or proceeding seeking Tenant's financial
reorganization or an arrangement with any of Tenant's creditors;
(d) Voluntary or involuntary appointment of a receiver, trustee,
keeper, or other person who takes possession for more than thirty
(30) days of substantially all of Tenant's assets or of any asset
used in Tenant's business on the Premises, regardless of whether
such appointment is as a result of insolvency or any other cause;
(e) Execution of an assignment for the benefit of creditors of
substantially all assets of Tenant available by law for the
satisfaction of judgment creditors;
(f) Commencement of proceedings for winding up or dissolving
(whether voluntary or involuntary) the entity of Tenant, if Tenant
is a corporation or a partnership;
(g) Levy of writ of attachment or execution on Tenant's interest
under this Lease, if such writ continues for a period of ten (10)
days;
(h) Transfer or attempted Transfer of this Lease or the Premises by
Tenant contrary to the provisions of Paragraph 24 below; or
(i) Breach by Tenant of any term, covenant, condition, warranty, or
other provision contained in this Lease or of any other obligation
owing or due the Landlord.
14.2 REMEDIES. Upon any Default by Tenant, Landlord shall have the
following remedies, in addition to all other rights and remedies
provided by law, to which Landlord may resort cumulatively, or in
the alternative:
14.2.1 TERMINATION. Upon any Default by Tenant, Landlord shall
have the right (but not the obligation) to give written notice to
Tenant of such default and terminate this Lease and Tenant's right
to possession of the Premises if (i) such default is in the payment
of Rentals and is not cured within three (3) days after any such
notice, or, (ii) with respect to the defaults referred to in
subparagraphs 14.1(b),(e), (f), (h) and (i), such default is not
cured within thirty (30) days after any such notices if a default
under subparagraphs 14.1(b) or (i) cannot be reasonably cured
within thirty (30) days, if Tenant does not commence to cure the
default within the thirty (30) day period or does not diligently
and in good faith prosecute the cure to completion), or, (iii),
with respect to the defaults specified in subparagraphs 14.1(c),
(d) and (g), such default is not cured within the respective time
periods specified in those subparagraphs. The parties agree that
any notice given by Landlord to Tenant pursuant to this Paragraph
14.2.1 shall be sufficient notice for purposes of California Code
of Civil Procedure Section 1161 and Landlord shall not be required
to give any additional notice in order to be entitled to commence
an unlawful detainer proceeding. Upon termination of this Lease
and Tenant's right to possession of the Premises, Landlord shall
have the right to recover from Tenant:
(a) The worth at the time of award of the unpaid Rentals which had
been earned at the time of termination;
(b) The worth at the time of award of the amount by which the
Rentals which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided;
(c) The worth at the time of award (computed by discounting at the
discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent) of the amount by which the Rentals
for the balance of the Lease Term after the time of award exceed
the amount of such rental loss that Tenant proves could be
reasonably avoided;
(d) Any other amounts necessary to compensate Landlord for all
detriment proximately caused by the Default by Tenant or which in
the ordinary course of events would likely result, including
without limitation the following:
(i) Expenses in retaking possession of the Premises;
(ii) Expenses for cleaning, repairing or restoring the
Premises;
(iii) Any unamortized real estate brokerage commission paid in
connection with this Lease;
(iv) Expenses for removing, transporting, and storing any of
Tenant's property left at the Premises (although Landlord
shall have no obligation to remove, or store any such
property);
(v) Expenses of reletting the Premises, including without
limitation, brokerage commissions and attorney's fees;
(vi) Attorney's fees and court costs; and
(vii) Costs of carrying the Premises such as repairs,
maintenance, taxes and insurance premiums, utilities and
security precautions (if any).
(e) The "worth at the time of award" of the amounts referred to in
subparagraphs (a) and (b) of this Paragraph 14.2.1 is computed by
allowing interest at an annual rate equal to the greater of: ten
percent (10%); or five percent (5%) plus the rate established by
the Federal Reserve Bank of San Francisco, as of the twenty-fifth
(25th) day of the month immediately preceding the Default by
Tenant, on advances to member banks under Sections 13 and 13(a) of
the Federal Reserve Act, as now in effect or hereafter from time
to time amended, not to exceed the maximum rate allowable by law.
14.2.2 CONTINUATION OF LEASE. Upon any Default by Tenant and
unless and until Landlord elects to terminate this Lease pursuant
to Paragraph 14.2.1 above, this Lease shall continue in effect
after the Default by Tenant and Landlord may enforce all its rights
and remedies under this Lease, including without limitation, the
right to recover payment of Rentals as they become due. Neither
efforts by Landlord to mitigate damages caused by Default by Tenant
nor the acceptance of any Rentals shall constitute a waiver by
Landlord of any of Landlord's rights or remedies, including the
rights and remedies specified in Paragraph 14.2.1 above.
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DAMAGE OR DESTRUCTION
15. 15.1 DEFINITION OF TERMS. For the purposes of this Lease,
the term: (a) "Insured Casualty" means damage to or destruction of
the Premises from a cause actually insured against, for which the
insurance proceeds paid or made available to Landlord are
sufficient to rebuild or restore the Premises under then-existing
building codes to the condition existing immediately prior to the
damage or destruction; and (b) "Uninsured Casualty" means damage to
or destruction of the Premises from a cause not actually insured
against, or from a cause actually insured against but for which the
insurance proceeds paid or made available to Landlord are for any
reason insufficient to rebuild or restore the Premises under
then-existing building codes to the condition existing immediately
prior to the damage or destruction, or from a cause actually
insured against but for which the insurance proceeds are not paid
or made available to Landlord within sixty (60) days of the event
of damage or destruction.
15.2 INSURED CASUALTY.
15.2.1 REBUILDING REQUIRED. In the event of an Insured Casualty
where the extent of damage or destruction is less than twenty
percent (20%) of then full replacement cost of the Premises,
Landlord shall rebuild or restore the Premises to the condition
existing immediately prior to the damage or destruction,
provided the damage or destruction was not a result of a
negligent or willful act of Tenant, and that there exist no
governmental codes or regulations that would interfere with
Landlord's ability to so rebuild or restore.
15.2.2 LANDLORD'S ELECTION. In the event of an Insured Casualty
where the extent of damage or destruction is equal to or greater
than twenty percent (20%) of the then full replacement cost of
the Premises, Landlord may, at its option and at its sole
discretion, rebuild or restore the Premises to the condition
existing immediately prior to the damage or destruction, or
terminate this Lease. Landlord shall notify Tenant in writing
within sixty (60) days after the event of damage or destruction
of Landlord's election to either rebuild or restore the Premises
or terminate this Lease.
15.2.3 CONTINUANCE OF LEASE. If Landlord is required to
rebuild or restore the Premises pursuant to Paragraph 15.2.1 or
if Landlord elects to rebuild or restore the Premises pursuant
to Paragraph 15.2.2, this Lease shall remain in effect and
Tenant shall have no claim against Landlord for compensation for
inconvenience or loss of business during any period of repair or
restoration.
15.3 UNINSURED CASUALTY.
15.3.1 LANDLORD'S ELECTION. In the event of an Uninsured
Casualty, Landlord may, at its option and at its sole discretion
(i) rebuild or restore the Premises as soon as reasonably
possible at Landlord's expense (unless the damage or destruction
was caused by a negligent or willful act of Tenant, in which
event Tenant shall pay all costs of rebuilding or restoring), in
which event this Lease shall continue in full force and effect
or (ii) terminate this Lease, in which event Landlord shall give
written notice to Tenant within sixty (60) days after the event
of damage or destruction of Landlord's election to terminate
this Lease as of the date of the event of damage or destruction,
and if the damage or destruction was caused by a negligent or
willful act of Tenant, Tenant shall be liable therefor to
Landlord.
15.3.2 TENANT'S ABILITY TO CONTINUE LEASE. If Landlord elects
to terminate this Lease and the extent of damage or destruction
is less than twenty percent (20%) of the then full replacement
cost of the Premises or the proceeds paid or made available to
Landlord are for any reason insufficient to rebuild or restore
the Premises under then-existing building codes to the condition
existing immediately prior to the damage or destruction, and if
there exist no governmental codes or regulations that would
interfere with Landlord's ability to so repair or restore, then
Tenant may nevertheless cause the Lease to continue in effect by
(i) notifying Landlord in writing within ten (10) days after
Landlord's notice of termination of Tenant's agreement to pay
all costs of rebuilding or restoring not covered by insurance,
and (ii) providing Landlord with reasonable security for or
assurance of such payment. Tenant shall pay to Landlord in cash
no later than thirty (30) days prior to the date of commencement
of construction the reasonable estimated cost of rebuilding or
restoring. In the event Tenant fails to pay such cost to
Landlord by the date specified, Landlord may immediately
terminate the Lease and recover from Tenant all costs incurred
by Landlord in preparation for construction. If the actual cost
of rebuilding or restoring exceeds the estimated cost of such
work, Tenant shall pay the difference to Landlord in cash upon
notification by Landlord of the final cost. If the cost of
rebuilding or restoring is less than the estimated cost of such
work, Tenant shall be entitled to a refund of the difference
upon completion of the rebuilding or restoring and determination
of final cost.
15.4 TENANT'S ELECTION. Notwithstanding anything to the contrary
contained in this Paragraph 15, Tenant may elect to terminate this
Lease in the event the Premises are damaged or destroyed and, in the
reasonable opinion of Landlord's architect or construction
consultants, the restoration of the Premises cannot be substantially
completed within one hundred eighty (180) days after the event of
damage or destruction. Tenant's election shall be made by written
notice to Landlord within ten (10) days after Tenant receives from
Landlord the estimate of the time needed to complete repair or
restoration of the Premises. If Tenant does not deliver said notice
within said ten (10) day period, Tenant may not later terminate this
Lease even if substantial completion of the rebuilding or restoration
occurs subsequent to said one hundred eighty (180) day period,
provided that Landlord is proceeding with diligence to rebuild or
restore the Premises. If Tenant delivers said notice within said ten
(10) day period, this Lease shall terminate as of the date of the
event of damage or destruction.
15.5 DAMAGE OR DESTRUCTION NEAR END OF LEASE TERM. Notwithstanding
anything to the contrary contained in this Paragraph 15, in the event
the Premises are damaged or destroyed in whole or in part (regardless
of the extent of damage) from any cause during the last twelve (12)
months of the Lease Term, Landlord may, at Landlord's option,
terminate this Lease as of the date of the event of damage or
destruction by giving written notice to Tenant of Landlord's election
to do so within thirty (30) days after the event of such damage or
destruction. For purposes of this Paragraph 15.5, if Tenant has been
granted an option to extend or renew the Lease Term pursuant to
another provision of this Lease, then the damage or destruction shall
be deemed to have occurred during the last twelve (12) months of the
Lease Term if Tenant fails to exercise its option to extend or renew
within twenty (20) days after the event of damage or destruction.
15.6 TERMINATION OF LEASE. If the Lease is terminated pursuant to
this Paragraph 15, the unused balance of the Security Deposit shall be
refunded to Tenant. The current Rent shall be proportionately reduced
during the period following the event of damage or destruction until
the date on which Tenant surrenders the Premises, based upon the
extent to which the damage or destruction interferes with Tenant's
business conducted in the Premises, as reasonably determined by
Landlord, to the extent such loss is covered as an insured peril by
the insurance carried by Landlord pursuant to Paragraph 8.1. All
other Rentals due hereunder shall continue unaffected during such
period. The proceeds of insurance carried by Tenant pursuant to
Paragraph 8.2 shall be paid to Landlord and Tenant, as their interests
appear.
15.7 ABATEMENT OF RENTALS. If the Premises are to be rebuilt or
restored pursuant to this Paragraph 15, the then current Rent shall be
proportionately reduced during the period of repair or restoration,
based upon the extent to which the making of repairs interferes with
Tenant's business conducted in the Premises, as reasonably determined
by Landlord, to the extent such loss is covered as an insured peril by
the insurance carried by Landlord pursuant to Paragraph 8.1. All other
Rentals due hereunder shall continue unaffected.
15.8 LIABILITY FOR PERSONAL PROPERTY. In no event shall Landlord
have any liability for, nor shall it be required to repair or restore,
any injury or damage to any Alterations to the Premises made by
Tenant, trade fixtures, equipment, merchandise, furniture, or any
other property installed by Tenant or at the expense of Tenant. If
Landlord or Tenant do not elect to terminate this Lease pursuant to
this Paragraph 15, Tenant shall be obligated to promptly rebuild or
restore the same to the condition existing immediately prior to the
damage or destruction in accordance with the provisions of Paragraph
13.1.
15.9 WAIVER OF CIVIL CODE REMEDIES. Landlord and Tenant acknowledge
that the rights and obligations of the parties upon damage or
destruction of the Premises are set forth herein; therefore Tenant
hereby expressly waives any rights to terminate this Lease upon damage
or destruction of the Premises, except as specifically provided by
this Lease, including without limitation any rights pursuant to the
provisions of Subdivision 2 of Section 1932 and Subdivision 4 of
Section 1933 of the California Civil Code, as amended from time to
time, and the provisions of any similar law hereinafter enacted, which
provisions relate to the termination of the hiring of a thing upon its
substantial damage or destruction.
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CONDEMNATION
16. 16.1 DEFINITION OF TERMS. For the purposes of this Lease, the term:
(a) "Taking" means a taking of the Premises or Common Area or
damage related to the exercise of the power of eminent domain and
includes, without limitation, a voluntary conveyance, in lieu of
court proceedings, to any agency, authority, public utility, person
or corporate entity empowered to condemn property; (b) "Total
Taking" means the Taking of the entire Premises or so much of the
Premises or Common Area as to prevent or substantially impair the
use thereof by Tenant for the uses herein specified; provided,
however, that in no event shall the Taking of less than twenty
percent (20%) of the Premises be considered a Total Taking; (c)
"Partial Taking" means the Taking of only a portion of the Premises
or Common Area which does not constitute a Total Taking; (d) "Date
of Taking" means the date upon which the title to the Premises or
Common Area or a portion thereof, passes to and vests in the
condemnor or the effective date of any order for possession if
issued prior to the date title vests in the condemnor; (e) "Award"
means the amount of any award made, consideration paid, or damages
ordered as a result of a Taking.
16.2 RIGHTS. The parties agree that in the event of a Taking all
rights between them or in and to an Award shall be as set forth
herein.
16.3 TOTAL TAKING. In the event of a Total Taking during the
Lease Term: (a) the rights of Tenant under this Lease and the
leasehold estate of Tenant in and to the Premises shall cease and
terminate as of the Date of Taking; (b) Landlord shall refund to
Tenant any prepaid Rent and the unused balance of the Security
Deposit; (c) Tenant shall pay Landlord any Rentals due Landlord
under the Lease, prorated as of the Date of Taking; (d) to the
extent the Award is not payable to the beneficiary or mortgagee of
a deed of trust or mortgage affecting the Premises, Tenant shall
receive from the Award those portions of the Award attributable to
trade fixtures of Tenant; (e) the remainder of the Award shall be
paid to and be the property of Landlord.
16.4 PARTIAL TAKING. In the event of a Partial Taking during the
Lease Term: (a) the rights of Tenant under the Lease and the
leasehold estate of Tenant in and to the portion of the Premises
taken shall cease and terminate as of the Date of Taking; (b) from
and after the Date of Taking the Rent shall be an amount equal to
the product obtained by multiplying the then current Rent by the
quotient obtained by dividing the fair market value of the Premises
immediately after the Taking by the fair market value of the
Premises immediately prior to the Taking; (c) to the extent the
Award is not payable to the beneficiary or mortgagee of a deed of
trust or mortgage affecting the Premises, Tenant shall receive from
the Award the portions of the Award attributable to trade fixtures
of Tenant; and (d) the remainder of the Award shall be paid to and
be the property of Landlord. Each party waives the provisions of
California Code of Civil Procedure Section 1265.130 allowing either
party to petition the Superior Court to terminate this Lease in the
event of a Partial Taking.
LIENS
17. 17.1 PREMISES TO BE FREE OF LIENS. Tenant shall pay for all labor
and services performed for, and all materials used by or furnished
to Tenant, Tenant's agents, or any contractor employed by Tenant
with respect to the Premises. Tenant shall indemnify, defend, and
hold Landlord harmless from and keep the Premises and Common Area
free from any liens, claims, demands, encumbrances, or judgments,
including all costs, liabilities and attorneys' fees with respect
thereto, created or suffered by reason of any labor or services
performed for, or materials used by or furnished to Tenant or
Tenant's agents or any contractor employed by Tenant with respect
to the Premises. Landlord shall have the right, at all times, to
post and keep posted on the Premises any notices permitted or
required by law, or which Landlord shall deem proper, for the
protection of Landlord and the Premises and Common Area, and any
other party having an interest therein, from mechanics' and
materialmen's liens, including without limitation a notice of
nonresponsibility. In the event Tenant is required to post an
improvement bond with a public agency in connection with any work
performed by Tenant on or to the Premises, Tenant shall include
Landlord as an additional obligee.
17.2 NOTICE OF LIEN; BOND. Should any claims of lien be filed
against, or any action be commenced affecting, the Premises,
Tenant's interest in the Premises or any other portion of the
Project, Tenant shall give Landlord notice of such lien or action
within three (3) days after Tenant receives notice of the filing of
the lien or the commencement of the action. In the event that
Tenant shall not, within twenty (20) days following the imposition
of any such lien, cause such lien to be released of record by
payment or posting of a proper bond, Landlord shall have, in
addition to all other remedies provided herein and by law, the
right, but not the obligation, to cause the same to be released by
such means as Landlord shall deem proper, including payment of the
claim giving rise to such lien or posting of a proper bond. All
such sums paid by Landlord and all expenses incurred by Landlord in
connection therewith, including attorneys' fees and costs, shall be
payable to Landlord by Tenant as Additional Rent on demand.
LANDLORD'S RIGHT OF ACCESS OF PREMISES
18. Landlord reserves and shall have the right and Tenant and Tenant's
agents shall permit Landlord and Landlord's agents to enter the
Premises at any reasonable time for the purpose of (i) inspecting
the Premises, (ii) performing Landlord's maintenance and repair
responsibilities set forth herein, (iii) posting notices of
non-responsibility, (iv) placing upon the Premises at any time "For
Sale" signs, (v) placing on the Premises ordinary "For Lease" signs
at any time within ninety (90) days prior to Lease Termination, or
at any time Tenant is in default hereunder, or at such other times
as agreed to by Landlord and Tenant, (vi) protecting the Premises
in the event of an emergency, and (vii) exhibiting the Premises to
prospective purchasers, lenders or tenants. In the event of an
emergency, Landlord shall have the right to use any and all means
which Landlord may deem proper to gain access to the Premises. Any
entry to the Premises by Landlord or Landlord's agents in
accordance with this Paragraph 18 or any other provision of this
Lease shall not under any circumstances be construed or deemed to
be a forcible or unlawful entry into, or a detainer of the
Premises, or an eviction of Tenant from the Premises or any portion
thereof nor give Tenant the right to abate the Rentals payable
under this Lease. Tenant hereby waives any claims for damages for
any injury or inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises,
and any other loss occasioned by Landlord's or Landlord's agents'
entry into the Premises as permitted by this paragraph 18 or any
other provision of this Lease.
LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS
19. Except as otherwise expressly provided herein, if Tenant shall at any
time fail to make any payment or perform any other act required to
be made or performed by Tenant under this Lease, Landlord may upon
ten (10) days written notice to Tenant, but shall not be obligated
to and without waiving or releasing Tenant from any obligation
under this Lease, make such payment or perform such other act to
the extent that Landlord may deem desirable, and in connection
therewith, pay expenses and employ counsel. All sums so paid by
Landlord and all penalties, interest and costs in connection
therewith shall be due and payable by Tenant as Additional Rent
upon demand.
LENDER REQUIREMENTS
20. 20.1 SUBORDINATION. This Lease, at Landlord's option, shall be
subject and subordinate to the lien of any mortgages or deeds of
trust (including all advances thereunder, renewals, replacements,
modifications, supplements, consolidations, and extensions thereof)
in any amount(s) whatsoever now or hereafter placed on or against
or affecting the Premises and/or the real property comprising the
Common Area or Landlord's interest or estate therein, without the
necessity of the execution and delivery of any further instruments
on the part of Tenant to effectuate such subordination. If any
mortgagee or beneficiary shall elect to have this Lease prior to
the lien of its mortgage or deed of trust, and shall give written
notice thereof to Tenant, this Lease shall be deemed prior to such
mortgage or deed of trust, whether this Lease is dated prior or
subsequent to the date of such mortgage or deed of trust or the
date of the recording thereof.
20.2 SUBORDINATION AGREEMENTS. Tenant shall execute and deliver,
without charge therefor, such further instruments evidencing
subordination of this Lease to the lien of any mortgages or deeds
of trust affecting the Premises and/or real property comprising the
Common Area as may be required by Landlord within ten (10) days
following Landlord's request therefor; provided that such mortgagee
or beneficiary under such mortgage or deed of trust agrees in
writing that this Lease shall not be terminated in the event of any
foreclosure if Tenant is not in default under this Lease. Failure
of Tenant to execute such instruments evidencing subordination of
this Lease shall constitute a Default by Tenant hereunder.
20.3 APPROVAL BY LENDERS. Tenant recognizes that the provisions
of this Lease may be subject to the approval of any financial
institution that may make a loan secured by a new or subsequent
deed of trust or mortgage affecting the Premises and/or real
property comprising the Common Area. If the financial institution
should require, as a condition to such financing, any modifications
of this Lease in order to protect its security interest in the
Premises, including without limitation, modification of the
provisions relating to damage to and/or condemnation of the
Premises, Tenant agrees to execute the appropriate amendments;
provided, however, that no modification shall substantially change
the size, location or dimension of the Premises, or increase the
Rentals payable by Tenant hereunder. If Tenant refuses to execute
any such amendment, Landlord may, in Landlord's discretion,
terminate this Lease.
10
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20.4 ATTORNMENT. In the event of foreclosure or the exercise of
power of sale under any mortgage or deed of trust made by Landlord
and covering the Premises and/or real property comprising the
Common Area. Tenant shall attorn to the purchaser upon any such
foreclosure or sale and recognize such purchaser as the Landlord
under this Lease, provided such purchaser expressly agrees in
writing to be bound by the terms of the Lease, including, but not
limited to, the quiet enjoyment provisions of Paragraph 39.
20.5 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS.
(a) DELIVERY TO TENANT. Tenant shall, within ten(10) days
following request by Landlord therefor and without charge,
execute and deliver to Landlord any and all documents, estoppel
certificates, and current financial statements of Tenant as may
be required and requested by Landlord in connection with the sale
or financing of the Premises and/or real property comprising the
Common Area, or requested by any lender making a loan affecting
the Premises and/or real property comprising the Common Area.
Landlord may require that Tenant in any estoppel certificate
shall (i) certify that this Lease is unmodified and in full force
and effect (or, if modified, state the nature of such
modification and certify that this Lease, or so modified, is in
full force and effect) and has not been assigned, (ii) certify
the date to which Rentals are paid in advance, if any, (iii)
acknowledge that there are not, to Tenant's knowledge, any
uncured defaults on the part of Landlord hereunder, or specify
such defaults if claimed, (iv) evidence the status of this Lease
as may be required either by a lender making a loan to Landlord
to be secured by a deed of trust or mortgage covering the
Premises and/or real property comprising the Common Area or a
purchaser of the Premises and/or real property comprising the
Common Area from Landlord, (v) warrant that in the event any
beneficiary of any security instrument encumbering the Premises
and/or real property comprising the Common Area forecloses on the
security instrument or sells the Premises and/or real property
comprising the Common Area pursuant to any power of sale
contained in such security instrument, such beneficiary of any
security instrument encumbering the Premises and/or real property
comprising the Common Area forecloses on the security instrument
or sells the Premises and/or real property comprising the Common
Area pursuant to any power of sale contained in such security
instrument, such beneficiary shall not be liable for the Security
Deposit, (vi) certify the date Tenant entered into occupancy of
the Premises and that Tenant is conducting business at the
Premises, (vii) certify that all improvements to be constructed
on the Premises by Landlord have been substantially completed
except for punch list items which do not prevent Tenant from
using the Premises for its intended use, and (viii) certify such
other matters relating to the Lease and/or Premises as may be
requested by a lender making a loan to Landlord or a purchaser of
the Premises and/or real property comprising the Common Area from
Landlord. Any such estoppel certificate may be conclusively
relied upon by any prospective purchaser or encumbrancer of the
Premises and/or real property comprising the Common Area. Any
financial statements of Tenant shall include an opinion of a
certified public accountant (if available) and a balance sheet
and profit and loss statement for the most recent fiscal year,
all prepared in accordance with generally accepted accounting
principles consistently applied.
(b) NONDELIVERY BY TENANT. Tenant's failure to deliver an
estoppel certificate as required pursuant to Paragraph 20.5(a)
above shall be conclusive upon Tenant that (i) this Lease is in
full force and effect, without modification except as may be
represented by Landlord and has not been assigned, (ii) there are
now no uncured defaults in Landlord's performance, (iii) no
Rentals have been paid in advance except those that are set forth
in this Lease. (iv) no beneficiary of any security instrument
encumbering the Premises and/or real property comprising the
Common Area shall be liable for the Security Deposit in the event
of a foreclosure or sale under such security instrument (v) the
improvements to be constructed on the Premises by Landlord have
been substantially completed except for punch list items which do
not prevent Tenant from using the Premises for its intended use,
and(vi) Tenant has entered into occupancy of the Premises on such
date as may be represented by Landlord and is open and conducting
business at the Premises. Tenant's failure to deliver any
financial statements, estoppel certificates or other documents as
required pursuant to Paragraph 20.5(a) above shall be a Default by
Tenant.
HOLDING OVER
21. This Lease shall terminate without further notice at the
expiration of the Lease Term. It is the desire of Landlord either
to enter into a new lease with Tenant for the Premises prior to the
expiration of the Lease Term, or to have Tenant vacate the Premises
pursuant to Paragraph 35 below. Therefore, any holding over by
Tenant after Lease Termination shall not constitute a renewal or
extension of the Lease Term, nor give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any
holding over after Lease Termination with the consent of Landlord
shall be construed to be a tenancy from month to month, at one
hundred fifty percent (150%) of the monthly Rent for the
month preceding Lease Termination in addition to all Additional
Rent payable hereunder, and shall otherwise be on the terms and
conditions herein specified insofar as applicable. If Tenant
remains in possession of the Premises after Lease Termination
without Landlord's consent. Tenant shall indemnify, defend and hold
Landlord harmless from and against any loss, damage, expense, claim
or liability resulting from Tenant's failure to surrender the
Premises, including without limitation, any claims made by any
succeeding tenant based on delay in the availability of the
Premises.
NOTICES
22. Any notice required or desired to be given under this Lease shall be
in writing, and all notices shall be given by personal delivery or
mailing. All notices personally given on Tenant may be delivered to
any person apparently in charge at the Premises, on any corporate
officer or agent of Tenant if Tenant is a corporation, or on any
one signatory party if more than one party signs this Lease on
behalf of Tenant; any notice so given shall be binding upon all
signatory parties as if served upon each such party personally. Any
notice given pursuant to this Paragraph 22 shall be deemed to have
been given when personally delivered, or if mailed, when
seventy-two (72) hours have elapsed from the time when such notice
was deposited in the United States mail, certified or registered
mail and postage prepaid, addressed to the party at the last
address given for purposes of notice pursuant to the provisions of
this Paragraph 22. At the date of execution of this Lease, the
addresses of Landlord and Tenant are set forth in Paragraph 1.11
above.
ATTORNEYS' FEES
23. In the event either party hereto shall bring any action or legal
proceeding for damages for an alleged breach of any provision of
this Lease, to recover Rentals, to enforce an indemnity defense or
hold harmless obligation, to terminate the tenancy of the Premises,
or to enforce, protect, interpret, or establish any term,
condition, or covenant of this Lease or right or remedy of either
party, the prevailing party shall be entitled to recover, as a part
of such action or proceeding, reasonable attorneys' fees and court
costs, including attorneys' fees and costs for appeal, as may be
fixed by the court or jury.
ASSIGNMENT, SUBLETTING AND HYPOTHECATION
24. 24.1 IN GENERAL. Tenant shall not voluntarily sell, assign or
transfer all or any part of Tenant's interest in this Lease or in
the Premises or any part thereof, sublease all or any part of the
Premises, or permit all or any part of the Premises to be used by
any person or entity other than Tenant or Tenant's employees,
except as specifically provided in this Paragraph 24.
24.2 VOLUNTARY ASSIGNMENT AND SUBLETTING.
(a) NOTICE TO LANDLORD. Tenant shall, by written notice, advise
Landlord of Tenant's desire on a stated date (which date shall not
be less than thirty (30) days nor more than ninety (90) days after
the date of Tenant's notice) to assign this Lease or to sublet all
or any part of the Premises for any part of the Lease Term. Said
notice shall state that the notice constitutes an offer to terminate
the Lease or Tenant's interest in the portion of the Premises
specified pursuant to Paragraph 24.2(b) if the notice applies to a
proposed assignment of the Lease or Tenant's interest therein, a
proposed sublease of all or any part of the Premises for more than
fifty percent (50%) of the remainder of the Lease Term, or a
proposed sublease of more than fifty percent (50%) of the Premises
for any period. Tenant's notice shall state the name, legal
composition and address of the proposed assignee or subtenant, and
Tenant shall provide the following information to Landlord with said
notice: a true and complete copy of the proposed assignment
agreement or sublease; an audited financial statement of the
proposed assignee or subtenant prepared in accordance with generally
accepted accounting principles within one year prior to the proposed
effective date of the assignment or sublease; the nature of the
proposed assignee's or subtenant's business to be carried on in the
Premises; the payments to be made or other consideration to be given
on account of the assignment or sublease; a current financial
statement of Tenant; and such other pertinent information as may be
requested by Landlord, all in sufficient detail to enable Landlord
to evaluate the proposed assignment or sublease and the prospective
assignee or subtenant. Tenant's notice shall not be deemed to have
been served or given until such time as Tenant has provided Landlord
with all information reasonably requested by Landlord pursuant to
this Paragraph 24.2. Tenant shall immediately notify Landlord of any
modification to the proposed terms of such assignment or sublease.
Tenant may withdraw its notice at any time prior to exercise by
Landlord of Landlord's right to terminate as described in Paragraph
24.2(b).
(b) OFFER TO TERMINATE. If Tenant notifies Landlord of its desire
to assign this Lease or any interest herein, to sublet all or any
part of the Premises for more than fifty percent (50%) of the
remainder of the Lease Term, or to sublet more than
<PAGE>
fifty percent (50%) of the Premises for any period, Tenant's notice
shall constitute an offer to terminate this Lease or Tenant's
interest in the portion of the Premises specified and Landlord shall
have the right, to be exercised by giving written notice to Tenant
within thirty (30) days after receipt of Tenant's notice, to
terminate the Lease (i) entirely, in the event of a proposed
assignment or a sublease of the entire Premises for the remainder of
the Lease Term, (ii) as to the portion of the Premises which is the
subject of a proposed sublease for more than fifty percent (50%) of
the remainder of the Lease Term, or (iii) as to the portion of the
Premises which is the subject of a proposed sublease of more than
fifty percent (50%) of the Premises for any period, as specified in
Tenant's notice. For purposes of this Paragraph 24.2(b), (i) the
term of a proposed sublease shall include all options to extend or
renew, and (ii) a proposed sublease shall be deemed to be for the
remainder of the Lease Term if the term of the proposed sublease
will expire within one year prior to the end of the Lease Term. If
Tenant's notice specifies all of the Premises and Landlord elects to
terminate, this Lease shall terminate on the date stated in the
notice given by Tenant pursuant to Paragraph 24.2(a), subject to any
obligations which have accrued and are unfulfilled as of such date.
If Tenant's notice specifies less than all of the Premises and
Landlord elects to terminate, this Lease shall terminate on the date
stated with respect to that portion of the Premises, and Rent and
all other costs and expenses payable by Tenant hereunder shall be
adjusted pro rata, based upon the number of net leasable square feet
retained by Tenant after the termination, compared to the total
number of net leasable square feet in the entire Premises excluding
any areas of the Premises designated in the proposed sublease for
ingress and egress and common areas, if any. The Lease as so amended
shall continue thereafter in full force and effect. Landlord and
Tenant shall execute an amendment to this Lease specifying the new
Premises, the adjusted Rent, a reasonable method for apportioning
maintenance and operating obligations based on the multi-tenant
nature of the Premises, and Tenant's share of costs and expenses;
provided, however, that failure by either party to execute such an
amendment shall not affect the validity of this Lease.
(c) LANDLORD'S CONSENT. If Landlord does not exercise its right to
terminate pursuant to Paragraph 24.2(b), within thirty (30) days
after receipt of Tenant's notice or if a proposed sublease is not
subject to the provisions of Paragraph 24.2(b), Landlord shall not
unreasonably withhold its consent to the proposed assignment or
subletting, on the terms and conditions specified in said notice. If
Tenant's notice fails to state that it constitutes an offer to
terminate the Lease as may be required pursuant to Paragraph
24.2(a), such notice shall be deemed insufficient for the purposes
of this Paragraph 24.2 and Landlord may not unreasonably withhold
its consent to the proposed assignment or subletting. Without
otherwise limiting the criteria upon which Landlord may withhold its
consent to any proposed assignment or sublease, if Landlord
withholds its consent where Tenant is in default at the time of the
giving of Tenant's notice or at any time thereafter, or where the
net worth of the proposed assignee or subtenant (according to
generally accepted accounting principles) is less that the greater
of (i) the net worth of Tenant immediately prior to the assignment
or sublease (ii) or the net worth of Tenant at the time this Lease
is executed, such withholding of consent shall be presumptively
reasonable. Any and all rent paid by an assignee or subtenant,
including but not limited to, any rent in excess of the Rentals to
be paid under this Lease (prorated in the event of a sublease of
less than the entire Premises), shall be paid directly to Landlord,
as Additional Rent, at the time and place specified in this Lease.
For the purposes of this Paragraph 24, the term "rent" shall include
any consideration of any kind received, or to be received, by Tenant
from an assignee or subtenant, if such sums are related to Tenant's
interest in this Lease or in the Premises, including, but not
limited to, key money, bonus money, and payments (in excess of the
fair market value thereof) for Tenant's assets, fixtures, trade
fixtures, inventory, accounts, goodwill, equipment, furniture,
general intangibles., and any capital stock or other equity
ownership interest of Tenant. Any assignment or subletting without
Landlord's consent shall be voidable at Landlord's option, and shall
constitute a Default by Tenant, Landlord's consent to any one
assignment or sublease shall not constitute a waiver of the
provisions of this Paragraph 24 as to any subsequent assignment or
sublease nor a consent to any subsequent assignment or sublease;
further, Landlord's consent to an assignment or sublease shall not
release Tenant from Tenant's obligations under this Lease, and
Tenant shall remain jointly and severally liable with the assignee
or subtenant.
(d) ASSUMPTION OF OBLIGATIONS. In the event Landlord consents to
any assignment, such consent shall be conditioned upon the assignee
expressly assuming and agreeing to be bound by each of Tenant's
covenants, agreements and obligations contained in this Lease,
pursuant to a written assignment and assumption agreement in a form
approved by Landlord. Landlord's consent to any assignment or
sublease shall be evidenced by Landlord's signature on said
assignment and assumption agreement or on said sublease or by a
separate written consent. In the event Landlord consents to a
proposed assignment or sublease, such assignment or sublease shall
be valid and the assignee or subtenant shall have the right to take
possession of the Premises only if an executed original of the
assignment or sublease is delivered to Landlord, and such document
contains the same terms and conditions as stated in Tenant's notice
to Landlord given pursuant to Paragraph 24.2(a) above, except for
any such modifications to which Landlord has consented in writing.
24.3 COLLECTION OF RENT. Tenant hereby irrevocably gives to and
confers upon Landlord, as security for Tenant's obligations under
this Lease, the right, power and authority to collect all rents
from any assignee or subtenant of all or any part of the Premises
as permitted by this Paragraph 24, or otherwise, and Landlord, as
assignee of Tenant, or a receiver for Tenant appointed on
Landlord's application, may collect such rent and apply it toward
Tenant's obligations under this Lease; provided, however, that
until the occurrence of any Default by Tenant or except as provided
by the provisions of Paragraph 24.2(c) above. Tenant shall have the
right to collect such rent. Upon the occurrence of any Default by
Tenant, Landlord may at any time without notice in Landlord's own
name sue for or otherwise collect such rent, including rent past
due and unpaid, and apply the same, less costs and expenses of
operation and collection, including reasonable attorneys' fees,
toward Tenant's obligations under this Lease. Landlord's collection
of such rents shall not constitute an acceptance by Landlord of
attornment by such subtenants; in the event of a Default by Tenant,
Landlord shall have all rights provided by this Lease and by law,
and Landlord may, upon re-entry and taking possession of the
Premises, eject all parties in possession or eject some and not
others, or eject none, as Landlord shall determine in Landlord's
sole discretion.
24.4 NO BONUS VALUE. It is the intent of the parties hereto that this
Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon
Tenant by this Lease. The parties agree that this Lease is not
intended to have a bonus value, nor to serve as a vehicle whereby
Tenant may profit by a future assignment or sublease of this Lease
or the right to use or occupy the Premises as a result of any
favorable terms contained herein or any future changes in the
market for leased space. It is the intent of the parties that any
such bonus value that may attach to this Lease shall be and remain
the exclusive property of Landlord.
24.5 CORPORATIONS AND PARTNERSHIPS. If Tenant is a partnership, any
withdrawal or substitution (whether voluntary, involuntary, or by
operation of law and whether occurring at one time or over a period
of time) of any partner(s) owning fifty percent (50%) or more
(cumulatively) of the partnership, any assignment(s) of fifty
percent (50%) or more (cumulatively) of any interest in the capital
or profits of the partnership, or the dissolution of the
partnership shall be deemed an assignment of this Lease requiring
the prior written consent of Landlord. If Tenant is a corporation,
any dissolution, merger, consolidation or other reorganization of
Tenant, any sale or transfer (or cumulative sales or transfers) of
the capital stock of Tenant in excess of fifty percent (50%), or
any sale (or cumulative sales) of all of the assets of Tenant shall
be deemed an assignment of this Lease requiring the prior written
consent of Landlord which consent shall not be unreasonably
withheld. Any such withdrawal or substitution of partners or
assignment of any interest in or dissolution of a partnership
tenant, and any such sale of stock or assets of a corporate tenant
without the prior written consent of Landlord shall be a Default by
Tenant hereunder. The foregoing notwithstanding, the sale or
transfer of any or all of the capital stock of a corporation, the
capital stock of which is now or hereafter becomes publicly traded,
shall not be deemed an assignment of this Lease.
24.6 REASONABLE PROVISIONS. Tenant expressly agrees that the
provisions of this Paragraph 24 are not unreasonable standards or
conditions for purposes of Section 1951.4(b)(2) of the California
Civil Code, as amended from time to time, under bankruptcy laws, or
for any other purpose.
24.7 ATTORNEYS' FEES. Tenant shall pay, as Additional Rent,
Landlord's actual attorneys' fees for reviewing, investigating,
processing and/or documenting any requested assignment or sublease,
whether or not Landlord's consent is granted.
<PAGE>
24.8 INVOLUNTARY TRANSFER. No interest of Tenant in this Lease shall
be assignable involuntarily or by operation of law, including,
without limitation, the transfer of this Lease by testacy or
intestacy. Each of the following acts shall be considered an
involuntary assignment:
(a) If Tenant is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors, or a proceeding under any
bankruptcy law is instituted in which Tenant is the bankrupt; or,
if Tenant is a partnership or consists of more than one person or
entity, if any partner of the partnership or other person or entity
is or becomes bankrupt or insolvent, or makes an assignment for the
benefit of creditors;
(b) Levy of a writ of attachment or execution on this Lease;
(c) Appointment of a receiver with authority to take possession of
the Premises in any proceeding or action to which Tenant is a
party; or
(d) Foreclosure of any lien affected Tenant's interest in the
Premises, which lien was not consented to by Landlord pursuant to
Paragraph 24.9.
An involuntary assignment shall constitute a Default by Tenant and
Landlord shall have the right to terminate this Lease, in which
case this Lease shall not be treated as an asset of Tenant. In the
event the Lease is not terminated, the provisions of Paragraph
24.2(c) regarding rents paid by an assignee or subtenant and
Paragraph 24.4 shall apply. If a writ of attachment or execution is
levied on this Lease, or if any involuntary proceeding in
bankruptcy is brought against Tenant or a receiver is appointed,
Tenant shall have sixty (60) days in which to cause the attachment
or execution to be removed, the involuntary proceeding dismissed,
or the receiver removed.
24.9 HYPOTHECATION. Tenant shall not hypothecate, mortgage or
encumber Tenant's interest in this Lease or in the Premises or
otherwise use this Lease as a security device in any manner without
the consent of Landlord, which consent Landlord may withhold in its
sole and absolute discretion. Consent by Landlord to any such
hypothecation or creation of a lien or mortgage shall not
constitute consent to an assignment or other transfer of this Lease
following foreclosure of any permitted lien or mortgage.
24.10 BINDING ON SUCCESSORS. The provisions of this Paragraph 24
expressly apply to all heirs, successors, sublessees, assignees and
transferees of Tenant.
SUCCESSORS
25. Subject to the provisions of Paragraph 24 above and Paragraph 30.2(a)
below, the covenants, conditions, and agreements contained in this
Lease shall be binding on the parties hereto and on their
respective heirs, successors and assigns.
LANDLORD DEFAULT; MORTGAGE PROTECTION
26. Landlord shall not be in default under this Lease unless Tenant shall
have given Landlord written notice of the breach and, within thirty
(30) days after notice, Landlord has not cured the breach or, if
the breach is such that it cannot reasonably be cured under the
circumstances within thirty (30) days, has not commenced diligently
to prosecute the cure to completion. Any money judgment obtained
by Tenant based upon Landlord's breach of this Lease shall be
satisfied only out of the proceeds of the sale or disposition of
Landlord's interest in the Premises (whether by Landlord or by
execution of judgment). In the event of any default on the part of
Landlord under this Lease, Tenant shall give notice by registered
or certified mail to any beneficiary of a deed of trust or any
mortgagee of a mortgage affecting the Premises and/or real property
comprising the Common Area whose address shall have been furnished
to Tenant, and shall offer such beneficiary or mortgagee a
reasonable opportunity to cure the default, including time to
obtain possession of the Premises by power of sale or judicial
foreclosure, if such should prove necessary to effect a cure.
EXHIBITS
27. All exhibits attached to this Lease shall be deemed to be incorporated
herein by the individual reference to each such exhibit, and all
such exhibits shall be deemed to be a part of this Lease as though
set forth in full in the body of the Lease.
SURRENDER OF LEASE NOT MERGER
28. The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger and shall, at the
option of Landlord, terminate all or any existing subleases or
subtenants, or may, at the option of Landlord, operate as an
assignment to Landlord of any or all such subleases or subtenants.
WAIVER
29. The waiver by Landlord of any breach of any term, covenant or
condition herein contained (or the acceptance by Landlord of any
performance by Tenant after the time the same shall become due)
shall not be deemed to be a waiver of such term, covenant or
condition or any subsequent breach thereof or of any other term,
covenant or condition herein contained, unless otherwise expressly
agreed to by Landlord in writing. The acceptance by Landlord of
any sum less than that which is required to be paid by Tenant shall
be deemed to have been received only on account of the obligation
for which it is paid (or for which it is allocated by Landlord, in
Landlord's absolute discretion, if Tenant does not designate the
obligation as to which the payment should be credited), and shall
not be deemed an accord and satisfaction notwithstanding any
provisions to the contrary written on any check or contained in any
letter of transmittal. The acceptance by Landlord of any sum
tendered by a purported assignee or transferee of Tenant shall not
be deemed a consent by Landlord to any assignment or transfer of
Tenant's interest herein. No custom or practice which may arise
between the parties hereto in the administration of the terms of
this Lease shall be construed as a waiver of diminution of
Landlord's right to demand performance by Tenant in strict
accordance with the terms of this Lease.
GENERAL
30. 30.1 CAPTIONS AND HEADINGS. The captions and paragraph headings used
in this Lease are for convenience of reference only. They shall
not be construed to limit or extend the meaning of any part of this
Lease, and shall not be deemed relevant in resolving any question
of interpretation or construction of any paragraph of this Lease.
30.2 DEFINITIONS.
(a) LANDLORD. The term Landlord as used in this Lease, so far
as the covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner
at the time in question of the fee title to the Premises. In
the event of any transfer(s) of such interest, the Landlord
herein named (and in case of any subsequent transfers or
conveyances, the then grantor) shall have no further liability
under this Lease to Tenant except as to matters of liability
which have accrued and are unsatisfied as of the date of such
transfer, it being intended that the covenants and obligations
contained in this Lease on the part of Landlord shall be
binding on Landlord and its successors and assigns only during
and in respect of their respective periods of ownership of the
fee; provided that any funds in the possession of Landlord or
the then grantor and as to which Tenant has an interest, less
any deductions permitted by law or this Lease, shall be turned
over to the grantee. The covenants and obligations contained in
this Lease on the part of Landlord shall, subject to the
provisions of this Paragraph 30.2(a), be binding upon each
Landlord and such Landlord's heirs, personal representatives,
successors and assigns only during its respective period of
ownership. Except as provided in this Paragraph 30.2(a), this
Lease shall not be affected by any transfer to Landlord's
interest in the Premises, and Tenant shall attorn to any
transferee of Landlord provided that all of Landlord's
obligations hereunder are assumed in writing by such transferee.
(b) AGENTS. For purposes of this Lease and without otherwise
affecting the definition of the word "agent" or the meaning of
and "agency", the term "agents" shall be deemed to include the
agents, employees, officers, directors, servants, invitees,
contractors, successors, representatives, subcontractors,
guests, customers, suppliers, partners, affiliated companies,
and any other person or entity related in any way to the
respective party, Tenant or Landlord.
(c) INTERPRETATION OF TERMS. The words "Landlord" and "Tenant"
as used herein shall include the plural as well as the singular.
Words in the neuter gender include the masculine and feminine
and words in the masculine or feminine gender include the neuter.
30.3 COPIES. Any executed copy of this Lease shall be deemed an
original for all purposes.
30.4 TIME OF ESSENCE. Time is of the essence as to each and every
provision in this Lease requiring performance within a specified time,
except as to the conditions relating to the delivery of possession of
the Premises to Tenant.
30.5 SEVERABILITY. In case any one or more of the provisions
contained herein shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegally or
unenforceability shall not affect any other provision of this Lease,
but this Lease shall be construed as if such invalid, illegal or
unenforceable provision had not been contained herein. However,
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if Tenant's obligation to pay the Rentals is determined to be
invalid or unenforceable, this Lease at the option of Landlord
shall terminate.
30.6 GOVERNING LAW. This Lease shall be construed and enforced in
accordance with the laws of the State of California.
30.7 JOINT AND SEVERAL LIABILITY. If Tenant is more than one person
or entity, each such person or entity shall be jointly and
severally liable for the obligations of Tenant hereunder. If
Tenant is a husband and wife, the obligations hereunder shall
extend to their sole and separate property as well as community
property.
30.8 CONSTRUCTION OF LEASE PROVISIONS. Although printed provisions
of this Lease were prepared by Landlord, this Lease shall not be
construed either for or against Tenant or Landlord, but shall be
construed in accordance with the general tenor of the language to
reach a fair and equitable result.
30.9 CONDITIONS. All agreements by Tenant contained in this Lease,
whether expressed as covenants or conditions, shall be construed to
be both covenants and conditions, conferring upon Landlord, in the
event of a breach thereof, the right to terminate this Lease.
30.10 TENANT'S FINANCIAL STATEMENTS. Tenant hereby warrants that
all financial statements delivered by Tenant to Landlord are true,
correct, and complete, and prepared in accordance with generally
accepted accounting principles. Tenant acknowledges and agrees
that Landlord is relying on such financial statements in accepting
this Lease, and that a breach of Tenant's warranty as to such
financial statements shall constitute a Default by Tenant.
30.11 WITHHOLDING OF LANDLORD'S CONSENT. Notwithstanding any
other provision of this Lease, where Tenant is required to obtain
the consent (whether written or oral) of Landlord to do any act, or
to refrain from the performance of any act, Tenant agrees that if
Tenant is in default with respect to any term, condition, covenant
or provision of this Lease, then Landlord shall be deemed to have
acted reasonably in withholding its consent if said consent is, in
fact, withheld.
SIGNS
31. Tenant shall not place or permit to be placed any sign or decoration
on the Common Area or the exterior of the Premises or that would be
visible from the exterior of the Premises, without the prior
written consent of Landlord, which consent may be withheld in
Landlord's absolute discretion. In no event shall any such sign
revolve, rotate, move or create the illusion of revolving, rotating
or moving or be internally illuminated and there shall be no
exterior spotlighting or other illumination on any such sign.
Tenant, upon written notice by Landlord, shall immediately remove
any of Tenant's signs or decorations that are visable from the
exterior of the Premises or that Tenant has placed or permitted to
be placed on the Common Area or the exterior of the Premises
without the prior written consent of Landlord. If Tenant fails to
so remove such sign or decoration within five (5) days after
Landlord's written notice, Landlord may enter the Premises and
remove such sign or decoration and Tenant shall pay Landlord, as
Additional Rent upon demand, the cost of such removal. All signs
placed on the Premises or Common Area by Tenant shall comply with
all recorded documents affecting the Premises, including but not
limited to any Declaration of Conditions, Covenants and
Restrictions; the sign criteria, which will be attached hereto as
Exhibit "E" if applicable (as the same may be amended from time to
time); and applicable statutes, ordinances, rules and regulations
of governmental agencies having jurisdiction thereof. At
Landlord's option, Tenant shall at Lease Termination remove any
sign which it has placed on the Premises or the Common Area, and
shall, at its sole cost, repair any damage caused by the
installation or removal of such sign.
LANDLORD AS PARTY DEFENDANT
32. If, by reason of any act or omission by Tenant or Tenant's agents,
Landlord is made a party defendent concerning this Lease, the
Premises, or the Common Area, Tenant shall indemnify Landlord
against all liability incurred (or threatened against) Landlord as
a party defendent, including all damages, costs and attorneys'
fees.
LANDLORD NOT A TRUSTEE
33. Landlord shall not be deemed to be a trustee of any funds paid to
Landlord by Tenant (or held by Landlord for Tenant) pursuant to
this Lease, including without limitation the Security Deposit.
Landlord shall not be required to keep any such funds separate from
Landlord's general funds. Any funds held by Landlord pursuant to
this Lease shall not bear interest.
INTEREST
34. Any payment due from Tenant to Landlord, except for Rent received by
Landlord within thirty (30) days after the same is due, shall bear
interest from the date due until paid, at an annual rate equal to
the greater of: ten percent (10%); of five percent (5%) plus the
rate established by the Federal Reserve Bank of San Francisco, as
of the twenty-fifth (25th) day of the month immediately preceding
the due date, on advances to member banks under Sections 13 and
13(a) of the Federal Reserve Act, as now in effect or hereafter
from time to time amended. In addition, Tenant shall pay all costs
and attorneys' fees incurred by Landlord in the collection of such
amounts.
SURRENDER OF PREMISES
35. On the last day of the Lease Term or upon the sooner termination of
this Lease, Tenant shall, to the reasonable satisfaction of
Landlord, surrender the Premises to Landlord in good condition
(reasonable wear and tear excepted) with all originally painted
interior walls washed, or re-painted if marked or damaged and other
interior walls cleaned and repaired or replaced, all carpets
cleaned and in good condition, the air conditioning, ventilating
and heating equipment inspected, serviced and repaired by a
reputable and licensed service firm (unless Landlord has elected to
maintain heating and air conditioning systems pursuant to Paragraph
10.1 above), and all floors cleaned and waxed. Tenant shall remove
all of Tenant's personal property and trade fixtures from the
Premises, and all property not so removed shall be deemed abandoned
by Tenant. Furthermore, Tenant shall immediately repair all
damaged to the Premises and Common Area caused by any such removal.
If the Premises are not so surrendered at Lease Termination,
Tenant shall indemnify, defend and hold Landlord harmless from and
against any loss, damage, expense, claim or liability resulting
from delay by Tenant in so surrendering the Premises including,
without limitation, any claims made by any succeeding tenant or
losses to Landlord due to lost opportunities to lease to succeeding
tenants.
NO PARTNERSHIP OR JOINT VENTURE
36. Nothing in this Lease shall be construed as creating a partnership or
joint venture between Landlord, Tenant, or any other party, or
cause Landlord to be responsible for the debts or obligations of
Tenant or any other party.
ENTIRE AGREEMENT
37. Any agreements, warranties, or representations not expressly contained
herein shall in no way bind either Landlord or Tenant, and Landlord
and Tenant expressly waive all claims for damages by reason of any
statement, representation, warranty, promise or agreement, if any,
not contained in this Lease. This Lease supersedes and cancels any
and all previous negotiations, arrangements, brochures, agreements
and understandings, whether written or oral, between Landlord and
its agents and Tenant and its agents with respect to the Premises,
Common Area or this Lease. This Lease constitutes the entire
agreement between the parties hereto and no addition to, or
modification of, any term or provision of this Lease shall be
effective until and unless set forth in a written instrument signed
by both Landlord and Tenant.
SUBMISSION OF LEASE
38. Submission of this instrument for Tenant's examination or execution
does not constitute a reservation of space nor an option to lease.
This instrument shall not be effective until executed by both
Landlord and Tenant. Execution of this Lease by Tenant shall
constitute an offer by Tenant to lease the Premises, which offer
shall be deemed accepted by Landlord when this Lease is executed by
Landlord and delivered to Tenant.
QUIET ENJOYMENT
39. Landlord covenants and agrees with Tenant that upon Tenant paying
Rentals and performing its covenants and conditions under the
Lease, Tenant shall and may peaceably and quietly have, hold and
enjoy the Premises for the Lease Term, subject, however, to the
terms of this Lease and of any mortgages or deeds of trust
affecting the Premises and/or the real property comprising the
Common Area, and the rights reserved by Landlord hereunder. Any
purchaser upon any foreclosure or exercise of the power of sale
under any mortgage or deed of trust made by Landlord and covering
the Premises to whom Tenant attorns pursuant to Paragraph 20.4
above shall be bound by the terms of this Paragraph 39.
AUTHORITY
40. The undersigned parties hereby warrant that they have proper authority
and are empowered to execute this Lease on behalf of the Landlord
and Tenant, respectively. If Tenant is a corporation (or
partnership), each individual executing this Lease on behalf of
said corporation (or partnership) represents and warrants that he
is duly authorized to execute and deliver this Lease on behalf of
said corporation in accordance with a duly adopted resolution of
the Board of Directors of said corporation or in accordance with
the by-laws of said corporation (or on behalf of said partnership
in accordance with the partnership agreement of such partnership),
and that this Lease is binding upon said corporation (or
partnership) in accordance with its terms. If Tenant is a
corporation, Tenant shall, upon execution of this Lease, deliver to
Landlord a certified copy of the resolution of the Board of
Directors of said corporation authorizing or ratifying the
execution of this Lease. In the event Tenant should fail to
deliver such resolution to Landlord upon execution of this Lease,
Landlord shall not be deemed to have waived its right to require
delivery
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of such resolution, and at any time during the Lease Term Landlord
may request Tenant to deliver the same, and Tenant agrees it shall
thereafter promptly deliver such resolution to Landlord. If Tenant
is a corporation, Tenant warrants that: (a) Tenant is a valid and
existing corporation; (b) Tenant is qualified to do business in
California; (c) All fees and all franchise and corporate taxes are
paid to date, and will be paid when due; (d) All required forms and
reports will be filed when due; and (e) The signers of this Lease
are properly authorized to execute this Lease.
BUILDING PLANS
41. Tenant acknowledges that any plan of the Premises and Common Area
which may have been displayed or furnished to Tenant or which may
be a part of Exhibit "A" is tentative; Landlord may change the
exterior of the Premises and the shape, size, location, number, and
extent of the Common Area improvements shown on any such plan and
eliminate or add any improvements to the Common Area in Landlord's
sole discretion; provided, however, that the Premises shall be
substantially as shown on such plan.
ADDENDUM
42. Paragraphs 43 through 49 are added hereto and made a part of this
Lease.
IN WITNESS WHEREOF, the parties have executed this Lease effective
as of the date set forth below.
LANDLORD: Devcon/Bubb Road Investors TENANT: Hybrid Networks, Inc.
a California limited partnership a Delaware Corporation
------------------------------------ -----------------------------
By: Devcon Construction, Inc.,
general managing partner
By /s/ Company Officer By /s/ Richard Fuller
---------------------------------- --------------------------
Title General Partner Title VP, Finance
------------------------------- ------------------------
By By
---------------------------------- ---------------------------
Title Title
------------------------------- ------------------------
Date 5/31/95 Date 5/30/95
-------------------------------- -------------------------
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ADDENDUM TO LEASE AGREEMENT DATED MAY 25, 1995 BETWEEN HYBRID NETWORKS, INC.,
a California Corporation, ("TENANT") AND DEVCON/BUBB ROAD INVESTORS,
a California general partnership, ("LANDLORD"), for the Premises located at
10161 BUBB ROAD, CUPERTINO, CALIFORNIA.
43. LEASED PREMISES. Except as provided below, it is understood and
agreed that during the Lease Term, the Premises are being leased on an
"as-is" basis, in its present condition, subject to Landlord's obligation to
install tile in the former computer room as shown outlined in red on the
attached Exhibit "B".
Landlord further agrees to deliver the Premises, including the roof, to
Tenant in good condition and working order with the mechanical, electrical
and plumbing (the "building systems") operable. Landlord shall maintain the
roof and the building systems in operable condition at its sole cost and
expense for the first sixty (60) days of the Lease Term. However, Landlord's
responsibility shall not extend to (i) any work done or caused to be done by
the Tenant; (ii) any acts of Tenant which may be deemed to be detrimental to
the Premises; and (iii) any customary maintenance of the Premises which is
the responsibility of the Tenant pursuant to the Lease.
44. OPTION TO EXTEND LEASE TERM. In consideration for Tenant never
having been in Default under this Lease, Landlord hereby grants to Tenant the
option to extend the Lease Term for one additional three (3) year period (the
"Option"), on the following terms and conditions:
(a) Tenant must give Landlord notice in writing of its exercise of the
Option to extend the Lease Term no earlier than nine (9) months nor later
than six (6) months before the date the Lease Term would end but for said
exercise.
(b) Tenant may not extend the Lease Term pursuant to the Option granted
by this Paragraph 44 if Tenant has ever been in Default in the performance of
any of the terms and conditions of this Lease prior to the date of Tenant's
notice of exercise of this Option, or if Tenant shall have assigned or
otherwise transferred its interest in this Lease and/or the Premises (other
than to an affiliate of Tenant) whether or not Landlord's consent to such
assignment or transfer has been given. If Tenant is in Default under this
Lease on the date that the extended term is to commence, then Landlord may
elect to terminate this Lease, notwithstanding any notice given by Tenant of
an exercise of its option to extend. For purposes of this Paragraph 44(b),
the term "affiliate" shall mean any successor to Tenant by operation of
merger or other corporate reorganization or by the acquisition of all or
substantially all of Tenant's assets.
(c) All terms and conditions of this lease apply during the extended
term, except that the Base Rent for the extended term shall be determined in
accordance with Paragraph 45 below.
(d) Once Tenant delivers notice of its exercise of the option to extend
the Lease Term, Tenant may not withdraw such exercise and, subject to the
provision of this Paragraph 44 and Paragraph 45, such notice shall operate to
extend the Lease Term. Upon the extension of the Lease Term pursuant to this
Paragraph 44, the term "Lease Term" as used in this Lease shall thereafter
include that extended term and the Lease Termination date shall be the
expiration date of that extended term.
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45. RENT DURING EXTENDED TERM. If Tenant elects to extend the Lease
Term pursuant to Paragraph 44, the Rent for the extended term shall be an
amount equal to the fair market rental value of the Premises in relation to
market conditions at the time of the extension, ("market conditions,"
including, but not being limited to, rental rates for comparable space with
comparable tenant improvements and taking into consideration any adjustments
to rent based upon direct costs (operating expenses) and taxes, load factors,
financing charges, and/or cost of living or other rental adjustments; the
relative strength of the tenants; the size of the space; and any other
factors which affect market rental values at the time of extension) subject
in each case to future market rate cost of living adjustments. In no event
shall the Rent for the extended term be lower than the Rent for the last year
of the initial Lease Term. The Rent for the extended term shall be determined
as follows:
(a) After timely receipt by Landlord of Tenant's notice of exercise
of the option to extend the Lease Term, Landlord and Tenant shall have a
period of thirty (30) days in which to agree on the Rent and any cost of
living adjustment for that extended term. If Landlord and Tenant agree on
said Rent during that period, they shall immediately execute an amendment to
this Lease stating that Rent and any cost of living adjustment for that
extended term.
(b) If Landlord and Tenant are unable to agree on the Rent and any
cost of living adjustment for that extended term as aforesaid, then within
five (5) days after the expiration of the thirty (30) day period described in
Paragraph 45(a) above, each party, at its cost and by giving notice to the
other party, shall appoint an M.A.I. real estate appraiser, with at least
five (5) years full-time commercial appraisal experience in the area in which
the Premises are located, to appraise and set the fair market rental value of
the Premises and determine market cost of living adjustments, if any. If a
party does not appoint an appraiser within five (5) days after the other
party has given notice of the name of its appraiser, the single appraiser
appointed shall be the sole appraiser and shall set the fair market rental
value and determine market cost of living adjustments, if any. The cost of
such sole appraiser shall be borne equally by the parties. If two appraisers
are appointed by the parties as provided in this Paragraph, the two
appraisers shall meet promptly and attempt to set the fair market rental
value and determine market cost of living adjustment, if any. If they are
unable to agree within twenty (20) days after the last appraiser has been
appointed, then the two appraisers shall attempt to select a third appraiser
meeting the qualifications stated in this paragraph within ten (10) days
after the last day the two appraisers are given to set the fair market rental
value and determine market cost of living adjustments, if any. If they are
unable to agree on the third appraiser, either of the parties to this Lease,
by giving ten (10) days notice to the other party, may apply to the presiding
judge of the Superior Court of Santa Clara County for a selection of a third
appraiser who meets the qualifications stated above. Each of the parties
shall bear one-half (1/2) of the cost of appointing the third appraiser and
of paying the third appraiser's fee. The third appraiser, however selected,
shall be a person who has not previously acted in any capacity for either
party. Within fifteen (15) days after the selection of the third appraiser,
the majority of the appraisers shall set the fair market rental and determine
market cost of living adjustments, if any. If the majority of the appraisers
are unable to set the fair market rental value and determine market cost of
living adjustments, if any, within said
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fifteen (15) day period, then each appraiser shall, within five (5) days
after the expiration of said fifteen (15) day period, submit his independent
appraisal in simple letter form to Landlord and Tenant stating his
determination of the fair market rental value of the Premises. The three
appraisals shall be added together and the total divided by three. The
resulting quotient shall be the fair market rental value, and the Rent for
the extended term shall be one hundred percent (100%) of such amount (subject
to future market cost of living adjustments). Provided, however, (i) if the
lowest appraisal is less than eighty five percent (85%) of the middle
appraisal it shall be disregarded, and/or (ii) if the highest appraisal is
greater than one hundred fifteen percent (115%) of the middle appraisal it
shall be disregarded. If only one appraisal is so disregarded, the remaining
two appraisals shall be added together, the sum divided by two (2), and the
resulting quotient shall be conclusively deemed the fair market rental value
of the Premises. The appraisers shall jointly determine any market cost of
living adjustment to be applied to said amount during the extended term. In
establishing the fair market rental value and market cost of living
adjustments, if any, the appraiser or appraisers shall consider the
reasonable market rental value for the highest and best use of the Premises
(including, but not limited to, rental rates for comparable space with
comparable tenant improvements and any adjustments to rent based upon direct
costs (operating expenses) and taxes, load factors, financing charges and/or
cost of living or other rental adjustments; the relative strength of the
tenants; and of size of the space); without regard to the existence of this
Lease but taking into consideration the absolute nature of this Lease.
As consideration for Landlord's granting to Tenant the option to extend
the Lease Term as provided for herein, if Tenant elects to deal with, consult
or hire a real estate estate broker, Tenant shall be responsible for any fee
or commission payable to any such real estate broker or agent with whom
Tenant deals with, consults or hires in connection with the foregoing
determination of Rent or the extension of the Lease Term, and Landlord shall
have no liability therefor.
46. ANTENNA/MICROWAVE DISH INSTALLATION RIGHTS. Subject to Landlord's
approval, which shall not be unreasonably withheld, Tenant shall have the
right to install antennas and/or microwave dishes on the roof of the Premises
at Tenant's sole cost and shall replace the roof to its original condition
upon termination of the Lease or any extensions thereof.
47. PARKING LOT. Landlord shall pay for the cost of sealing and
restriping the entire parking lot and such cost will be passed through to
Tenant. This process will be completed as soon as possible based on
Landlord's good faith efforts.
48. SIGNS. Landlord agrees that Tenant shall have the right, at Tenant's
sole cost and expense, to use the existing monument sign to place Tenant's
name/logo. Tenant shall restore sign to original condition upon termination.
49. SUBLEASE. Landlord approves the proposed Sublease of approximately
4,300 square feet to Big Island Communications under the terms and conditions
listed in such Sublease.
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EXHIBIT "A"
[FLOORPLAN]
<PAGE>
EXHIBIT "B"
[FLOORPLAN]
<PAGE>
EXHIBIT "C"
(Not Applicable)
<PAGE>
EXHIBIT "D"
(Not Applicable)
<PAGE>
EXHIBIT "E"
(Not Applicable)
<PAGE>
SUBLEASE
1. PARTIES.
This Sublease, dated October 24 , 19 96 , is made between
Norian Corporation ("Sublessor"),
and Hybrid Networks, Inc. ("Sublessee").
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated August 22 , 19 96 ,
wherein Bubb Partners, A California General Partnership ("Lessor")
leased to Sublessor the real property located in the City of Cupertino ,
County of Santa Clara , State of California ,
described as 10201 Bubb Rd, consisting of approximately 9,216 square feet
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("Master Premises"). Said lease has been amended by the following
amendments None
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said lease and amendments are herein collectively referred to as the
"Master Lease" and are attached hereto as Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in this Sublease the following portion of the Master Premises
("Premises"): All
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease has
not been amended or modified except as expressly set forth herein, that
Sublessor is not now, and as of the commencement of the Term hereof will not
be, in default or breach of any of the provisions of the Master Lease, and
that Sublessor has no knowledge of any claim by Lessor that Sublessor is in
default or breach of any of the provisions of the Master Lease.
5. TERM.
The term of this Sublease shall commence on February 1 ,19 97
("Commencement Date"), or when Lessor consents to this Sublease (if such
consent is required under the Master Lease), whichever shall last occur, and
end on August 31 , 19 97 ("Termination Date"), unless otherwise
sooner terminated in accordance with the provisions of this Sublease. In the
event the Term commences on a date other than the Commencement Date,
Sublessor and Sublessee shall execute a memorandum setting forth the actual
date of commencement of the Term. Possession of the Premises ("Possession")
shall be delivered to Sublessee on the commencement of the Term. If for any
reason Sublessor does not deliver Possession to Sublessee on the commencement
of the Term, Sublessor shall not be subject to any liability for such
failure, the Termination Date shall not be extended by the delay, and the
validity of this Sublease shall not be impaired, but rent shall abate until
delivery of Possession. Notwithstanding the foregoing, if Sublessor has not
delivered Possession to Sublessee within thirty (30) days after the
Commencement Date, then at any time thereafter and before delivery of
Possession, Sublessee may give written notice to Sublessor of Sublessee's
intention to cancel this Sublease. Said notice shall set forth an effective
date for such cancellation which shall be at least ten (10) days after
delivery of said notice to Sublessor. If Sublessor delivers Possession to
Sublessee on or before such effective date, this Sublease shall remain in
full force and effect. If Sublessor fails to deliver Possession to Sublessee
on or before such effective date, this Sublease shall be cancelled, in which
case all consideration previously paid by Sublessee to Sublessor on account
of this Sublease shall be returned to Sublessee, this Sublease shall
thereafter be of no further force or effect, and Sublessor shall have no
further liability to Sublessee on account of such delay or cancellation. If
Sublessor permits Sublessee to take Possession prior to the commencement of
the Term, such early Possession shall not advance the Termination Date and
shall be subject to the provisions of this Sublease, including without
limitation the payment of rent.
6. RENT
6.1 MINIMUM RENT. Sublessee shall pay to Sublessor as minimum rent,
without deduction, setoff, notice, or demand, at 10260 Bubb Rd., Cupertino,
CA 95014 or at such other place as Sublessor shall designate from time to
time by notice to Sublessee, the sum of thirteen thousand, eight hundred
twenty-four Dollars ($ 13,824.00 ) per month, in advance on the first
day of each month of the Term. Sublessee shall pay to Sublessor upon
execution of this Sublease the sum of thirteen thousand, eight hundred
twenty-four Dollars ($ 13,824.00 ) as rent for February, 1997 .
If the Term begins or ends on a day other than the first or last day of a
month, the rent for the partial months shall be prorated on a per
diem basis. Additional provisions:
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6.2 OPERATING COSTS. If the Master Lease requires Sublessor to pay
to Lessor all or a portion of the expenses of operating the building
and/or project of which the Premises are a part ("Operating Costs"),
including but not limited to taxes, utilities, or insurance, then
Sublessee shall pay to Sublessor as additional rent one hundred
percent ( 100 %) of the
amounts payable by Sublessor for Operating Costs incurred during the Term.
Such
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additional rent shall be payable as and when Operating Costs are payable
by Sublessor to Lessor. If the Master Lease provides for the payment by
Sublessor of Operating Costs on the basis of an estimate thereof, then
as and when adjustments between estimated and actual Operating Costs are
made under the Master Lease, the obligations of Sublessor and Sublessee
hereunder shall be adjusted in a like manner; and if any such adjustment
shall occur after the expiration or earlier termination of the Term,
then the obligations of Sublessor under this Subsection 6.2 shall
survive such expiration or termination. Sublessor shall, upon request by
Sublessee, furnish Sublessee with copies of all statements submitted by
Lessor of actual or estimated Operating Costs during the Term.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease
the sum of thirteen thousand, eight hundred twenty-four Dollars ($
13,824.00) as security for Sublessee's faithful performance of Sublessee's
obligations hereunder ("Security Deposit"). If Sublessee fails to pay rent or
other charges when due under this Sublease, or fails to perform any of its
obligations hereunder, Sublessor may use or apply all or any portion of the
Security Deposit for the payment of any rent or other amount then due
hereunder and unpaid, for the payment of any other sum for which Sublessor
may become obligated by reason of Sublessee's default or breach, or for any
loss or damage sustained by Sublessor as a result of Sublessee's default or
breach. If Sublessor so uses any portion of the Security Deposit, Sublessee
shall, within ten (10) days after written demand by Sublessor, restore the
Security Deposit to the full amount originally deposited, and Sublessees's
failure to do so shall constitute a default under this Sublease. Sublessor
shall not be required to keep the Security Deposit separate from its general
accounts, and shall have no obligation or liability for payment of interest
on the Security Deposit. In the event Sublessor assigns its interest in this
Sublease, Sublessor shall deliver to its assignee so much of the Security
Deposit as is then held by Sublessor. Within thirty (30) days after the
Term has expired, or Sublessee has vacated the Premises, or any final
adjustment pursuant to Subsection 6.2 hereof has been made, whichever shall
last occur, and provided Sublessee is not then in default of any of its
obligations hereunder, the Security Deposit, or so much thereof as had not
theretofore been applied by Sublessor, shall be returned to Sublessee or to
the last assignee, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for General Office ,
and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any part
of the Premises without the prior written consent of Sublessor (and the
consent of Lessor, if such is required under the terms of the Master Lease).
10. OTHER PROVISIONS OF SUBLEASE.
SEE INSERT ONE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are
applicable to the Premises, except that the obligation to pay rent to
Lessor under the Master Lease shall be considered performed by Sublessee to
the extent and in the amount rent is paid to Sublessor in accordance with
Section 6 of this Sublease. Sublessee shall not commit or suffer any act or
omission that will violate any of the provisions of the Master Lease.
Sublessor shall exercise due diligence in attempting to cause Lessor to
perform its obligations under the Master Lease for the benefit of
Sublessee. If the Master Lease terminates, this Sublease shall terminate
and the parties shall be relieved of any further liability or obligation
under this Sublease, provided however, that if the Master Lease terminates
as a result of a default or breach by Sublessor or Sublessee under this
Sublease and/or the Master Lease, then the defaulting party shall be liable
to the nondefaulting party for the damage suffered as a result of such
termination. Notwithstanding the foregoing, if the Master Lease gives
Sublessor any right to terminate the Master Lease in the event of the
partial or total damage, destruction, or condemnation of the Master
Premises or the building or project of which the Master Premises are a
part, the exercise of such right by Sublessor shall not constitute a
default or breach hereunder. Notwithstanding any provision to the contrary,
Sublessor's liability for damages to Sublessee shall not include and
liability for consequential damages and shall be limited to the total amount
of rent to be paid to Sublessor by Sublessee pursuant to this Sublease.
11. ATTORNEYS' FEES.
If Sublessor, Sublessee, or Broker shall commence an action against the
other arising out of or in connection with this Sublease, the prevailing
party shall be entitled to recover its costs of suit and reasonable
attorney's fees.
12. AGENCY DISCLOSURE.
Sublessor and Sublessee each warrant that they have dealt with no other
real estate broker in connection with this transaction except: Kirk C. Syme,
Corporate R.E. Consulting who represents Sublessor
and NA , who represents
NA . In the event that
NA represents both Sublessor and Sublessee, Sublessor and
Sublessee hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not
expect said broker to disclose to either of them the confidential
information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such
consent is required under the terms of the Master Lease), Sublessor shall
pay Broker a real estate brokerage commission in accordance with Sublessor's
contract with Broker for the subleasing of the Premises, if any, and
otherwise in the amount of NONE Dollars ($ -0- ), for
services rendered in effecting this Sublease. Broker is hereby made a third
party beneficiary of this Sublease for the purpose of enforcing its right to
said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to be
given by either party on the other hereunder shall be in writing. All
notices and demands by the Sublessor to Sublessee shall be sent in
accordance with section 60 of the Master Lease to the Sublessee at the
Premises, and to the address hereinbelow, or to such other place as
Sublessee may from
<PAGE>
time to time designate in a notice to the Sublessor. All notices and
demands by the Sublessee to Sublessor shall be sent by United States
Mail, postage prepaid, addressed to the Sublessor at the address set
forth herein, and to such other person or place as the Sublessor may
from time to time designate in a notice to the Sublessee.
To Sublessor: 10260 Bubb Rd., Cupertino, CA 95014
------------------------------------------------------------
To Sublessee: 10161 Bubb Rd., Cupertino, CA 95014
------------------------------------------------------------
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY
LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS
REQUIRED UNDER THE TERMS OF THE MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders
having jurisdiction over the parties, property or the subject matter of
this Agreement, including, but not limited to, the 1964 Civil Rights
Act and all amendments thereto, the Foreign Investment In Real Property
Tax Act, the Comprehensive Environmental Response Compensation and
Liability Act, and The Americans With Disabilities Act.
Sublessor: Norian Corporation Sublessee: Hybrid Networks, Inc.
-------------------------- ---------------------------
By: /s/ Claude Pering By: /s/ Richard Fuller
--------------------------------- ----------------------------------
Title: EXEC. V.P., OPERATIONS Title: VP, FINANCE
------------------------------ -------------------------------
By: By:
--------------------------------- ----------------------------------
Title: Title:
------------------------------ -------------------------------
Date: 11/20/96 Date: 11/15/96
------------------------------- --------------------------------
LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor"), lessor under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master
Lease concerning further assignment or subletting. Lessor certifies that, as
of the date of Lessor's execution hereof, Sublessor is not in default or
breach of any of the provisions of the Master Lease, and that the Master
Lease has not been amended or modified except as expressly set forth in the
foregoing Sublease.
Lessor: Bubb Partners, A California General Partnership
-----------------------------
By:
---------------------------------
Title:
------------------------------
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
- ------------------------------------------------------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by
your attorney. No representation or recommendation is made by Broker as to
the legal sufficiency or tax consequences of this document or the
transaction to which it relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other
person, with experience in evaluating the condition of the property,
including the possible presence of asbestos, hazardous materials and
underground storage tanks.
- ------------------------------------------------------------------------------
17. RIGHT OF FIRST REFUSAL TO SUBLEASE 10161 BUBB RD.
CP RF
Sublessee currently leases the building located at 10161 Bubb Rd. under a
lease dated 5/25/95 with Devcon Bubb Investors as lessor with a lease term
expiring May 31, 1998. In the event Sublessee desires to sublease all or part
of 10161 Bubb Rd. prior to June 1, 1998, Sublessee shall first give notice to
Sublessor of the anticipated date of availability for occupancy and the terms
under which Sublessee desires to offer such space to Sublessor and to the
open market. If Sublessor desires to negotiate for the potential expansion
into 10161 Bubb Rd., Sublessor shall give written notice of such intent
within 15 business days following receipt of Sublessee's notice, and
Sublessor and Sublessee shall proceed to negotiate in good faith for up to 30
days following. If Sublessor and Sublessee have not reached some agreement on
or before the end of such 30 day period then Sublessee shall be free
thereafter to offer such space to any person or entity and to enter into a
sublease(s) for such space without any further reference to Sublessor;
provided that, if Sublessee proposes to sublease such space to another person
or entity on terms less favorable to Sublessee than evidenced by Sublessee's
last offer to Sublessor in the aforementioned negotiations, then Sublessee
shall notify Sublessor and Sublessor shall have the right to sublease such
space on the same terms and conditions as proposed with such other person or
entity. If Sublessee does not lease such space within four months following
its notice to Sublessor identified above, then, if Sublessee continues to or
again desires to offer space for lease, Sublessee shall again provide
Sublessor with the Right of First Refusal as set forth in this paragraph.
Furthermore, in the event Sublessor exercises this Right of First Offer,
Sublessee shall pay a fee to Kirk C. Syme, Corporate Real Estate
Consulting (Broker) equal to four (4%) percent of the gross remaining
lease consideration. Such fee shall be due and payable upon execution of
the Sublease for 10161 Bubb Rd. by Sublessee and Sublessor.
18 NO ASSIGNMENT OR SUBLETTING
Any transfer, circumstances or event which constitutes an assignment or
subletting under the Master Lease shall constitute an assignment or
subletting under this Sublease.
3
<PAGE>
AMENDMENT (#1) TO SUBLEASE
THIS AMENDMENT #1 TO SUBLEASE DATED THE 24TH DAY OF OCTOBER, 1996, BY AND
BETWEEN NORIAN CORPORATION ("SUBLESSOR") AND HYBRID NETWORKS, INC.
("SUBLESSEE").
WITNESSETH:
WHEREAS, Sublessor and Sublessee entered into a Sublease Agreement, dated
October 24, 1996, to sublease 9,216 square feet in a building commonly known
as 10201 Bubb Road, Cupertino, CA and
WHEREAS, Sublessor and Sublessee desire to further amend the lease,
NOW, THEREFORE, in consideration of the following covenants and conditions
contained herein, the parties agree as follows:
1. The Lease Term, as outlined in paragraph 5, shall be extended to
September 30, 1998.
2. The Rent, as outlined in paragraph 6.1, shall be increased to read
$18,432.00 per month effective September 1, 1997.
3. The Security Deposit, as outlined in paragraph 7, shall be increased to
read $18,432.00 effective September 1, 1997.
IN WITNESS HEREOF, the parties have set their hands and seals on the date
first above written.
Sublessor: Norian Corporation Sublessee: Hybrid Networks, Inc.
By: /s/ C. Pering 5/28/97 By: /s/ William H. Fry
-------------------------------- --------------------------------
Claude Pering William Fry
Title: Executive Vice President, Title: Vice President, Operations
Operations
<PAGE>
INSERT ONE
Except as specifically set forth below, all of the terms, provisions,
and conditions in the Master Lease, together with any modifications thereto,
are incorporated in this Sublease by reference, and are made a part hereof as
if herein set forth at length. Sublessor being substituted for the "Lessor"
under the Master Lease, Sublessee being substituted for the "Tenant" under
the Master Lease, and Subleased Premises being substituted for "Premises"
under the Master Lease. "Rent" under the Master Lease shall be deemed to
refer to Rent hereunder. As used in this Sublease, the term "Building" shall
mean the building in which the Premises are located. Notwithstanding the
foregoing, (A) with respect to any matter requiring Lessor's consent under
the Master Lease, Lessor's consent will be required under this Sublease, and
no consent of Sublessor will be deemed to have occurred (regardless of the
passage of time) unless Lessor has given its consent (or is deemed, pursuant
to the terms of the Master Lease, to have given its consent) and Sublessor
has given its consent, (B) Sublessor shall have no liability to Sublessee
with respect to representations and warranties made by Lessor in the Master
Lease or any indemnifications or other obligations or liabilities of Lessor
with respect to Hazardous Materials or Environmental Laws, or Lessor's
repair, maintenance, restoration, upkeep, insurance, and similar obligations
under the Master Lease, regardless of whether or not the incorporation of one
or more provisions of the Master Lease into the Sublease might otherwise
operate to make Sublessor liable therefor, (C) in any case where under the
incorporated provisions of the Master Lease the Lessor reserves or is granted
the right to enter or use the Premises or any areas beneath, above or
adjacent thereto, such reservation or grant of right of entry shall be deemed
to be for the benefit of both Lessor and Sublessor, (D) in any case where
under the incorporated provisions of the Master Lease Lessee is to indemnify
and/or release Lessor, such indemnity and/or release shall be deemed to run
from Sublessee to both Lessor and Sublessor, (E) in any case where under the
incorporated provisions of the Master Lease Lessee is to execute and deliver
certain documents to Lessor, such obligation shall be deemed to run from
Sublessee to both Lessor and Sublessor, and (F) Sublessee shall name
Sublessor and Lessor as additional insureds for the amounts stated in the
Master Lease on all policies required to be carried by Sublessee.
The following terms of the Master Lease are incorporated herein with the
modifications specified below: the term "Lessor" shall refer only to Lessor
and not to Sublessor in the first sentence of Section 7.2(a), in Section 8.2,
and in Section 8.4; Sublessor shall have none of the obligations imposed on
Lessor in Article 9 or in Article 14; Sublessee shall have no right to share
in any condemnation award under Article 14 except to the extent that an award
is separately made for Sublessee's relocation costs, Sublessee's trade
fixtures or Sublessee's personal property; the provisions of Article 55 shall
govern only the relationship between Sublessor and Sublessee; and the
provisions of Section 60 regarding the addresses of the parties are deemed
modified by Paragraph 14 of this Sublease.
The following terms of the Master Lease are excluded from this Sublease
and are not incorporated herein; Articles 1, 3, 4, 5, Sections 6.1, 6.2(a),
7.1, Article 12, Articles 15, 25, 39, 50, 51, 52, 53, and 59.
CP RF
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is entered into as of
January 15, 1996 (the "EFFECTIVE DATE") between HYBRID NETWORKS, INC., a
California corporation (the "COMPANY"), and CARL S. LEDBETTER, JR.
("LEDBETTER").
The parties hereby agree as follows:
1. TERM OF EMPLOYMENT; POSITION. Subject to the terms and conditions
of this Agreement, the Company hereby agrees to employ Ledbetter on a full-
time basis as the Company's Chief Executive Officer during the two year period
commencing on the Effective Date and expiring on the second anniversary of the
Effective Date (such time period is hereinafter called the "EMPLOYMENT TERM")
unless Ledbetter's employment and the Employment Term are sooner terminated in
accordance with the provisions of Section 4 below. Ledbetter hereby agrees to
such employment.
2. LEDBETTER'S DUTIES; NONCOMPETITION. Ledbetter will be responsible
for managing the Company as its Chief Executive Officer in accordance with the
Company's Bylaws and subject to the direction of the Company's Board of
Directors. He will move to the vicinity of the Company's offices in
Cupertino, and his office will be in the Company's headquarters building.
During the Employment Term, Ledbetter will not, without the prior written
consent of the Company, engage in, or provide services to, any organization,
association or business that is in competition with or detrimental to the
business of the Company.
3. COMPENSATION AND BENEFITS.
3.1 SALARY AND BONUSES. During the Employment Term, the Company
will pay Ledbetter, in equal semi-monthly installments, salary at the rate of
$175,000 per year. In addition, Ledbetter will be eligible for three bonuses
during the first year of his employment, to be paid as follows:
(a) $25,000 when he has assembled his management team.
(b) $25,000 for meeting the expense target referred to below.
(c) $25,000 for meeting the revenue plan referred to below.
Within the first 90 days of the Employment Term, Ledbetter will develop with
the management team an expense target and a revenue plan for the Company, and
he will present such target and plan to the Company's Board of Directors for
approval or modification. Such approval will not be unreasonably withheld,
and any such modification will not be made unreasonably. The final target and
plan, as approved by the Board of Directors, will constitute the expense
target and revenue plan referred to in (b) and (c) above.
3.2 EMPLOYEE BENEFITS. Ledbetter will be entitled to participate
in all benefit programs that the Company establishes and makes available to
its employees generally.
<PAGE>
3.3 WITHHOLDING. The Company will withhold from all payments of
salary and other compensation to Ledbetter, payroll withholding taxes and
other amounts that the Company is required to withhold from such payments
under applicable law.
3.4 RELOCATION COSTS. The Company will reimburse Ledbetter for up
to $50,000 of actual and reasonable expenses for the relocation of his family
and household goods to California and up to $30,000 of actual and reasonable
expenses for temporary housing while he accomplishes the relocation. In
addition, the Company will pay Ledbetter up to $17,500 of actual and
reasonable expenses to purchase tickets for his family to travel to and from
California while he is employed by the Company and in the process of
relocation. The parties anticipate that the relocation will be completed
within six months after the Effective Date. The amount paid by the Company
pursuant to this Section 3.4 will be repaid by Ledbetter pro rata if he
voluntarily terminates his employment with the Company before the end of such
six-month period.
3.5 STOCK OPTION. The Company will grant to Ledbetter options to
purchase 953,379 shares of the Company's Common Stock pursuant to the
Company's Executive Officer Incentive Plan and the related Stock Option
Agreement, copies of which have been provided to Ledbetter.
4. TERMINATION. During the Employment Term, the Company will not
terminate Ledbetter's employment other than for Cause (as defined in Section
4.2). Notwithstanding anything herein to the contrary, the Employment Term,
the employment of Ledbetter by the Company and this Agreement may be
terminated in accordance with the following:
4.1 EXPIRATION. Immediately, upon expiration of the Employment
Term in accordance with Section 1 hereof.
4.2 FOR CAUSE. By the Company, immediately for Cause (as defined
in this Section 4.2). For the purposes of this Agreement, the term "CAUSE"
will be deemed to exist upon: (a) a good faith finding by the Company that
Ledbetter has willfully failed to perform his lawful assigned duties for the
Company or abandoned his employment with the Company in any manner; (b) a good
faith finding by the Company of dishonesty, gross negligence or intentional
misconduct on the part of Ledbetter (including but not limited to
misappropriation of intellectual property of the Company or of others); or (c)
the conviction of Ledbetter of any felony.
4.3 VOLUNTARY TERMINATION. Immediately, upon Ledbetter's
resignation from the Company or any other voluntary termination by Ledbetter
of his employment with the Company (a "VOLUNTARY TERMINATION").
4.4 DEATH. Immediately, upon the death of Ledbetter.
4.5 DISABILITY. By the Company, immediately after 30 days' notice,
upon the disability of Ledbetter. As used in this Agreement, the term
"DISABILITY" will
-2-
<PAGE>
mean the material inability of Ledbetter, due to a physical or mental
disability, to perform the services and duties of Ledbetter contemplated by
this Agreement for a period of at least 90 days (whether or not such 90 days
are consecutive) during any twelve-month period. The Company will promptly
notify Ledbetter in writing if it determines that Ledbetter's employment has
been terminated due to disability.
5. EFFECT OF TERMINATION.
5.1 TERMINATION FOR CAUSE; VOLUNTARY TERMINATION. If Ledbetter's
employment is terminated for any reason, then the Company will pay to
Ledbetter the salary and benefits accrued and otherwise payable to him under
Section 3.1 and Section 3.2 through the effective date of termination.
5.2 SURVIVAL. Notwithstanding anything to the contrary in this
Agreement, all obligations of the Company and Ledbetter under this Agreement
which, according to the terms of this Agreement are required to be performed
after termination or expiration of this Agreement, will survive termination or
expiration of this Agreement, and such surviving obligations of a party will
remain enforceable against that party.
6. PROPRIETARY INFORMATION AGREEMENT. Nothing in this Agreement will
affect or modify the terms of Ledbetter's Employee Proprietary Information and
Inventions Agreement with the Company, which will remain in full force and
effect.
7. MISCELLANEOUS.
7.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior or concurrent agreements, understandings, representations
or warranties, whether written or oral, between the Company and Ledbetter.
7.2 AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and Ledbetter.
7.3 GOVERNING LAW; SEVERABILITY. This Agreement will be construed,
interpreted and enforced in accordance with the laws of the State of
California as applied to agreements entered into in California by California
residents without reference to principles of conflict of laws or choice of
law. In case any provision of this Agreement will be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions will in no way be affected or impaired thereby.
7.4 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon
and inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business; PROVIDED, HOWEVER, that
the obligations of Ledbetter hereunder are personal and will not be assigned
by him.
-3-
<PAGE>
7.5 WAIVER. No delay or omission by the Company in exercising any
right under this Agreement will operate as a waiver of that or any other
right. A waiver or consent given by the Company on any one occasion will be
effective only in that instance and will be construed as a bar or waiver of
any right on any other occasion.
7.6 CAPTIONS. The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.
7.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, and all of which
together will be one instrument.
8. ADVICE TO SEEK COUNSEL. LEDBETTER ACKNOWLEDGES TO THE COMPANY THAT
HE HAS BEEN ADVISED BY THE COMPANY TO RETAIN AN INDEPENDENT ATTORNEY TO ADVISE
HIM REGARDING HIS RIGHTS, OBLIGATIONS AND INTERESTS UNDER THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first set forth above.
HYBRID NETWORKS, INC. LEDBETTER
a California corporation
By: /s/ James R. Flach 15 Jan 96 /s/ Carl S. Ledbetter 15 Jan 1996
---------------------------------- --------------------------------------
Carl S. Ledbetter
Title: CEO
-------------------------------
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
-4-
<PAGE>
HYBRID NETWORKS, INC.
SENIOR SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "AGREEMENT") is entered into as of April
30, 1997, among Hybrid Networks, Inc., a Delaware corporation having its
principal place of business at 10161 Bubb Road, Cupertino, California
95014-4167 (the "COMPANY"), and London Pacific Life & Annuity Company, a
North Carolina stock life insurer, having its principal place of business at
3109 Poplarwood Court, Suite 108, Raleigh, North Carolina 27064 ("PURCHASER").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. AUTHORIZATION AND SALE OF THE DEBENTURE
1.1 AUTHORIZATION; ISSUANCE OF DEBENTURE. The Company has
authorized the issuance and sale pursuant to the terms and conditions hereof
of $5.5 million in principal amount of the Company's Senior Secured
Convertible Debenture due 2002 (the "DEBENTURE"), which Debenture shall be in
the form set forth in EXHIBIT A hereto and shall be convertible as of the
Closing (as hereinafter defined) into 1,386,240 shares of the Company's
Common Stock, at a Conversion Price (as defined in the Debenture) of
$3.967566, subject to adjustment as provided in the Debenture.
1.2 ISSUANCE AND SALE. Subject to the terms and conditions hereof,
at the Closing (as hereinafter defined), the Company will issue and sell the
Debenture to Purchaser and Purchaser will purchase the Debenture from the
Company.
1.3 FEE. At the Closing (as hereinafter defined), the Company will
pay to London Pacific International Limited ("LPIL") $500,000 as LPIL's fee
arranging for the financing provided for herein (the "FEE").
2. CLOSING; DELIVERY.
2.1 CLOSING. The closing (the "CLOSING") of the purchase and sale
of the Debenture will occur on April _, 1997, or such other date as the
parties may agree upon (the "Closing Date"). The Closing will take place at
the offices of Fenwick & West LLP, counsel to the Company, at Two Palo Alto
Square, Palo Alto, California.
2.2 DELIVERY. Subject to the terms of this Agreement, at the
Closing (i) the Company will issue and deliver the Debenture to Purchaser,
(ii) Purchaser will deliver to the Company by wire transfer U.S. $5,500,000
constituting the purchase price for the Debenture, (iii) the Company will pay
the Fee to LPIL as provided in Section 1.3, (iv) the parties will enter into
the Security Agreement in substantially the form set forth in EXHIBIT B
hereto (the "SECURITY AGREEMENT"), (v) the Company, Purchaser and certain
existing stockholders of the Company will enter into the Amended and Restated
Rights Agreement in substantially the form set forth in EXHIBIT C hereto (the
"RIGHTS AGREEMENT") and (vi) the parties will deliver such other documents as
they are required to deliver pursuant to Section 5.
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Purchaser, except as set forth on an exceptions
letter (the "EXCEPTIONS LETTER") furnished to Purchaser, as follows:
3.l ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as now conducted and expected to be conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction
in which the failure so to qualify would have a material adverse effect on
its business or properties. The Company is not required to qualify to
transact business in Georgia. The Company is in the process of qualifying to
do business in New Jersey. The Company has made available to Purchaser true
and complete copies of the charter documents for the Company, as amended to
date.
3.2 CORPORATE POWER. The Company has all requisite legal and
corporate power to enter into this Agreement, the Security Agreement and the
Rights Agreement to issue, sell, execute and deliver the Debenture hereunder
and to carry out and perform its obligations under the terms of this
Agreement, the Security Agreement, the Rights Agreement and the Debenture.
3.3 SUBSIDIARIES. The Company does not control, directly or
indirectly, or have an interest in, any other corporation, association or
business entity.
3.4 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of
the Company consists, or will consist prior to the Closing, of:
(a) PREFERRED STOCK. 18,000,000 shares of Preferred Stock,
(i) 1,547,175 shares of which are designated Series A Preferred Stock, all of
which are issued and outstanding, (ii) 1,237,439 shares of which are
designated Series B Preferred Stock, of which 799,908 shares are issued and
outstanding, (iii) 761,694 shares of which are designated Series C Preferred
Stock, all of which are issued and outstanding, (iv) 5,251,003 shares of
which are designated Series D Preferred Stock, of which 3,200,002 shares are
issued and outstanding, (v) 1,315,864 shares of which are designated Series E
Preferred Stock, all of which are issued and outstanding, (vi) 986,898 shares
of which are designated Series F Preferred Stock, all of which are issued and
outstanding, (vii) 6,360,381 shares of which are designated Series G
Preferred Stock, of which 3,457,500 shares are issued and outstanding, and
(viii) 497,323 shares of which are designated Series H Preferred Stock, of
which 493,827 shares are issued and outstanding. The rights, preferences and
privileges of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series
F Preferred Stock, Series G Preferred Stock and the Series H Preferred Stock
are as stated in the Amended and Restated Certificate of Incorporation, a
copy of which the Company has provided to Purchaser (the "AMENDED
CERTIFICATE").
(b) COMMON STOCK. 29,000,000 shares of Common Stock, of
which 6,946,616 shares are issued and outstanding.
(c) VALID ISSUANCE. All the issued and outstanding shares of
Common Stock and Preferred Stock have been dully authorized and are validly
issued, fully paid and nonassessable and were issued in compliance with all
federal and state securities laws.
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(d) OPTIONS AND CONVERTIBLE SECURITIES. There are no
outstanding preemptive or other rights, plans, options, warrants, conversion
rights or agreements for the purchase or acquisition from the Company of any
shares of its capital stock, except for (i) the conversion privileges of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock,
Series G Preferred Stock, Series H Preferred Stock and the Debenture (ii) the
rights provided in paragraph 2.3 of the Amended and Restated Investors Rights
Agreement as in effect prior to the execution and delivery of the Rights
Agreement (the "CURRENT RIGHTS AGREEMENT"), (iii) 2,579,086 shares of Common
Stock reserved for issuance upon the exercise of outstanding options or
awards granted or that may be granted under the Company's 1993 Equity
Incentive Plan, (iv) 1,350,000 shares of Common Stock reserved for issuance
upon the exercise of options or awards granted or that may be granted under
the Company's Executive Incentive Plan, (v) 500,000 shares of Common Stock
reserved for issuance upon the exercise of options or awards granted or that
may be granted under the Company's 1996 Equity Incentive Plan, (vi) 200,000
shares of Common Stock that had been subject to issuance to Intel Corporation
pursuant to the Series E/F Preferred Stock Purchase Agreement between the
Company and Intel Corporation entered into in December 1995 (the "INTEL
AGREEMENT"), (vii) warrants to purchase up to 2,051,001 shares of Series D
Preferred Stock and warrants to purchase up to 205,861 shares of Series B
Preferred Stock granted or extended pursuant to the Convertible Note and
Warrant Agreement dated as of June 12, 1996, (viii) warrants granted to Alex.
Brown & Sons Incorporation to purchase at $3.83 per share up to 156,658
shares of Series G Preferred Stock, (ix) warrants to purchase up to 22,857
shares of Series B Preferred Stock and up to 15,665 shares of Series G
Preferred Stock granted pursuant to certain equipment leasing agreements
entered into by the Company and (x) the rights granted to Gary M. Lauder
under Section 4.3 of the Stock Purchase Agreement dated as of October 21,
1994 between the Company and Mr. Lauder (the "SERIES B AGREEMENT"), whereby
the Company covenanted to Mr. Lauder that, as long as he holds at least 50%
of the number of shares of Series B Preferred Stock purchased by him under
the Series B Agreement, the Company will not, without his prior written
consent, alter or change the powers, preferences or special rights of the
Company's Series B Stock so as to affect them adversely without so affecting
the entire class of Preferred Stock. Except for the Voting Agreement dated as
of May 31, 1995 among the Company and certain stockholders, the Amended
Certificate and Sections 4.2 and 4.3 of the Series B Agreement, the Company
is not a party or subject to any agreement or understanding, and, to the
Company's knowledge, there is no agreement or understanding between any
persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of the
Company. Substantially all the stockholders, option holders and warrant
holders of the Company (excluding the holder of the warrant referred to in
(ix) above) have entered into "market stand-off" agreements substantially
similar to that set forth in Section l.12 of the Current Rights Agreement. In
the case of warrants the exercise period of which has been extended, such
extensions were duly effected by all necessary corporate action. With respect
to the liquidation preference participation rights of the Series D Preferred
Stock and the Series E Preferred Stock that have been eliminated, such
elimination was effected by all necessary corporate action.
3.5 AUTHORIZATION.
(a) All corporate action on the part of the Company, its
officers, directors and stockholders necessary for (i) the issuance and sale
of the Debenture pursuant hereto, (ii) the issuance of the shares of Common
Stock issuable upon conversion of the Debenture (the "COMMON SHARES") and
(iii) the execution, delivery and performance by the Company of this
Agreement, the
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Security Agreement, the Rights Agreement and the Debenture have been taken or
will be taken prior to the Closing hereunder. This Agreement is, and upon
execution and delivery the Security Agreement, the Rights Agreement and the
Debenture will be, the valid and binding obligations of the Company
enforceable against it in accordance with their terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of creditor's
rights and rules or laws concerning equitable remedies.
(b) The Debenture and the Common Shares, when issued in
compliance with the provisions of this Agreement, will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Common Shares may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or
otherwise required by such laws at the time a transfer is proposed. The
Company has reserved for issuance the Common Shares.
(c) No stockholder of the Company has any right of first
refusal or any preemptive rights in connection with the issuance and sale of
the Debenture or the Common Shares except those that have been complied with
or waived.
3.6 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has
good and marketable title to its properties and assets and good title to all
its leasehold estates, in each case subject to no mortgage, pledge, lien,
encumbrance, security interest, claim, equitable interest or charge, other
than or resulting from taxes which have not yet become delinquent and liens
and encumbrances which do not in any case materially detract from the value
of the property subject thereto or materially impair the operations of the
Company and which have not arisen otherwise than in the ordinary course of
business.
3.7 MATERIAL CONTRACTS. Except for the agreements and instruments,
stock options and warrants referred to in Section 3.4, the Company is not a
party to any agreement or contract which is not in the ordinary course of
business of the Company requiring payment by or to the Company of an amount
in excess of $25,000.
3.8 PATENTS, TRADEMARKS, ETC. The Company owns, or has the right
to use (or can obtain the right to use on reasonable commercial terms), all
patents, trademarks, service names, trade names, copyrights, licenses, trade
secrets, inventions or other proprietary rights necessary to its business as
now conducted or proposed to be conducted, and has not received a notice that
it is infringing upon or otherwise acting adversely to the right or claimed
right of any person under or with respect to any of the foregoing, and, to
the Company's knowledge, there is no basis for any such claim. The Company is
not aware of any violation by a third party of any of the Company's patents,
trademarks, service marks, trade names, copyrights, trade secrets or other
proprietary rights. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order
of any court or administrative agency, that would interfere with their duties
to the Company or that would conflict with the Company's business as
currently conducted. Neither the execution nor delivery of this Agreement,
nor the carrying on of the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company
does not believe it is or will be necessary to utilize any inventions of
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any of its employees made prior to their employment by the Company, except for
inventions that have been assigned or licensed to the Company pursuant to
assignments or licenses that were entered into by the Company on commercially
reasonable terms.
3.9 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The
Company is not in violation of its charter documents, as amended, or any
mortgage, indenture, contract, agreement, instrument, judgment, decree, writ
or order by which the Company is bound or to which its properties are subject
or, to the Company's knowledge, any statute, rule, or regulation applicable
to the Company, except for any violation that would not materially and
adversely affect the business, assets, liabilities, financial condition,
operations or prospects of the Company. The execution, delivery and
performance of and compliance with this Agreement, the Security Agreement,
the Rights Agreement and the Debenture, and the transactions provided for
herein and therein will not result in any such violation and will not be in
conflict with or constitute a default under any of the foregoing and will not
result in the creation of any mortgage, pledge, lien, encumbrance, security
interest, claim, equitable interest or charge upon any of the properties or
assets of the Company pursuant to any of the foregoing. To the best of the
Company's knowledge, all material instruments, licenses, contracts, leases or
other agreements as amended or modified to date (collectively "CONTRACTS") to
which the Company is a party are valid and binding and in full force and
effect in all material respects, and the Company has not been notified by any
party thereto of any such party's intention or desire to terminate or modify
in any material respect any of such Contracts, or of any claim or threat that
the Company has breached any of such Contracts. The Company has provided
Purchaser with access to all Contracts, including, without limitation, those
listed in the Exceptions Letter.
3.l0 EMPLOYEES. To the Company's knowledge, no employee of the
Company is in violation of any term of any employment contract, patent
disclosure agreement or any other contract or agreement relating to the right
of any such employee to be employed by the Company because of the nature of
the business conducted or to he conducted by the Company or for any other
reason, and the continued employment by the Company of its present employees
will not result in any such violations. Other than the Company's 401-K plan
and the incentive stock plans referred to in Section 3.4, the Company has no
deferred compensation, pension, profit sharing, bonus, insurance, severance
or any other similar employee benefit plan or arrangements covering any of
its officers or employees. There are no asserted controversies or labor
disputes or union organization activities pending or, to the knowledge of the
Company, threatened, between it and its employees. Each employee of the
Company has executed a Proprietary Information and Inventions Agreement, a
copy of the form of which has been made available to Purchaser. To the
Company's knowledge, the Company has complied with all applicable state and
federal equal employment opportunity and other laws related to employment.
3.11 LITIGATION, ETC. There are no actions, suits, claims,
proceedings or governmental investigations against the Company pending before
any court or governmental agency or, to the Company's knowledge, threatened
to be brought against the Company before any court or governmental agency,
nor, to the Company's knowledge, is there any basis therefore which, either
in any case or in the aggregate, would result in any material adverse change
in the business, prospects, affairs or operations of the Company, or in any
material impairment of the right or ability of the Company to carry on its
business, or in any material liability on the part of the Company, and none
which questions the validity of this Agreement or the Rights Agreement or any
action taken or to be taken in connection herewith or therewith. The Company
is not a party or subject to any writ, order,
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decree or judgment, and there is no action, suit or proceeding currently pending
that the Company has originated.
3.12 REGISTRATION RIGHTS. Except as provided in the Current Rights
Agreement and in the Rights Agreement (when executed and delivered), the Company
is not under any obligation to register (and has not agreed to register) any
presently outstanding securities, or any securities which may hereafter be
issued, under the Securities Act of 1933, as amended (the "Securities Act").
3.13 GOVERNMENTAL CONSENT ETC. No consent, approval or
authorization of, or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement or the Debenture, or the offer, sale
or issuance of the Debenture or the consummation of any other transaction
provided for herein or therein, except, if required. qualifications or
filings under the Securities Act, the California Corporate Securities Law of
1968, as amended, and other applicable state securities laws, which
qualifications or filings, if required, will be obtained or made and will be
effective within the time periods required by law.
3.14 SECURITIES ACT. Subject to the accuracy of Purchaser's
representations in Section 4 hereof, the offer, sale and issuance of the
Debenture in conformity with the terms of this Agreement and the issuance of
the Common Shares upon conversion of the Debenture constitute transactions
exempt from the registration requirements of Section 5 of the Securities Act.
3.15 INSURANCE. The Company has fire and casualty insurance
policies, with extended coverage in full force and effect, with all premiums
currently paid, sufficient in amount (subject to reasonable deductibles) to
allow the Company to replace any of its properties (including leased
properties) that might be damaged or destroyed and adequate for the Company's
business and, to the Company's knowledge, consistent with insurance coverage
maintained by similar businesses.
3.16 DISCLOSURE; BUSINESS PLAN. No statement by the Company
contained in this Agreement, including all exhibits, the Exceptions Letter,
the Investment Memorandum dated April 1997 delivered by the Company to
Purchaser in connection with Purchaser's purchase of the Debenture hereunder
(the "Business Plan") and the Debenture, when read together, contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. The
Company has provided Purchaser with all material information Purchaser or its
representatives have requested in connection with Purchaser's decision to
purchase the Debenture. The projections contained in the Business Plan are
based on assumptions (including assumptions not set forth in the Business
Plan but available from the Company) as to future events that may well not
occur or may occur differently than assumed. These assumption include but are
not limited to assumptions as to the Company's future reserves, costs, the
availability and terms of future financing,, products, the performance and
market acceptance of those products, market and economic conditions,
competition, intellectual property position, absence of material litigation
and other matters. These assumptions are subject to material uncertainties
and risks such as the risks referred to in the Business Plan. While the
projections were prepared in good faith and the Company believes the
underlying assumptions are reasonable, there can be no assurance that the
results illustrated will be achieved. Due to the many uncertainties involved,
the actual results of the Company's future operations will inevitably be
different than those projected and the differences
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may well be material. The projections have not been compiled, examined,
reviewed or passed upon the Company's independent accountants or by legal
counsel.
3.l7 TAXES. The Company has paid, or made provision for the payment
of, all taxes which have or may have become due pursuant to income tax
returns required to be filed by it or pursuant to any assessment which has
been received by it. The Company's sales tax returns through March 1995 have
been audited with no deficiency assessment. Except for those returns, no
federal or state income or sales tax return of the Company has been audited.
No deficiency assessment or proposed adjustment of the Company's United
States income tax, state or municipal taxes or sales taxes is pending, and
the Company has no knowledge of any proposed liability for any tax to be
imposed on its property or assets.
3.18 TRANSACTIONS WITH PRINCIPALS. Except for employment, severance
or other compensation arrangements referred to above, no employee,
stockholder or director of the Company is indebted to the Company, nor is the
Company indebted (or committed to make loans or extend or guarantee credit)
to any of them.
3.19 FINANCIAL STATEMENTS. The Company has delivered to Purchaser
audited balance sheets of the Company (including the Subsidiaries) at March
31, 1996 and at March 31, 1995, audited statements of operations,
stockholders' equity (deficiency) and cash flows for the fiscal years ended
March 31, 1996 and March 31, 1995, an unaudited balance sheet at March 31,
1997 and an unaudited statement of operations for the fiscal year ended March
31, 1997 (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements
are complete and correct in all material respects and have been prepared in
accordance with generally accepted accounting principles and the Company's
books and records, and fairly present the financial position of the Company
at the date thereof and the results of operations, stockholders' equity and
cash flows of the Company for the periods covered thereby (except, in the
case of the unaudited financial statements, for normal audit adjustments).
The Company has taken reasonable steps to improve the physical inventory
count procedure, as recommended in the 1996 management letter (a copy of
which has been furnished by the Company to Purchaser).
3.20 CHANGES. Since March 31, 1997, there has not been any material
change in the assets, liabilities, financial condition or operations of the
Company other than changes in the ordinary course of business, none of which
individually or in the aggregate has had or is likely to have a material
adverse effect on such assets, liabilities, financial condition or operations
of the Company, or to the knowledge of the Company, any other event or
condition of any character that has materially and adversely affected, or
threatened to materially or adversely affect, the results of operations,
financial condition or business of the Company including but not limited to
the following: (a) any event which materially and adversely affects the
Company's business as it is currently being conducted; (b) any declaration,
setting aside or payment of any dividend or other distribution in respect of
any of the Company's capital stock, or any direct or indirect redemption,
purchase or other acquisition of any of such stock by the Company, other than
the repurchase of unvested shares of Common Stock of the Company issued to
employees, officers or directors of, or consultants to, the Company; (c) any
waiver by the Company of a valuable right or of a material debt owed to it
where such waiver has a material and adverse effect on the Company's
financial condition or business as it is currently conducted; (d) any
material change or amendment to a contract or arrangement by which the
Company or any of its assets or properties is bound or subject where such
change or amendment has a material and adverse effect on the Company's
financial
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condition or business as it is currently conducted; (e) any commitment,
transaction or other action by the Company other than in the ordinary course
of business and consistent with past practice where such commitment,
transaction or other action has a material and adverse effect on the
Company's financial condition or business as it is currently conducted; (f)
any amendment or other change to the Amended Certificate or to the Bylaws of
the Company (including any change of the Company's name); (g) any sale or
other disposition of any material right, title or interest in or to any
material assets or properties of the Company or any revenues derived
therefrom other than in the ordinary course of business and consistent with
past practice; (h) any creation, incurrence or assumption of any indebtedness
for money borrowed by the Company exceeding $25,000 (not including net
increases in accounts payable incurred in the ordinary course of the
Company's business); (i) any material capital expenditures by the Company not
in the ordinary course of business; (j) any material change in any accounting
principle or method (other than normal adjustments as a result of the audit
of the Company's financial statements for fiscal 1997) or in any election for
federal income tax purposes used by the Company; or (k) any authorization,
approval, agreement or commitment to do any of the foregoing.
3.21 MINUTE BOOKS. The minute books of the Company made available
to Purchaser contain a complete summary of all meetings of directors and
stockholders since the date of the Company's incorporation. The most recent
minutes furnished by the Company to Purchaser were for the Board meeting held
January 28, 1997. The Company has, however, provided Purchaser with a draft
of the minutes for the meeting held March 25, 1997. There were no duly
convened meetings of the Company's Board of Directors between those dates.
3.22 PERMITS. The Company has all permits, licenses and any similar
authority necessary, to its knowledge, for the conduct of its business as now
conducted by it, the lack of which would materially and adversely affect the
properties, prospects or financial condition of the Company, except for any
licenses which the Company can obtain without undue effort or expense.
3.23 ENVIRONMENTAL AND SAFETY LAWS. The Company is not, to its
knowledge in violation of any applicable statute, law or regulation relating
to environment (including disposal of waste products and effluents) or
occupation, health and safety, except for any violation which the Company
could cure without making material expenditures or without materially
changing its business or operations.
3.24 MANUFACTURING AND MARKETING RIGHTS. Except for the Intel
License and the Sharp Agreements, the Company has not granted rights to
manufacture, produce, assemble, license, market or sell its products to any
other persons, and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products, other than License agreements entered into in the ordinary
course of business. The Company has identified satisfactory back-up
manufacturing sources for its current products, is negotiating with Sharp to
provide manufacturing on an exclusive basis for certain of its future
products and is seeking similar arrangements with one or more manufacturers
for certain of its other products. The Company currently has adequate sources
for the components of its current products and those currently under
development, except that the Company has a single source for certain of its
components (including the 64 QAM modulation chip and the 286 c.p.u. chip),
and a disruption in the supply of such components could have a material
adverse effect on the Company, its business and its operations.
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3.25 INVENTORY. The Company's inventory and work in process are in
good condition, not obsolete, and saleable in the ordinary course of the
Company's business, except for obsolete inventory that the Company has fully
reserved for in its Financial Statements (the reserve is approximately
$150,000).
3.26 CONTINUING DEVELOPMENT. The Company is in the development
stage and has and continues to provide products to customers for testing. As
the Company receives input from customers with respect to the operation of
its products, including descriptions of issues, problems and complaints, the
Company responds with improvements in its products and related services. That
process is ongoing. While the issues, problems and complaints that customers
have had with the Company's products during their various stages of
development are not immaterial, the Company believes that it has responded
appropriately with respect to these matters in the past and that it fully
anticipates being able to respond appropriately with respect to such matters
in the future as well.
3.27 CANCELED PURCHASE ORDERS. The Company has from time to time
had purchase orders rescinded, continued or modified, although such
rescission, continuance or modification has not had a material adverse effect
on the Company's business or prospects as described in the Business Plan.
3.28 LEASES. The Company leases properties (a) in New Jersey at l06
Apple Street, Tinton Falls (which lease expires September 16, 1998); (b) in
San Francisco at 500 Sansome Street (which lease expires March 9, 2002); (c)
in Cupertino (the Company's principal place of business) at 10161 Bubb Road
(which lease expires May 31, 1998), subject to a three year option to renew
exercisable between the ninth and sixth month preceding the end of the term).
The Company is also the Sublessee (with Norian Corporation as Sublessor) at
10201 Bubb Road in Cupertino (which sublease expires August 31, 1997).
3.29 TRIALS. The Company's trials in Minnesota of wireless internet
access systems is proceeding in a reasonably satisfactory manner.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND RESTRICTIONS ON
TRANSFER IMPOSED BY THE SECURITIES ACT AND STATE SECURITIES LAWS.
4.1 REPRESENTATIONS AND WARRANTIES BY PURCHASER. Purchaser
represents and warrants to the Company as follows (the Company is entering
into this Agreement with Purchaser in reliance upon Purchaser's
representations to the Company set forth below, which by Purchaser's execution
of this Agreement such Purchaser hereby confirms):
(a) The Debenture and Common Shares issuable upon conversion
thereof to be acquired by Purchaser are being acquired by Purchaser for
Purchaser's own account, not as a nominee or agent, and not with a view to
the sale or other disposition of any part thereof. Purchaser has no present
intention of selling, granting any participation in, or otherwise disposing
of the Debenture or Common Shares or any interest therein. Purchaser does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participation to such person (or to any other person)
with respect to the Debenture or Common Shares issuable upon conversion
thereof. Purchaser confirms that the Debenture has been offered only to
Purchaser and not to any other offeree and that the Business Plan has been
prepared only for Purchaser's own use and not for the use of any other person
and will not be shown or delivered by Purchaser or any of its
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representatives to any other person who may acquire an interest in the
Debenture or any portion thereof without the prior written consent of the
Company.
(b) Purchaser understands that the Debenture and the Common
Shares have not been registered under the Securities Act in reliance upon the
exemptions or under state securities laws from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section
4(2) of the Securities Act and Regulation D thereunder and in reliance upon
certain exemptions from the registration requirements of applicable state
securities laws. The Company has no present intention of registering the
Debenture or the Common Shares. The Debenture and Common Shares must be held
by Purchaser indefinitely (unless sold by Purchaser in a registered offering
or pursuant to valid exemptions from the requirements of registration under
the Securities Act and the applicable state securities laws). Purchaser must
therefore bear the economic risk of such investment indefinitely, unless a
subsequent disposition thereof is registered under the Securities Act and
applicable state securities law or is exempt from registration. Purchaser
further understands that the exemptions from registration relied upon by the
Company depend upon, among other things, the bona fide nature of Purchaser's
investment intent expressed above and Purchaser's other representations
herein.
(c) During the negotiation of the transactions contemplated
herein, Purchaser and the Purchaser's representatives and legal counsel have
been afforded full and free access to corporate books, financial statements,
records, contracts, documents and other information concerning the Company
and to its offices and facilities, have been afforded an opportunity to ask
such questions of the Company's officers, employees, agents, accountants and
representatives concerning the Company's business, operations, financial
condition, assets, liabilities and other relevant matters as they have deemed
necessary or desirable, and have been given all such information as has been
requested, in order to evaluate the merits and risks of the prospective
investments contemplated herein.
(d) Purchaser and Purchaser's representatives and legal
counsel have been solely responsible for Purchaser's own "due diligence"
investigation of the Company and its management and business, for Purchaser's
own analysis of the merits and risks of this investment, and for Purchaser's
own analysis of the fairness and desirability of the terms of the investment.
In taking any action or performing any role relative to the arranging of the
proposed investment, Purchaser has acted solely in Purchaser's own interest,
and none of Purchaser's (or any agents or employees of Purchaser) has acted
as an agent of the Company. Purchaser has such knowledge and experience in
financial and business matters that Purchaser is capable of evaluating the
merits and risks of the purchase of the Debenture pursuant to the terms of
this Agreement and of protecting Purchaser's interests in connection
therewith. Purchaser acknowledges that the Business Plan and the Exceptions
Letter are provided to Purchaser strictly for Purchaser's use in connection
with its purchase of the Debenture hereunder, and Purchaser agrees to keep
the Business Plan and the Exceptions Letter confidential and not disclose
either of them or any information contained therein to others (other than
Purchaser's counsel and representatives in connection with this investment)
without the prior written consent of the Company.
(e) Purchaser represents that: (i) Purchaser is an
"accredited investor" as defined in Rule 501(a) of Regulation D under the
Securities Act; (ii) Purchaser has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of
its prospective investment in the Debenture and Common Shares issuable upon
conversion
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thereof; (iii) Purchaser has received all the information it has requested
from the Company and considers necessary or appropriate for deciding whether
to purchase the Debenture and Common Shares issuable upon conversion thereof;
(iv) Purchaser has the ability to bear the economic risks inherent in
Purchaser's investment in the Debenture and Common Shares issuable upon
conversion thereof; (v) Purchaser is able, without materially impairing its
financial condition, to hold the Debenture and Common Shares issuable upon
conversion thereof for an indefinite period of time and to suffer a complete
loss of its investment, and (vi) Purchaser understands and has fully
considered for purposes of this investment the risks of this investment and
understands that: (1) the Company is an enterprise with limited financial and
operating history; (2) the Debenture and Common Shares issuable upon
conversion thereof represent an extremely speculative investment which
involves a high degree of risk of loss, (3) there are substantial
restrictions on the transferability of, and there may be no public market for
the Debenture and Common Shares issuable upon conversion thereof, and,
accordingly, it may not be possible for Purchaser to liquidate its investment
in the Debenture and Common Shares issuable upon conversion thereof; and (4)
there have been no representations as to the present or possible future
value, if any, of the Debenture and Common Shares issuable upon conversion
thereof or Purchaser's collateral under the Debenture.
(f) Purchaser has the full right, power and authority to
enter into and perform Purchaser's obligations under this Agreement, the
Security Agreement and the Rights Agreement, and each of this Agreement, the
Security Agreement and the Rights Agreement constitutes the valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with
their terms except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting enforcement of creditors' rights and rules or laws concerning
equitable remedies.
(g) No consent, approval or authorization of or designation,
declaration or filing with any governmental authority on the part of
Purchaser is required in connection with the valid execution, delivery and
performance by Purchaser of this Agreement, the Security Agreement or the
Rights Agreement; neither the execution, the delivery nor the performance of
this Agreement, the Security Agreement or the Rights Agreement by Purchaser
is or will be in violation of any applicable statute, law or regulation.
(h) Purchaser is an insurance company incorporated in North
Carolina and admitted to sell insurance in California and is exempt from the
California usury laws under Section 1100.1 of the California Insurance Code.
4.2 LEGENDS. The Debenture and each certificate representing the
Common Shares may be endorsed with the following legends (or any legends
substantially to the same effect):
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER
THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE
AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN
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INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
(b) Any other legends as the Companv may reasonably deem to
be required by California law or other applicable state securities laws.
In order to ensure and enforce compliance with the restrictions imposed by
applicable law and those referred to in the foregoing legends, or elsewhere
herein, the Company may issue appropriate "stop transfer" instructions to its
transfer agent, if any, with respect to any certificate or other instrument
representing the Debenture or any Common Shares, or, if the Company transfers
its own securities, that it may make appropriate notations to the same effect in
the Company's records.
4.3 REMOVAL OF LEGEND AND TRANSFER RESTRICTIONS. Any legend
endorsed on a certificate pursuant to Section 4.2 and the stop transfer
instructions or notations with respect to the Debenture or Common Shares
shall be removed, and the Company shall issue a certificate without such
legend to the holder thereof, if the Debenture or Common Shares are
registered under the Securities Act (and a prospectus meeting the
requirements of Section 10 of the Securities Act is available) and are
registered under applicable state securities law, if such legend and
instructions may be properly removed under the terms of Rule 144 promulgated
under the Securities Act and under any applicable state securities law or if
such holder provides the Company with an opinion of counsel for such holder,
reasonably satisfactory to legal counsel for the Company, to the effect that
any resale, transfer or assignment of the Debenture or Common Shares may be
made without registration.
4.4 "MARKET STAND-OFF". Purchaser hereby agrees that, during the
period of duration specified by the Company and an underwriter of Common
Stock of the Company not to exceed 180 days following the effective date of a
registration statement of the Company filed under the Securities Act, such
signatory shall not, directly or indirectly sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees, or
affiliates, of Purchaser who agree to be similarly bound) any securities of
the Company held by it at any time during such period except Common Stock
included in such registration and except to the extent otherwise consented to
by the Company and such underwriter. To the extent that any officer or
director of the Company has not entered into a market stand-off agreement of
equivalent duration and effect with respect to any Company securities
beneficially owned by such officer or director, the Company shall use best
efforts to require each officer and director of the Company to enter into
such an agreement.
5. CONDITIONS TO CLOSINGS.
5.1 CONDITIONS TO OBLIGATIONS OF PURCHASER AT CLOSING. The
obligation of Purchaser to purchase the Debenture at the Closing is subject
to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Purchaser pursuant to the terms
of Section 7.1:
(a) REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in
Section 3 of this Agreement and in the Debenture shall be true and complete
in all material respects (i) on the date hereof (except where
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explicitly made as of a different date) and (ii) on the Closing Date with the
same force and effect as if they had been made on and as of the Closing Date
(except where explicitly made as of a different date); the Company's business
and assets shall not have been adversely affected in any material way prior
to the Closing Date; and the Company shall have performed all obligations and
conditions herein required to be performed or observed by it on or prior to
the Closing Date, including, without limitation, making arrangements
satisfactory to London for the immediate payment of the Fee pursuant to
Section 1.3.
(b) CONSENTS AND WAIVERS. The Company shall have obtained
any and all consents (including all governmental or regulatory consents,
approvals or authorizations required in connection with the valid execution,
issuance, delivery and performance by the Company of this Agreement, the
Security Agreement, the Rights Agreement or the Debenture), permits and
waivers necessary or appropriate for consummation of the transactions
provided for in this Agreement, the Security Agreement, the Rights Agreement
and the Debenture.
(c) FINANCING STATEMENTS AND RELATED DOCUMENTS. The Company
shall have executed and delivered to Purchaser for filing, or have caused to
be filed for Purchaser, such UCC-1 financing statements, assignment(s) of
patent rights and other documents as Purchaser may reasonably request to
perfect Purchaser's security interests in the Company's assets in accordance
with the terms of the Security Agreement and the Debenture.
(d) SECURITY AGREEMENT AND RIGHTS AGREEMENT. The Company
shall have executed and delivered the Security Agreement, and the Company and
the existing stockholders of the Company whose signatures are required shall
have executed and delivered the Rights Agreement.
(e) COMPLIANCE CERTIFICATE. The Company shall have delivered
to Purchaser a certificate, executed on behalf of the Company by its Chief
Executive Officer, dated the Closing Date, certifying to the fulfillment of
the conditions specified in subsections (a), (b) and, if applicable, (c) of
this Section 5.1.
(f) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
hereby and all documents and instruments incident to such transactions shall
be reasonably satisfactory in substance and form to Purchaser and their
special counsel, and Purchaser and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as they
may reasonably request.
5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY AT THE CLOSING. The
Company's obligation to issue and sell the Debenture at the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Purchaser in Section 4 hereof shall be true and complete
in all material respects (i) on the date hereof and (ii) on the Closing Date
with the same force and effect as if they had been made on and as of the
Closing Date.
(b) CONSENTS AND WAIVERS. Purchaser shall have obtained any
and all consents (including all governmental or regulatory consents,
approvals or authorizations required in connection with the valid execution,
delivery and performance by Purchaser of this Agreement),
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permits and waivers necessary or appropriate for the consummation by
Purchaser of the transactions provided for in this Agreement or in the
Debenture.
6. AFFIRMATIVE AND NEGATIVE COVENANTS. The Company hereby covenants and
agrees with Purchaser as follows (the following covenants and agreements
shall continue as long as the Debenture remains outstanding, unless an
earlier expiration date is indicated below):
6.1 INSPECTION RIGHTS. For so long as the Debenture remains
outstanding, the Company will permit representatives of Purchaser to visit
and inspect any of its properties and to examine and make copies of its
non-privileged books and records and to discuss its affairs, finances and
accounts with its officers, employees and agents all at such reasonable times
and as often as may reasonably be desired. Purchaser agrees to keep such
information confidential and to not buy or sell the Company's securities
while in the possession of material non-public information regarding the
Company.
6.2 BOARD VISITATION RIGHTS. Until the Company consummates an
initial public offering of its Common Stock or the Debenture is no longer
outstanding, the Company will permit one representative of the Purchaser to
attend all Board of Director meetings in a non-voting capacity, and shall
provide such representative with copies of all non-privileged information
otherwise distributed to members of the Board of Directors. Purchaser agrees
to keep such information confidential.
6.3 ADDITIONAL SECURITIES. Except as set forth in Section 4 of the
Debenture, for so long as the Debenture remains outstanding, the Company will
not incur any additional indebtedness, or issue or sell any debt or equity
securities, which have a right of payment, liquidation preference, dividend
right or other right that entitles the holder thereof to payment that is
senior to the Debenture or is inconsistent with the seniority in right of
payment of the Debenture granted under this Agreement and the Debenture,
PROVIDED, HOWEVER, that the Company may enter into capital lease agreements
secured by specific property and capital equipment acquisitions.
6.4 REPAYMENT OF SUBORDINATED DEBT. For so long as the Debenture
remains outstanding, the Company will not directly or indirectly redeem,
retire or purchase any indebtedness subordinate to the Debenture, although
the Company will be entitled to pay such indebtedness in accordance with its
terms (provided that such payment does not violate Purchaser rights in the
event of a default under the Debenture).
6.5 DIVIDENDS AND DISTRIBUTIONS. For so long as the Debenture remains
outstanding, the Company will not pay any dividends to any shareholder or
effect any distribution of the Company's assets to any shareholder (other than
payments in the ordinary course of the Company's business or repurchase in
accordance with the terms of the Company's equity incentive plans of shares
issued under such plans).
6.6 ENCUMBRANCES AND LIENS. Except as set forth in Section 4 of the
Debenture, the Company will not create, assume or suffer to exist, any
mortgage, pledge, security interest, encumbrance or lien on property of any
kind, real, personal or mixed, now owned or hereafter acquired, or upon the
income or profits thereof, except (i) as already existed prior to the execution
of this Agreement; (ii) for minor encumbrances and easements on real property
which do not affect its market value, (iii) for purchase money interests (which
includes mortgages, conditional sale contracts, capitalized leases and similar
title retention or deferred purchase devices) encumbering
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<PAGE>
only the property purchased and existing liens on purchased property in the
ordinary course of business. or (iv) for any extension, renewal or
replacement of the foregoing in the ordinary course of business.
6.7 AFFILIATES. The Company will not enter into or perform any
transaction with any person or entity who controls or is controlled by or
under common control with the Company (an "AFFILIATE"), except on terms no
less favorable to the Company than would be available in a bona fide arms
length transaction with a non-Affiliate.
6.8 PAYMENT OF OBLIGATIONS. The Company will pay and discharge
promptly all taxes, assessments and other governmental charges and claims
levied or imposed upon it or its property, or any part thereof, provided,
however, that the Company will have the right to contest in good faith any
such taxes, assessments, charges or claims, and pending the outcome of such
contest, to delay or refuse payment thereof provided that adequate funded
reserves are established.
6.9 MAINTENANCE OF CORPORATE EXISTENCE AND PRINCIPAL PLACE OF
BUSINESS. The Company will maintain and preserve its existence and assets and
all rights, franchises and other authority necessary for the conduct or its
business and will maintain and preserve its property, equipment and
facilities in commercially useful order, condition and repair. The Company
will not change its corporate name or dba without the prior written consent
of the Purchaser, which consent shall not be unreasonably withheld by the
Purchaser. The Company will not move its principal place of business outside
California without Purchaser's prior written consent, which consent shall not
be unreasonably withheld by the Purchaser.
6.10 MAINTENANCE OF COMMERCIAL RELATIONSHIPS. The Company shall use
commercially reasonable efforts to preserve its contracts and leases material
to its business and to preserve the goodwill of and maintain the existing
relationships with its customers, suppliers and personnel which are
beneficial to the business of the Company.
6.11 INSURANCE The Company will keep all of its insurable property,
real, personal, or mixed, insured by good and responsible companies against
fire, accident and such other risks as are customarily insured against by
companies conducting similar business with respect to like properties and in
amounts of coverage as are commercially reasonable. The Company will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damage to persons or property.
6.12 COMPLIANCE WITH LAWS AND REGULATIONS. The Company will use its
best efforts to ensure that it does not violate any federal, state, local or
foreign law, ordinance or regulations or any order, judgment, injunction or
decree or any court, arbitrator or governmental body which are material to
the conduct of the Company's business, including without limitation laws
relating to pollution or protection of the environment, labor and employment
practices, health and safety, and importing and exporting goods and services.
6.13 CAPITAL EXPENDITURES. The Company will not (i) make any plant
or fixed capital expenditure, or any commitment therefor, or purchase any
personal property or replacement equipment in excess of $1.5 million during
its fiscal year 1998, in excess of $2.5 million during its fiscal year 1999,
in excess of $5.5 million during its fiscal year 2000 and in excess of $11.0
million during its fiscal year 2001; provided, however, that such limits will
be increased by a percentage
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<PAGE>
equal to that percentage by which the current fiscal year's net revenues
exceed the current fiscal year's projected net revenues (as set forth in the
Business Plan).
6.14 KEY MAN LIFE. The Company shall obtain and maintain key man
life insurance on Mr. Carl S. Ledbetter ("Ledbetter") for so long as
Ledbetter remains Chief Executive Officer of the Company, with proceeds
payable to the Company.
7. MISCELLANEOUS.
7.1 WAIVERS AND AMENDMENTS. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by a statement in writing signed by the party against which enforcement
of the change, waiver, discharge or termination is sought.
7.2 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
7.3 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive the execution of this Agreement and the
Closing.
7.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. The Company may not assign its rights or delegate its duties
under this Agreement, the Security Agreement or the Debenture, except by
operation of law or with the prior written consent of Purchaser.
7.5 ENTIRE AGREEMENT. This Agreement, the exhibits to this
Agreement and the Exceptions Letter constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and thereof and supersede and replace any prior or concurrent
agreements, understandings or representations between the Company and
Purchaser
7.6 NOTICES, ETC. All notices required or permitted hereunder
shall be in writing and shall be sent via facsimile, overnight courier
service or mailed by first class mail, postage prepaid, addressed or sent (a)
if to Purchaser, at the address of Purchaser set forth above or facsimile no.
(919) 981-2797 (with a copy to Berkeley International Capital Corporation,
650 California Street, San Francisco, California 94920, facsimile no. (415)
249-0553), or at such other address or number as Purchaser shall have
furnished to the Company in writing, or (b) if to the Company, at the address
set forth above or facsimile no.: (408) 725-2439, or at such other address or
number as the Company shall have furnished to Purchaser in writing.
7.7 SEPARABILITY. In case any provision of this Agreement shall be
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
7.8 FINDER'S FEES.
(a) The Company (i) represents and warrants that it has
retained no finder or broker, in connection with the transactions
contemplated by this Agreement and (ii) hereby agrees to indemnify and to
hold Purchaser harmless of and from any liability for any commission or
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compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or
asserted liability) for which the Company, or any of its employees or
representatives, are responsible. The Company shall, however, pay the Fee
pursuant to Section l.3.
(b) Purchaser (i) represents and warrants that it has
retained no finder or broker, in connection with the transactions
contemplated by this Agreement and (ii) hereby agrees to indemnify and to
hold the Company harmless of and from any liability for any commission or
compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or
asserted liability) for which Purchaser, or any of its employees or
representatives, are responsible.
7.9 EXPENSES AND FEES. The Company will bear the actual legal
expenses that Purchaser incurs with respect to this Agreement and the
transaction provided for herein up to a maximum amount of $10,000. Except for
the immediately preceding sentence, the Company and Purchaser shall each bear
its respective expenses and legal fees incurred with respect to this
Agreement and such transaction. In the event any litigation between the
parties arises out of, in connection with or with respect to this Agreement,
the prevailing party shall be entitled to receive from the nonprevailing
party the reasonable costs and expenses incurred by the prevailing party
(including attorneys fees) in connection with such litigation.
7.10 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
7.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.l2 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to Purchaser, upon any breach or default of
the Company under this Agreement, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on Purchaser's part of any breach or
default under this Agreement, or any waiver on Purchaser's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing and that
all remedies, either under this Agreement, or by law or otherwise afforded to
Purchaser, shall be cumulative and not alternative.
7.13 FUTURE EMPLOYEE AGREEMENTS AND ISSUANCES. The Company will require
that all future employees of the Company enter into Proprietary Information
and Inventions Agreements in substantially the form provided to the Agent's
counsel, with such amendments thereto or deviations therefrom as the
Company's Chief Executive Officer or Board of Directors may from time to time
deem appropriate. All future issuances of securities of the Company to
employees, officers and consultants shall be made pursuant to stock purchase
or stock option agreements approved by the Company's Board of Directors, and
including a "market stand-off" provision
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substantially similar to that set forth in Section 1.12 of the Rights Agreement
or such other terms as the Board of Directors may approve.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
"COMPANY"
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
---------------------------------
Its: PRESIDENT & CEO
---------------------------------
"PURCHASER"
LONDON PACIFIC LIFE & ANNUITY COMPANY
By: Susan Y. Gressel
-----------------------------------
Its: V.P. & Treasurer
-----------------------------------
Exhibit:
- --------
A. Form of Debenture
B. Form of Security Agreement
C. Form of Rights Agreement
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SENIOR SECURED CONVERTIBLE DEBENTURE DUE 2002
CUPERTINO, CALIFORNIA
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THIS
DEBENTURE IS SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. HOLDER SHOULD
BE AWARE THAT HOLDER MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE MAKER OF THIS DEBENTURE MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO
THE MAKER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALES IS IN COMPLIANCE
WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
$5,500,000 April 30, 1997
For value received, Hybrid Networks, Inc., a Delaware corporation
("HYBRID") at 10161 Bubb Road, Cupertino, California 95014-4167, promises to
pay on April 30, 2002 (the "MATURITY DATE") to the order of London Pacific
Life & Annuity Company ("LONDON PACIFIC") or any subsequent holder of this
Debenture (London Pacific or such subsequent holder, as applicable, is
referred to herein as "HOLDER") by wire transfer in immediately available
funds to the account of London Pacific at 3109 Poplarwood Court, Suite 108,
Raleigh, North Carolina 27604 (or such other address as Holder may specify in
writing to Hybrid), the principal sum of Five Million Five Hundred Thousand
Dollars ($5,500,000) together with any interest accrued and unpaid as of the
date thereof; on the terms and conditions set forth herein.
1. TERM AND PAYMENT. The term of this Debenture shall commence on the
date first set forth above and shall end April 30, 2002. During the term of
this Debenture, the unpaid principal amount hereof shall bear interest at the
rate of 12% per annum, on a 360 days basis, actual days elapsed, which shall
be payable quarterly in arrears commencing on June 30, 1997 and continuing on
the last day of each third month (September 30, December 31, March 31 and
June 30) thereafter until maturity. On the Maturity Date, all accrued and
unpaid interest and all principal shall be paid in full, except as provided
otherwise herein. It is provided, however, that the rate at which interest
will accrue on unpaid principal under this Debenture will not exceed the
highest rate permitted by applicable law. Principal and interest shall be
payable in lawful money of the United States of America, without any
deduction of any nature by way of set off, counterclaim or otherwise.
<PAGE>
This Debenture is issued by Hybrid pursuant to the Senior Secured
Convertible Debenture Purchase Agreement dated as of the date hereof between
Hybrid and London Pacific.
2. CONVERSION.
(a) RIGHT TO CONVERT/AUTOMATIC CONVERSION.
(1) Subject to Section 2(c) below, this Debenture shall be
convertible, in whole or in part (subject to Section 2(g) below), at the
option of Holder, at any time after the date hereof until this Debenture is
paid in full into such number of fully paid and nonassessable shares of
Common Stock of Hybrid, par value $0.001 per share ("COMMON STOCK"), as is
determined by dividing the outstanding principal amount of this Debenture by
the Conversion Price then in effect. As of the date on which this Debenture
is issued (the "ISSUANCE DATE"), the Conversion Price is $3.967566. Such
Conversion Price shall be subject to adjustment as set forth in Section 2(c).
(Such Conversion Price, as so adjusted, is referred to herein as the
"CONVERSION PRICE.") If this Debenture is converted for the full original
principal amount following the Issuance Date, assuming no adjustment to the
Conversion Price, Holder would receive upon such conversion 1,386,240 shares
of Common Stock.
(2) This Debenture shall automatically be converted in full into
shares of Common Stock, by dividing the outstanding principal amount of this
Debenture by the Conversion Price then in effect, on the Conversion Date (as
defined below) following the consummation of (A) the sale of Common Stock by
Hybrid in a bona fide, firm commitment underwritten public offering pursuant
to a registration statement under the Securities Act of 1933, as amended (the
"ACT"), provided that (i) the public offering price per share is not less
than an amount (the "MINIMUM PER SHARE PRICE") which when multiplied by the
number of all the issued and outstanding shares of Common Stock of Hybrid on
a fully diluted basis immediately before the sale (assuming the exercise of
all outstanding options, warrants, conversion rights and other rights to
acquire shares of Common Stock of Hybrid and assuming the issuance of all
other shares currently reserved for issuance under Hybrid's equity incentive
plans (such assumed exercise and issuance are referred to as the "ASSUMED
ISSUANCES") (but excluding the shares of Common Stock sold in the public
offering, the shares of Common Stock issuable upon conversion of the
Debentures, and all shares (or securities convertible or exchangeable into
shares), other than the shares included in the Assumed Issuances, issued
after the date hereof)) equals at least $166.5 million and (ii) the gross
proceeds to Hybrid of such public offering are at least $15 million or (B)
the acquisition of all or substantially all of the capital stock of Hybrid or
all or substantially all of its assets by a third party (whether in a merger,
consolidation, sale of assets or otherwise) for consideration of at least
$166.5 million in cash or fair market value of securities issued in
connection with the acquisition (excluding any consideration attributable to
any securities that Hybrid may issue in connection with the acquisition),
provided that, if securities of the acquiror (or its affiliate) are issued in
connection with the acquisition, such securities shall be freely tradable by
the Holder or shall, in the aggregate, be publicly valued at least an amount
(the "MINIMUM AMOUNT") which, when added to the amount of any cash paid by
the acquiror to Hybrid or its stockholders in connection with the
acquisition) is at least $166.5 million. The term "CONVERSION DATE" shall
mean: (I), in the case of a public offering referred to in (A) above, the
first day following any 90 consecutive calendar day period commencing on or
any time after the public offering on which the closing price of the Common
Stock of Hybrid (as publicly reported on the public market on which such
Common Stock is traded) is equal to or
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greater than the Minimum Per Share Price for each day of such 90 consecutive
calendar day period. (Accordingly, if the closing price of Common Stock is at
least equal to the Minimum Per Share Price on each of the 90 calendar days
commencing with the date on which shares of the Common Stock are sold in the
public offering, then the Conversion Date will be the first day following
such 90th calendar day) or (II) in the case of an acquisition referred to in
(B) above, the date on which the acquisition is consummated; it is provided,
however, that if securities are issued in connection with the acquisition and
such securities are freely tradable by the Holder, then the Conversion Date
shall be the first day following any 90 consecutive calendar day period
commencing on or after the acquisition on which the securities, when added to
the amount of any cash paid by the acquiror to Hybrid or its stockholders in
connection with the acquisition are publicly valued at least the Minimum
Amount for each day during such 90 consecutive day period.
(b) MECHANICS OF CONVERSION. Before Holder shall be entitled to
convert this Debenture or any portion thereof into shares of Common Stock,
Holder shall surrender this Debenture, duly endorsed, at the office of Hybrid
and shall give written notice to Hybrid of the election to convert this
Debenture or portion thereof specifying the portion) and shall state therein
the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. Hybrid shall, as soon as practicable
thereafter, issue and deliver to Holder, or to Holder's nominee or nominees,
the shares of Common Stock to which Holder shall be entitled. Such conversion
shall be deemed to have been made immediately prior to the close of business
on the date on which this Debenture is surrendered and notice of conversion
is given as provided above (except that, in the case of any automatic
conversion pursuant to Section 2(a)(2), the conversion shall be deemed to
have been made immediately prior to the occurrence that triggers such
conversion as provided in Section 2(a)(2)), and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock as of such date. If the conversion is in connection
with an underwritten offer of securities registered pursuant to the Act, the
conversion may, at the option of Holder, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the shares of Common Stock issuable
upon such conversion shall not be deemed to have converted such shares until
immediately prior to the closing of such sale of securities
(c) CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be
subject to adjustment from time to time as follows:
(1) (A) Upon each issuance by Hybrid of any Additional Stock (as
defined below), after the Issuance Date, without consideration (except as
provided in Section 2(c)(3) below or for a consideration per share less than
the Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this Section
2(c)(1) be adjusted to a price determined by multiplying the Conversion Price
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issuance plus the number of
shares of Common Stock which the aggregate consideration received by Hybrid
for such issuance would purchase at the Conversion Price, and the denominator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of such
Additional Stock; it is provided, however, that during the period commencing
on the Issuance Date and ending on the earlier of (I) October __, 1998 or
(II) the consummation of Hybrid's
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<PAGE>
sale of its Common Stock in a bona fide, firm commitment underwriting
pursuant to a registration statement under the Act, the public offering price
per share of which was not less than 175% of the then Conversion Price and
that results in aggregate gross proceeds to Hybrid of $15.0 million or more,
upon each issuance of Additional Stock without consideration (except as
provided in Section 2(c)(3) below) or for a consideration per share less than
the Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this Section
2(c)(1) be adjusted to the Effective Price (as defined below) at which the
Additional Stock is issued. The "EFFECTIVE PRICE" for any issuance of
Additional Stock shall mean the greater of $1.75 or the quotient determined
by dividing the total number of shares of Additional Stock issued by Hybrid
in such issuance into the aggregate amount of consideration received by
Hybrid therefor, as provided in this Section 2(c)(1).
(B) No adjustment of the Conversion Price shall be made
in an amount less than one cent per share, provided that any adjustments
which are not required to be made by reason of this sentence shall be carried
forward and shall be either taken into account in any subsequent adjustment
made prior to three years from the date of the event giving rise to the
adjustment being carried forward, or shall be made at the end of three years
from the date of the event giving rise to the adjustment being carried
forward. Except to the limited extent provided for in Section 2(c)(1)(E)(III)
and 2(c)(1)(E)(IV) below, no adjustment of the Conversion Price pursuant to
this Section 2(c)(1) shall have the effect of increasing the Conversion Price
above the Conversion Price in effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by Hybrid for any underwriting or otherwise in
connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the Issuance Date) of options to purchase or rights to subscribe for
Common Stock, securities that are by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions
shall apply for all purposes of this Section 2(c)(1) and Section 2(c)(2):
(I) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions
to exercisability, including without limitation, the passage of time, but
without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided
in Sections 2(c)(1)(C) and 2(c)(1)(D), except as provided in subsection
2(c)(i)(E)(V), if any, received by Hybrid upon the issuance of such options
or rights plus the minimum exercise price provided in such options or
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rights (without taking into account potential antidilution adjustments) for
the Common Stock converted thereby.
(II) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability,
including without limitation, the passage of time, but without taking into
account potential antidilution adjustments) for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable
securities and subsequent conversion or exchange thereof shall be deemed to
have been issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration, if
any, received by Hybrid for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be received
by Hybrid (without taking into account potential antidilution adjustments)
upon the conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be determined in
the manner provided in Section 2(c)(1)(C) and 2(c)(1)(D), except as provided
in subsection 2(c)(1)(E)(V)).
(III) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to Hybrid
upon exercise of such options or rights or upon conversion of or in exchange
for such convertible or exchangeable securities, including, but not limited
to, a change resulting from the antidilution provisions thereof, the
Conversion Price, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance of Common
Stock or any payment of such consideration upon the exercise of any such
options or rights or the conversion or change of such securities.
(IV) Upon the expiration of any such options or
rights, the termination of any such rights to convert or change or the
expiration of any options or rights related to such convertible or
exchangeable securities, the Conversion Price, to the extent in any way
affected by or computed using such options, rights or securities or options
or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities, provided that no such recomputation shall have the effect of
increasing or decreasing the Conversion Price to an amount other than the
amount that would have existed on the recomputation date had the unexercised
options or rights never been issued.
(V) In determining the amount of consideration
received by Hybrid for or upon the issuance of any Additional Stock or other
securities for the purposes of this Section 2(c)(1) or Section 2(c)(2) the
value of any options to purchase or rights to subscribe for Common Stock,
securities that are by their terms convertible into or exchangeable for
Common Stock or options to Purchase or rights to subscribe for such
convertible or exchangeable securities (each a "DERIVATIVE SECURITY") issued
by Hybrid shall be deemed to be zero (so that the issuance
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itself of any such Derivative Security shall not be deemed to increase or
decrease the consideration otherwise received by Hybrid under this Section
2(c)(1) or Section 2(c)(2), inasmuch as the rights under such Derivative
Security shall be deemed to have been exercised immediately upon the issuance
of such Derivative Security (as contemplated by Sections 2(c)(1)(E)(I) and
2(c)(1)(E)(II).
(2) "ADDITIONAL STOCK" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to Section 4(c)(1)(E) by
Hybrid after the Issuance Date other than
(A) Common Stock issued pursuant to a transaction described
in Section 2(c)(3) hereof;
(B) shares of Common Stock or Preferred Stock, or options,
warrants or rights to acquire any such shares, issuable or issued to
employees, consultants, directors or vendors (if in transactions with
primarily non-financing purposes and approved by the Board of Directors of
Hybrid) of Hybrid directly or pursuant to a stock option plan or restricted
stock plan approved by the Board of Directors of Hybrid; provided that the
price at which such shares are issued (or, in the case of such options,
warrants or rights, the exercise price thereof) is at the time of issuance of
such shares (or at the time of the issuance of such options, warrant or
rights, as the case may be) not less than the fair market value of such
shares as determined by the Board of Directors; as provided in Section
2(c)(1)(E), the term "ADDITIONAL STOCK" shall not include any shares of
capital stock that are issued upon the exercise of any options, warrants or
rights excluded from the definition of Additional Stock hereunder;
(C) shares of Common Stock issued or issuable upon conversion
of this Debenture or upon conversion of or as a dividend or distribution on
shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock, Series G Preferred Stock or Series H Preferred Stock.
(3) In the event Hybrid should at any time or from time to time
after the Issuance Date fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"COMMON STOCK EQUIVALENTS") without any payment of any consideration by such
holder for the additional shares of Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
destruction, split or subdivision if no record date is fixed), the Conversion
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable on conversion of the Debenture shall be increased in
proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed issuances in
Section 2(c)(1)(E).
(4) If the number of shares of Common Stock outstanding at any
time after the Issuance Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination,
the Conversion Price shall be appropriately
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increased so that the number of shares of Common Stock issuable on conversion
of the Debenture shall be decreased in proportion to such decrease in
outstanding shares.
(d) OTHER DISTRIBUTIONS. In the event Hybrid shall declare a
distribution payable in securities of other persons, evidences of
indebtedness issued by Hybrid or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 2(c)(3), then, in
each such case for the purpose of this Section 2(d), Holder shall be entitled
to a proportionate share of any such distribution as though Holder was the
holder of the number of shares of Common Stock of Hybrid into which the
Debenture is convertible as of the record date fixed for the determination of
the holders of Common Stock of Hybrid entitled to receive such distribution.
(e) RECAPITALIZATIONS. If at any time or from time to time there
shall be recapitalization of the Common Stock, provision shall be made so
that Holder shall thereafter be entitled to receive upon conversion of this
Debenture or any portion thereof the number of shares of stock or other
securities or property of Hybrid or otherwise to which a holder of Common
Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 2 with respect to the
rights of Holder after the recapitalization to the end that the provisions of
this Section 2 (including adjustment of the Conversion Price then in effect
and the number of shares issuable upon conversion of the shares of this
Debenture) shall be applicable after that event as nearly equivalent as may
be practicable.
(f) NO IMPAIRMENT. Hybrid will not, by amendment of its Certificate
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
Hybrid, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 2 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of
Holder against impairment.
(g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(1) No fractional shares shall be issued upon conversion of this
Debenture or any portion thereof, and the number of shares of Common Stock to
be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on
the basis of the total principal amount of this Debenture that Holder is at
the time converting into Common Stock and the number of shares of Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.
(2) Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Section 2, Hybrid, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. Hybrid shall upon the written request at
any time of Holder, furnish or cause to be furnished to Holder a like
certificate selling forth (A) such adjustment and readjustment, (B) the
Conversion Price at the time in effect and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of the Debenture.
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(h) NOTICES OF RECORD DATE. In the event of any taking by Hybrid of a
record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, Hybrid shall
mail to Holder, at least 20 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right.
(i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. Hybrid 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
this Debenture such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of the Debenture; and if at
any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect such conversion, in addition to such other
remedies as shall be available to Holder, Hybrid will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
(j) NOTICES. Any notice required by the provisions of this Debenture
shall be deemed given, with respect to Holder, (1) upon personal delivery to
Holder, (2) on the third business day after deposit in United States mail,
postage prepaid and addressed to Holder at Holder's address appearing on the
records of Hybrid on or at such other address as Holder may designate by
advance notice in accordance with this Section 2(j) or (3) upon confirmed
receipt by Holder of a facsimile transmission addressed to Holder and sent to
Holder's fax number indicated for such holder in the records of Hybrid or to
such other fax number as Holder may designate by advance notice in accordance
with this Section 2(j).
(k) EFFECT OF CONVERSION UPON INTEREST. Upon conversion of this
Debenture in full, Hybrid shall pay to Holder all accrued and unpaid
interest. In the event that this Debenture is converted in part, (1) Hybrid
shall pay to Holder all accrued and unpaid interest on the converted
principal amount of this Debenture and (2) after such conversion, the amount
of principal outstanding under the Debenture will be equal to the amount of
principal outstanding immediately before the conversion less the converted
principal amount. Interest will continue to accrue at the rate of 12% per
annum in such remaining outstanding principal amount until all outstanding
principal and accrued interest on this Debenture, including all interests
accrued on the principal amount of the Debenture that is not converted, is
paid.
3. GRANT OF SECURITY INTEREST. As security for all obligations of Hybrid
under this Debenture, Hybrid is executing and delivering concurrently
herewith that certain Security Agreement dated the date hereof between London
Pacific and Hybrid (the "SECURITY AGREEMENT") whereby Hybrid grants to Holder
a security interest in all of its tangible and intangible assets (including
but not limited to intellectual property), owned now or acquired later by
Hybrid, other than the Excluded Assets (defined below); and Hybrid agrees to
execute any documents reasonably necessary in Holder's opinion to perfect
this security interest. Hybrid agrees that it will not encumber or otherwise
cause a lien to be placed upon its assets, including but not limited to
intellectual property, except for equipment subject to Hybrid's equipment
leases (the "EXCLUDED ASSETS"), except as provided in Section 4 below or
except as may be permitted by Holder.
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4. SECURITY AND SENIORITY. The indebtedness evidenced by this Debenture
is senior in right of payment to all other indebtedness of Hybrid, except as
expressly provided herein. The indebtedness evidenced by this Debenture shall
be subordinate in right of payment to the prior payment in full of all Senior
Indebtedness (as defined below) at the election of Hybrid.
The term "SENIOR INDEBTEDNESS" means the principal of, interest on and
any other payment due pursuant to all indebtedness of Hybrid borrowed from
Silicon Valley National Bank or Coast Business Credit, or such other
commercial lending institution chosen by Hybrid, subject to Holder's consent
(which consent shall not be unreasonably withheld), at any time after six
months following the date of this Debenture in the principal amount of no
more than $5,000,000. Such Senior Indebtedness may be secured by all or a
portion of Hybrid's assets and any proceeds therefrom; in which case Holder
agrees to subordinate immediately any security interest in such assets and
proceeds on reasonable terms customarily required by such bank or other
lending institution (provided that such subordination does not prohibit the
payment of interest by Hybrid to Holder in accordance with the terms of this
Debenture).
5. TRANSFER. Except as permitted under the Act, or under applicable
state securities laws, pursuant to registration thereunder or exemption from
the registration requirements thereof, Hybrid may place such legends on this
Debenture or any Notes (as defined below) that Hybrid reasonably deems to be
required under the Act or applicable securities laws. Any purported transfer
that is not in compliance with this Section 5 shall be void and of no force
or effect. Before any portion of this Debenture may be transferred to another
person in accordance with this Section 5, Holder shall surrender this
Debenture to Hybrid (as provided in Section 2(b)) together with a written
notice (in accordance with Section (j)) setting forth the portion of this
Debenture that Holder requests to transfer, the identity of the proposed
transferee and the basis on which Holder requests the transfer in accordance
with this Section 5. Holder shall, at Hybrid's request, deliver an opinion of
counsel in support of its request for transfer.
If any transfer of a portion of this Debenture is made in accordance
with this Section 5, Hybrid shall cancel this Debenture and issue (a) a new
Debenture, in the form hereof, to the transfer for the portion transferred
and (b) a new Debenture, in the form hereof, to the transferor for the
portion not transferred. Such new Debentures are referred to herein,
collectively, as the "DEBENTURES" and the holders of the Debentures are
referred to herein as "HOLDERS." No payment of principal will be made by
Hybrid under the Debentures unless a payment of principal is made under each
of the Debentures in an amount equal to the total amount of principal being
paid under all the Debentures times a fraction, the numerator of which is the
principal amount outstanding under such Debenture and the denominator is the
principal amount outstanding under all of the Debentures. No Payment of
interest will be made by Hybrid under the Debentures unless a payment of
interest is made under each of the Debentures times a fraction, the numerator
of which is the outstanding amount of interest due under such Debenture and
the denominator is the outstanding amount of interest due under all the
Debentures.
Except as set forth above, each of the Holders shall be subject to the
obligations, and shall have the rights (reduced proportionately), of Holder
hereunder. The exercise of any security interest granted under Section 3 and
the Security Agreement, the exercise of any and all rights of Holder upon a
default under Section 6, the exercise of any other rights hereunder or under
the Security Agreement, the amendment of any Debenture or the Security
Agreement or the waiver of any provisions of any Debenture or the Security
Agreement shall be made only by the Holders that then
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hold Debentures representing in the aggregate at least a majority of the then
outstanding principal amount of all the Debentures (the "MAJORITY HOLDERS"),
and the Majority Holders shall give prompt written notice of such action to
Hybrid and the other Holders; any such exercise, amendment or waiver, when
approved by the Majority Holders, shall apply and be effective with respect
to all the Holders and all the Notes; it is provided, however, that (a) if
Hybrid reasonably determines that any exercise of any rights hereunder by any
one of the Holders, or that an amendment or waiver of any provisions of any
Note of any one of the Holders, shall not adversely affect any of the other
Holders, (b) if Hybrid gives at least 20-days' advance written notice to the
other Holders setting forth such exercise, amendment or waiver and indicating
the intention that it become effective within 20 days pursuant to this
proviso, and (c) if no other Holder gives such 20-day written notice of such
Holder's objection to such exercise, amendment or waiver, then the exercise,
amendment or waiver shall become effective at the end of such 20-day period
and shall apply only to the specific Holder and Debenture in question.
6. DEFAULT. For the purposes of this Debenture and each of the other
Debentures, the term "DEFAULT" shall refer to any of the following:
(a) Hybrid's failure to meet its payment obligations when due under
this Debenture, including, without limitation, the due and punctual payment
of any principal or interest on the Debenture as such principal or interest
shall become due and payable;
(b) Hybrid commits a breach or default in the due and punctual
performance of its obligations under this Debenture, the Security Agreement
or the Senior Secured Convertible Debenture Purchase Agreement dated the date
hereof between London Pacific and Hybrid;
(c) Hybrid commits a breach or default in the due and punctual
performance of any covenant or agreement with respect to indebtedness for
borrowed money and such breach or default permits the holder to accelerate
such indebtedness under the terms thereof, or interest shall become due and
payable or Hybrid commits a material breach under any real property lease
agreement or capital equipment lease agreement to which Hybrid is a party;
(d) A consolidation or merger of Hybrid with or into any other
corporation or corporations or a sale or other disposition of all or
substantially all the assets of Hybrid, if the surviving corporation or
corporations in the merger or consolidation or the purchaser or other
recipient of all or substantially all Hybrid's assets in such sale or other
disposition does not assume all Hybrid's obligations under this Debenture; or
(e) The filing of a petition in bankruptcy or under any similar
insolvency law by Hybrid, the making of an assignment for the benefit of
creditors, or if any voluntary petition in bankruptcy or under any similar
insolvency law is filed against Hybrid and such petition is not dismissed
within 60 days after the filing thereof.
Except for a default pursuant to (a) or (e), upon any such default
Hybrid shall have 30 days to cure such default after receipt of written
notice of default from Holder specifying the nature of Hybrid's default. If
Hybrid is unable to cure its default within 30 days, Holder may, at Holder's
option, accelerate repayment of the outstanding amount of principal and all
accrued and unpaid interest under this Debenture (or, if there is more than
one Debenture outstanding, the Majority Holders may accelerate repayment of
the outstanding principal and all accrued and unpaid interest
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under all the Debentures), in which case the outstanding amount of principal
and all accrued interest under this Debenture (or, if there is more than one
Debenture outstanding, the outstanding amounts of principal and accrued and
unpaid interest under all the Debentures) (in either case, the "OUTSTANDING
BALANCE") shall be due and payable in full on the 30th day following such
written notice of default. It is provided, however, that, if prior to the
date on which such Outstanding Balance becomes due and payable pursuant to
the acceleration provided for above. Holder (or the Majority Holders, as the
case may be) may elect to rescind such acceleration and take such action with
respect to such default as Holder determines (or such Majority Holders, as
the case may be, determine, provided that such Majority Holders give prompt
written notice thereof to Hybrid and the other Holders).
Upon any default of Hybrid under this Debenture, Holder will have, in
addition to Holder's rights and remedies under this Debenture, all the rights
and remedies of a secured party under the California Commercial Code,
including without limitation the right to full recourse against any real,
personal, tangible or intangible assets of Hybrid (other than the Excluded
Assets), and may pursue any legal or equitable remedies that are available to
Holder. Holder shall not have the right to sell or assign this Debenture to a
third party, except as permitted in the Agreement.
7. MISCELLANEOUS. Hybrid waives presentment for payment, protest, notice
of protest and notice of prepayment of this Debenture. Hybrid agrees to
reimburse Holder for all its reasonable costs and expenses, including
reasonable attorneys' fees, in connection with the enforcement of this
Debenture, whether or not any suit is instituted. Should suit be commenced to
collect this Debenture or any portion thereof, such sum as the court may deem
reasonable shall be added hereto as attorneys' fees, including any fees
awarded on any appeal. The term "SUIT" as used herein includes any action
before any United States Bankruptcy Court.
This Debenture shall be governed and construed according to the laws of
the State of California and shall be binding on the successors and assigns of
Hybrid.
Date April 30, 1997 HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
------------------------------------
Carl S. Ledbetter, President and
Chief Executive Officer
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SECURITY AGREEMENT
This Security Agreement (this "AGREEMENT") is made and entered into
effective as of April 30, 1997 (the "EFFECTIVE DATE") by and between Hybrid
Networks, Inc., a Delaware corporation ("BORROWER"), and London Pacific Life
& Annuity Company, a North Carolina stock life insurer ("LENDER").
RECITALS
A. Borrower is borrowing the principal amount of $5,500,000 from Lender
pursuant to the terms of a certain Senior Secured Convertible Debenture
Purchase Agreement between Borrower and Lender dated of even date herewith
(the "PURCHASE AGREEMENT") and a Senior Secured Convertible Debenture Due
2002 of Borrower to Lender dated of even date herewith (the "DEBENTURE").
B. The parties have agreed that Borrower's obligations under the Purchase
Agreement and the Debenture will be secured by Borrower's grant to Lender of
a security interest in and to certain collateral, pursuant to the terms and
conditions of this Agreement.
NOW, THEREFORE, as a material inducement to Lender to enter into the
Purchase Agreement, and in consideration of loan made by Lender under the
Debenture and the Purchase Agreement, the parties' agreements herein, and for
other good and valuable consideration, the parties hereby agree as follows:
1. SECURITY. The payment and performance of Borrower's obligations under
the Purchase Agreement and the Debenture (hereinafter collectively referred
to as the "OBLIGATIONS") will at all times be secured as follows:
(a) GRANT OF SECURITY INTEREST. As security for the due performance
and payment of the Obligations, Lender hereby grants to Lender a security
interest in the "Collateral" as defined in Section 1(b).
(b) COLLATERAL DEFINED. As used in this Agreement, the term
"COLLATERAL" means, collectively, any and all of the assets, properties,
goods, inventory, equipment, furniture, fixtures, leases, supplies, records,
money, documents, instruments, chattel paper, accounts, intellectual property
rights (including but not limited to, copyrights, moral rights, patents,
patent applications, trademarks, service marks, trade names, trade secrets
and other general intangibles), whether owned by Borrower on the Effective
Date or hereafter acquired, and all proceeds, returns, repossessions,
substitutions, exchanges and accessions thereof, except for the equipment
subject to certain equipment leases as set forth on EXHIBIT A attached
hereto, except as provided in Section 4 of the Debenture or except as may be
permitted by Lender.
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(c) FINANCING STATEMENTS. So long as Borrower is indebted to Lender
under the Debenture, Borrower will promptly execute and deliver to Lender
such assignments, notices, financing statements, or other documents and
papers (including, but not limited to, such documents as may be filed with
the U.S. Register of Copyrights and the U.S. Patent and Trademark Office in
order to perfect Lender's rights in Borrower's patents, registered
trademarks, registered copyrights and applications therefor) as Lender may
reasonably require in order to perfect and maintain the security interest in
the Collateral granted to Lender hereby and to give any third party notice of
Lender's interest in the Collateral. Borrower will pay to Lender all expenses
incurred by Lender in filing such assignments, notices, financing statements
or other documents or papers (and any continuation statements or amendments
thereto). Upon the full and final discharge of all of Borrower's Obligations,
Lender will execute and deliver such documents as may be reasonably necessary
and requested by Borrower to release the Collateral from the security
interested granted to Lender in this Agreement.
2. COVENANTS OF BORROWER. Borrower hereby covenants and agrees with Lender
as follows:
(a) TAXES. Borrower will pay all taxes due and owing by Borrower at
such time as they become due. Borrower will keep the Collateral in good
condition and repair continuously for so long as Borrower has Obligations to
Lender under the Debenture or under the Purchase Agreement.
(b) MAINTENANCE OF RECORDS. Borrower will keep and maintain at its own
cost and expense satisfactory and complete records of the Collateral
belonging to it. For Lender's further security, Lender will have a security
interest in all of the books and records of Borrower pertaining to the
Collateral.
(c) NOTICE TO ACCOUNT DEBTORS. Upon the request of Lender at any time
after the occurrence and during the continuance of an Event of Default (as
defined below), Borrower shall notify account debtors on all Borrower's
accounts that such accounts have been assigned to Lender and that payments in
respect thereof shall be made directly to Lender.
(d) MOVING OF COLLATERAL. Borrower will not move or relocate any or
all of the Collateral that remains owned by Borrower (other than any
Collateral that is sold, leased or otherwise transferred by Borrower in a
bona fide transaction for value) to any location outside the State of
California without giving Lender written notice of the moving of such
Collateral in sufficient time to enable Lender to make all filings necessary
to maintain without interruption the continuous perfection of Lender's
security interest in such moved or relocated Collateral in the
jurisdiction(s) in which such Collateral is moved or relocated. Any notice
provided by Borrower relating to the movement of Collateral shall indicate in
detail the description of the Collateral to be moved or relocated and the
location(s) and address(es) to which such Collateral is to be moved.
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3. LENDER' RIGHTS AND REMEDIES UPON EVENT OF DEFAULT.
(a) GENERAL REMEDIES. In the event of an occurrence of any Default (as
that term is defined in the Debenture) in addition to exercising any other
rights or remedies Lender may have under the Debenture at law or in equity or
pursuant to the provisions of the California Commercial Code, Lender may, at
its option, and without demand first made, exercise any one or all of the
following rights and remedies: (i) collect the Collateral and its proceeds;
(ii) take possession of the Collateral wherever it may be found using all
reasonable means to do so, or require Borrower to assemble the Collateral and
make it available to Lender at a place designated by Lender which is
reasonably convenient to Borrower; (iii) proceed with the foreclosure of the
security interest in the Collateral granted herein and the sale or
endorsement and collection of the proceeds of the Collateral in any manner
permitted by law or provided for herein; (iv) sell, lease or otherwise
dispose of the Collateral at public or private sale, with or without having
the Collateral at the place of sale; (v) institute a suit or other action
against Borrower for recovery on the Debenture; (vi) exercise any rights and
remedies of a secured party under the California Commercial Code; and/or
(vii) offset, against any payment due from Borrower to Lender, the whole or
any part of any indebtedness of Lender to Borrower.
(b) NO ELECTION OF REMEDIES. The election by Lender of any right or
remedy will not prevent Lender from exercising any other right or remedy
against Borrower.
(c) PROCEEDS. If a Default occurs, all proceeds and payments with
respect to the Collateral will be retained by Lender (or if received by
Borrower will be held in trust and will be forthwith delivered by Borrower to
Lender in the original form received, endorsed in blank) and held by Lender
as part of the Collateral or applied by Lender to the payment of the
Obligations.
(d) SALES OF COLLATERAL. Any item of Collateral may be sold for cash
or other value at public or private sale or other disposition and the
proceeds thereof collected by or for Lender. Borrower agrees to promptly
execute and deliver, or promptly cause to be executed and delivered, such
instruments, documents, assignments, waivers, certificates and affidavits and
supply or cause to be supplied such further information and take such further
action as Lender may require in connection with any such sale or disposition.
Lender will have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in Borrower, which right or equity is hereby waived or released.
If any notice of a proposed sale, lease, license or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable
and proper if given at least ten (10) days before such sale, lease, license
or other disposition. Lender agrees to give Borrower ten (10) days prior
written notice of any sale, lease, license or other disposition of Collateral
(or any part thereof) by Lender.
(e) APPLICATION OF PROCEEDS. The proceeds of all sales and collections
in respect of the Collateral, the application of which is not otherwise
specifically herein provided for, will be applied as follows: (i) first, to
the payment of the costs and expenses of such sale or sales and collections
and the attorneys' fees and out-of-pocket expenses incurred by Lender
relating to costs of collection; (ii) second, any surplus then remaining will
be applied first to the
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payment of all unpaid interest accrued under the Debenture, and then to the
payment of unpaid principal under the Debenture; and (iii) third, any surplus
then remaining will be paid to Borrower.
4. NOTICES. Any notice required or permitted hereunder will be given in
writing and will be deemed effectively given upon personal delivery, one day
after deposit in the United States mail by first class mail, one (1) business
day after its deposit with any express courier (prepaid), or one (1) business
day after transmission by telecopier, in each case addressed to the other
party at such party's address (or facsimile number, in the case of
transmission by telecopier) as shown below its signature to this Agreement,
or to such other address as such party may designate in writing from time to
time to the other party.
5. JURISDICTION; VENUE. Borrower, by its execution hereof hereby,
irrevocably submits to the IN PERSONAM jurisdiction of the state courts of
the State of California and of the United States District Court for the
Northern District of California that are located in Santa Clara County,
California, for the purpose of any suit, action or other proceeding arising
out of or based upon this Agreement.
6. TERMINATION. When all Obligations have been paid and performed in full
and discharged, this Agreement and the security interest granted to Lender
under this Agreement will terminate.
7. AMENDMENTS AND WAIVERS. No amendment or modification of this Agreement
may be made or be effective unless and until it is set forth in writing and
signed by all parties hereto. No waiver of any right under this Agreement
will be effective unless expressly set forth in a writing signed by each
party against whom such waiver is asserted. No course of dealing between the
parties will operate as a waiver of any party's rights under this Agreement.
A waiver on any one occasion will not be construed as a bar to or waiver of
any right or remedy on any future occasion. Borrower acknowledges that the
giving by Lender of any notice or information to Borrower, or the securing of
any consent by Borrower, not required by the express terms hereof to be given
or secured, will not by implication constitute an amendment to or waiver or
modification of any provision hereof, or impose upon Lender any duty to give
any such notice or information or to secure any such consent on any future
occasion.
8. ATTORNEYS' FEES. If any party hereto commences or maintains any action
at law or in equity (including counterclaims or cross-complaints) against the
other party hereto by reason of the breach or claimed breach of any term or
provision of this Agreement, then the prevailing party in said action will be
entitled to recover its reasonable attorney's fees and court costs incurred
therein.
9. SUCCESSORS AND ASSIGNS. The provisions of this Agreement will inure to
the benefit of, and be binding on, each party's respective heirs, successors
and assigns.
10. MISCELLANEOUS. The invalidity or unenforceability of any term or
provision of this Agreement will not affect the validity or enforceability of
any other term or provision hereof. The headings in this Agreement are for
convenience of reference only and will
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not alter or otherwise affect the meaning of this Agreement. This Agreement,
the Purchase Agreement and the Debenture and the exhibits thereto, together
constitute the entire agreement and understanding of the parties regarding
the subject matter hereof and supersede any and all prior understandings and
agreements between the parties with respect to such subject matter.
11. GOVERNING LAW. This Agreement will be governed by and construed
exclusively in accordance with the internal laws of the State of California
as applied to agreements between residents thereof and to be performed
entirely within such State, without reference to that body of law relating to
conflict of laws or choice of law.
12. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, which together will constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the Effective Date.
BORROWER: LENDER:
London Pacific Life & Annuity Company
By: /s/ Carl Ledbetter By: /s/ Susan Y. Gressel
--------------------------- ---------------------------
Name: Carl Ledbetter Name: Susan Y. Gressel
------------------------- -------------------------
Title: President & CEO Title: V.P. & Treasurer
------------------------ -----------------------
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
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EXHIBIT A
DESCRIPTION OF EXCLUDED COLLATERAL
1. That certain equipment that is now and in the future will be security
for the Equipment Leases with Comdisco (i) dated August 1, 1995 (with a
maximum amount of $500,000) and (ii) dated August 19 1996 (with a maximum
amount of $1,000,000).
2. That certain equipment that may be security for additional equipment
leases obtained by the Borrower in the future pursuant to Section 3 of the
Debenture.
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SENIOR SECURED CONVERTIBLE DEBENTURE DUE 2002
CUPERTINO, CALIFORNIA
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THIS
DEBENTURE IS SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY
NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
HOLDER SHOULD BE AWARE THAT HOLDER MAY BE REQUIRED TO BEAR THE FINANCIAL
RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE MAKER OF THIS
DEBENTURE MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE MAKER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALES
IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
$5,500,000 April 30, 1997
For value received, Hybrid Networks, Inc., a Delaware corporation
("HYBRID") at 10161 Bubb Road, Cupertino, California 95014-4167, promises to
pay on April 30, 2002 (the "MATURITY DATE") to the order of BG Services
Limited ("BG SERVICES") or any subsequent holder of this Debenture (BG
Services or such subsequent holder, as applicable, is referred to herein as
"HOLDER") by wire transfer in immediately available funds to the account of
BG Services c/o Minden House 6 Minden Place, St. Helier, Jersey, Channel
Islands (or such other address as Holder may specify in writing to Hybrid),
the principal sum of Five Million Five Hundred Thousand Dollars ($5,500,000)
together with any interest accrued and unpaid as of the date thereof, on the
terms and conditions set forth herein.
1. TERM AND PAYMENT. The term of this Debenture shall commence on the
date first set forth above and shall end April 30, 2002. During the term of
this Debenture, the unpaid principal amount hereof shall bear interest at the
rate of 12% per annum, on a 360 days basis, actual days elapsed, which shall
be payable quarterly in arrears commencing on June 30, 1997 and continuing on
the last day of each third month (September 30, December 31, March 31 and
June 30, 1997) thereafter until maturity. On the Maturity Date, all accrued
and unpaid interest and all principal shall be paid in full, except as
provided otherwise herein. It is provided, however, that the rate at which
interest will accrue on unpaid principal under this Debenture will not exceed
the highest rate permitted by applicable law. Principal and interest shall
be payable in lawful money of the United States of America, without any
deduction of any nature by way of set off, counterclaim or otherwise.
<PAGE>
This Debenture is issued by Hybrid pursuant to the Senior Secured
Convertible Debenture Purchase Agreement dated as of the date hereof between
Hybrid and London Pacific Life & Annuity Company ("TRANSFEROR"), and that
certain Assignment, Assumption and Consent between Hybrid, Transferor and BG
Services.
2. CONVERSION.
(a) RIGHT TO CONVERT/AUTOMATIC CONVERSION.
(1) Subject to Section 2(c) below, this Debenture shall be
convertible, in whole or in part (subject to Section 2(g) below), at the
option of Holder, at any time after the date hereof until this Debenture is
paid in full into such number of fully paid and nonassessable shares of
Common Stock of Hybrid, par value $0.001 per share ("COMMON STOCK"), as is
determined by dividing the outstanding principal amount of this Debenture by
the Conversion Price then in effect. As of the date on which this Debenture
is issued (the "ISSUANCE DATE"), the Conversion Price is $3.967566, Such
Conversion Price shall be subject to adjustment as set forth in Section 2(c).
(Such Conversion Price, as so adjusted, is referred to herein as the
"CONVERSION PRICE.") If this Debenture is converted for the full original
principal amount following the Issuance Date, assuming no adjustment to the
Conversion Price, Holder would receive upon such conversion 1,386,240 shares
of Common Stock.
(2) This Debenture shall automatically be converted in full
into shares of Common Stock, by dividing the outstanding principal amount of
this Debenture by the Conversion Price then in effect, on the Conversion Date
(as defined below) following the consummation of (A) the sale of Common Stock
by Hybrid in a bona fide, firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "ACT"), provided that (i) the public offering price per share is
not less than an amount (the "MINIMUM PER SHARE PRICE") which when multiplied
by the number of all the issued and outstanding shares of Common Stock of
Hybrid on a fully diluted basis immediately before the sale (assuming the
exercise of all outstanding options, warrants, conversion rights and other
rights to acquire shares of Common Stock of Hybrid and assuming the issuance
of all other shares currently reserved for issuance under Hybrid's equity
incentive plans (such assumed exercise and issuance are referred to as the
"ASSUMED ISSUANCES") (but excluding the shares of Common Stock sold in the
public offering, the shares of Common Stock issuable upon conversion of the
Debentures, and all shares (or securities convertible or exchangeable into
shares), other than the shares included in the Assumed Issuances, issued
after the date hereof)) equals at least $166.5 million and (ii) the gross
proceeds to Hybrid of such public offering are at least $15 million or (B)
the acquisition of all or substantially all of the capital stock of Hybrid or
all or substantially all of its assets by a third party (whether in a merger,
consolidation, sale of assets or otherwise) for consideration of at least
$166.5 million in cash or fair market value of securities issued in
connection with the acquisition (excluding any consideration attributable to
any securities that Hybrid may issue in connection with the acquisition),
provided that, if securities of the acquiror (or its affiliate) are issued in
connection with the acquisition, such securities shall be freely tradable by
the Holder or shall, in the aggregate, be publicly valued at at least an
amount (the "MINIMUM AMOUNT") which, when added to the amount of any cash
paid by the acquiror to Hybrid or its stockholders in connection with the
acquisition) is at least $166.5 million. The term "CONVERSION DATE" shall
mean: (I), in the case of a
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<PAGE>
public offering referred to in (A) above, the first day following any 90
consecutive calendar day period commencing on or any time after the public
offering on which the closing price of the Common Stock of Hybrid (as
publicly reported on the public market on which such Common Stock is traded)
is equal to or greater than the Minimum Per Share Price for each day of such
90 consecutive trading day period. (Accordingly, if the closing price of
Common Stock is at least equal to the Minimum Per Share Price on each of the
90 trading days commencing with the date on which shares of the Common Stock
are sold in the public offering, then the Conversion Date will be the first
day following such 90th trading day) or (II) in the case of an acquisition
referred to in (B) above, the date on which the acquisition is consummated;
it is provided, however, that if securities are issued in connection with the
acquisition and such securities are freely tradable by the Holder, then the
Conversion Date shall be the first day following any 90 consecutive calendar
day period commencing on or after the acquisition on which the securities,
when added to the amount of any cash paid by the acquiror to Hybrid or its
stockholders in connection with the acquisition are publicly valued at at
least the Minimum Amount for each day during such 90 consecutive day period.
(b) MECHANICS OF CONVERSION. Before Holder shall be entitled to
convert this Debenture or any portion thereof into shares of Common Stock,
Holder shall surrender this Debenture, duly endorsed, at the office of Hybrid
and shall give written notice to Hybrid of the election to convert this
Debenture or portion thereof (specifying the portion) and shall state therein
the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. Hybrid shall, as soon as practicable
thereafter, issue and deliver to Holder, or to Holder's nominee or nominees,
the shares of Common Stock to which Holder shall be entitled. Such
conversion shall be deemed to have been made immediately prior to the close
of business on the date on which this Debenture is surrendered and notice of
conversion is given as provided above (except that, in the case of any
automatic conversion pursuant to Section 2(a)(2), the conversion shall be
deemed to have been made immediately prior to the occurrence that triggers
such conversion as provided in Section 2(a)(2)), and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock as of such date. If the conversion is in connection
with an underwritten offer of securities registered pursuant to the Act, the
conversion may, at the option of Holder, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the shares of Common Stock issuable
upon such conversion shall not be deemed to have converted such shares until
immediately prior to the closing of such sale of securities.
(c) CONVERSION PRICE ADJUSTMENTS. The Conversion Price shall be
subject to adjustment from time to time as follows:
(1) (A) Upon each issuance by Hybrid of any Additional Stock
(as defined below), after the Issuance Date, without consideration (except as
provided in Section 2(c)(3) below or for a consideration per share less than
the Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this Section
2(c)(1) be adjusted to a price determined by multiplying the Conversion Price
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issuance plus the
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<PAGE>
number of shares of Common Stock which the aggregate consideration received
by Hybrid for such issuance would purchase at the Conversion Price, and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of
such Additional Stock; it is provided, however, that during the period
commencing on the Issuance Date and ending on the earlier of (I) October __,
1998 or (II) the consummation of Hybrid's sale of its Common Stock in a bona
fide, firm commitment underwriting pursuant to a registration statement under
the Act, the public offering price per share of which was not less than 175%
of the then Conversion Price and that results in aggregate gross proceeds to
Hybrid of $15.0 million or more, upon each issuance of Additional Stock
without consideration (except as provided in Section 2(c)(3) below) or for a
consideration per share less than the Conversion Price in effect immediately
prior to the issuance of such Additional Stock, the Conversion Price in
effect immediately prior to each such issuance shall forthwith (except as
otherwise provided in this Section 2(c)(1)) be adjusted to the Effective
Price (as defined below) at which the Additional Stock is issued. The
"EFFECTIVE PRICE" for any issuance of Additional Stock shall mean the greater
of $1.75 or the quotient determined by dividing the total number of shares of
Additional Stock issued by Hybrid in such issuance into the aggregate amount
of consideration received by Hybrid therefor, as provided in this Section
2(c)(1).
(B) No adjustment of the Conversion Price shall be made
in an amount less than one cent per share, provided that any adjustments
which are not required to be made by reason of this sentence shall be carried
forward and shall be either taken into account in any subsequent adjustment
made prior to three years from the date of the event giving rise to the
adjustment being carried forward, or shall be made at the end of three years
from the date of the event giving rise to the adjustment being carried
forward. Except to the limited extent provided for in Section
2(c)(1)(E)(III) and 2(c)(1)(E)(IV) below, no adjustment of the Conversion
Price pursuant to this Section 2(c)(1) shall have the effect of increasing
the Conversion Price above the Conversion Price in effect immediately prior
to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by Hybrid for any underwriting or otherwise in
connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other
than case shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the Issuance Date) of options to purchase or rights to subscribe for
Common Stock, securities that are by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities, the following provisions
shall apply for all purposes of this Section 2(c)(1) and Section 2(c)(2):
(I) The aggregate maximum number of shares of Common
Stock deliverable upon exercise (assuming the satisfaction of any conditions
to exercisability,
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<PAGE>
including without limitation, the passage of time, but without taking into
account potential antidilution adjustments) of such options to purchase or
rights to subscribe for Common Stock shall be deemed to have been issued at
the time such options or rights were issued and for a consideration equal to
the consideration (determined in the manner provided in Sections 2(c)(1)(C)
and 2(c)(1)(D), except as provided in subsection 2(c)(i)(E)(V), if any,
received by Hybrid upon the issuance of such options or rights plus the
minimum exercise price provided in such options or rights (without taking
into account potential antidilution adjustments) for the Common Stock
converted thereby.
(II) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability,
including without limitation, the passage of time, but without taking into
account potential antidilution adjustments) for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable
securities and subsequent conversion or exchange thereof shall be deemed to
have been issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration, if
any, received by Hybrid for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be received
by Hybrid (without taking into account potential antidilution adjustments)
upon the conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be determined in
the manner provided in Section 2(c)(1)(C) and 2(c)(1)(D), except as provided
in subsection 2(c)(1)(E)(V)).
(III) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to Hybrid
upon exercise of such options or rights or upon conversion of or in exchange
for such convertible or exchangeable securities, including, but not limited
to, a change resulting from the antidilution provisions thereof, the
Conversion Price, to the extent in any way affected by or computed using such
options, rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance of Common
Stock or any payment of such consideration upon the exercise of any such
options or rights or the conversion or change of such securities.
(IV) Upon the expiration of any such options or
rights, the termination of any such rights to convert or change or the
expiration of any options or rights related to such convertible or
exchangeable securities, the Conversion Price, to the extent in any way
affected by or computed using such options, rights or securities or options
or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities; provided that no such recomputation shall have the effect of
increasing or decreasing the Conversion Price to an amount other than the
amount that would have existed on the recomputation date had the unexercised
options or rights never been issued.
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(V) In determining the amount of consideration
received by Hybrid for or upon the issuance of any Additional Stock or other
securities for the purposes of this Section 2(c)(1) or Section 2(c)(2), the
value of any options to purchase or rights to subscribe for Common Stock,
securities that are by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such
convertible or exchangeable securities (each a "DERIVATIVE SECURITY") issued
by Hybrid shall be deemed to be zero (so that the issuance itself of any such
Derivative Security shall not be deemed to increase or decrease the
consideration otherwise received by Hybrid under this Section 2(c)(1) or
Section 2(c)(2), inasmuch as the rights under such Derivative Security shall
be deemed to have been exercised immediately upon the issuance of such
Derivative Security (as contemplated by Sections 2(c)(1)(E)(I) and
2(c)(1)(E)(II).
(2) "ADDITIONAL STOCK" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to Section 4(c)(1)(E)) by
Hybrid after the Issuance Date other than
(A) Common Stock issued pursuant to a transaction
described in Section 2(c)(3) hereof;
(B) shares of Common Stock or Preferred Stock, or
options, warrants or rights to acquire any such shares, issuable or issued to
employees, consultants, directors or vendors (if in transactions with
primarily non-financing purposes and approved by the Board of Directors of
Hybrid) of Hybrid directly or pursuant to a stock option plan or restricted
stock plan approved by the Board of Directors of Hybrid; provided that the
price at which such shares are issued (or, in the case of such options,
warrants or rights, the exercise price thereof) is at the time of issuance of
such shares (or at the time of the issuance of such options, warrant or
rights, as the case may be) not less than the fair market value of such
shares as determined by the Board of Directors; as provided in Section
2(c)(1)(E), the term "ADDITIONAL STOCK" shall not include any shares of
capital stock that are issued upon the exercise of any options, warrants or
rights excluded from the definition of Additional Stock hereunder;
(C) shares of Common Stock issued or issuable upon
conversion of this Debenture or upon conversion of or as a dividend or
distribution on shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series G Preferred Stock or Series H Preferred
Stock.
(3) In the event Hybrid should at any time or from time to
time after the Issuance Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "COMMON STOCK EQUIVALENTS") without any payment
of any consideration by such holder for the additional shares of Stock
issuable upon conversion or exercise thereof), then, as of such record date
(or the date of such dividend destruction, split or subdivision if no record
date is fixed), the Conversion Price shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of the Debenture
shall be increased
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in proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common Stock Equivalents
determined from time to time in the manner provided for deemed issuances in
Section 2(c)(1)(E).
(4) If the number of shares of Common Stock outstanding at any
time after the Issuance Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination,
the Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of the Debenture shall be
decreased in proportion to such decrease in outstanding shares.
(d) OTHER DISTRIBUTIONS. In the event Hybrid shall declare a
distribution payable in securities of other persons, evidences of
indebtedness issued by Hybrid or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 2(c)(3), then, in
each such case for the purpose of this Section 2(d), Holder shall be entitled
to a proportionate share of any such distribution as though Holder was the
holder of the number of shares of Common Stock of Hybrid into which the
Debenture is convertible as of the record date fixed for the determination of
the holders of Common Stock of Hybrid entitled to receive such distribution.
(e) RECAPITALIZATIONS. If at any time or from time to time there
shall be recapitalization of the Common Stock, provision shall be made so
that Holder shall thereafter be entitled to receive upon conversion of this
Debenture or any portion thereof the number of shares of stock or other
securities or property of Hybrid or otherwise to which a holder of Common
Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 2 with respect to the
rights of Holder after the recapitalization to the end that the provisions of
this Section 2 (including adjustment of the Conversion Price then in effect
and the number of shares issuable upon conversion of the shares of this
Debenture) shall be applicable after that event as nearly equivalent as may
be practicable.
(f) NO IMPAIRMENT. Hybrid will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by Hybrid, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 2 and in the taking of all
such action as may be necessary or appropriate in order to protect the
conversion rights of Holder against impairment.
(g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(1) No fractional shares shall be issued upon conversion of
this Debenture or any portion thereof, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. Whether or
not fractional shares are issuable upon such conversion shall be determined
on the basis of the total principal amount of this Debenture that Holder is
at the time converting into Common Stock and the number of shares of Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.
7
<PAGE>
(2) Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to this Section 2, Hybrid, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. Hybrid shall upon the written request at
any time of Holder, furnish or cause to be furnished to Holder a like
certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price at the time in effect and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of the Debenture.
(h) NOTICES OF RECORD DATE. In the event of any taking by Hybrid
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, Hybrid shall
mail to Holder, at least 20 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character
of such dividend, distribution or right.
(i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. Hybrid 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
this Debenture such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of the Debenture; and if at
any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect such conversion, in addition to such other
remedies as shall be available to Holder, Hybrid will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
(j) NOTICES. Any notice required by the provisions of this
Debenture shall be deemed given, with respect to Holder, (1) upon personal
delivery to Holder, (2) on the third business day after deposit in United
States mail, postage prepaid and addressed to Holder at Holder's address
appearing on the records of Hybrid on or at such other address as Holder may
designate by advance notice in accordance with this Section 2(j) or (3) upon
confirmed receipt by Holder of a facsimile transmission addressed to Holder
and sent to Holder's fax number indicated for such holder in the records of
Hybrid, or to such other fax number as Holder may designate by advance notice
in accordance with this Section 2(j).
(k) EFFECT OF CONVERSION UPON INTEREST. Upon conversion of this
Debenture in full, Hybrid shall pay to Holder all accrued and unpaid
interest. In the event that this Debenture is converted in part, (1) Hybrid
shall pay to Holder all accrued and unpaid interest on the converted
principal amount of this Debenture and (2) after such conversion, the amount
of principal outstanding under the Debenture will be equal to the amount of
principal outstanding immediately before the conversion less the converted
principal amount. Interest will continue to accrue at the rate of 12% per
annum in such remaining outstanding principal amount until all outstanding
principal and accrued interest on this Debenture, including all interests
accrued on the principal amount of the Debenture that is not converted, is
paid.
8
<PAGE>
3. GRANT OF SECURITY INTEREST. As security for all obligations of
Hybrid under this Debenture, Hybrid is executing and delivering that certain
Security Agreement dated the date hereof between Transferor and Hybrid (the
"SECURITY AGREEMENT") whereby Hybrid grants to Holder a security interest in
all of its tangible and intangible assets (including but not limited to
intellectual property), owned now or acquired later by Hybrid, other than the
Excluded Assets (defined below); and Hybrid agrees to execute any documents
reasonably necessary in Holder's opinion to perfect this security interest.
Hybrid agrees that it will not encumber or otherwise cause a lien to be
placed upon its assets, including but not limited to intellectual property,
except for equipment subject to Hybrid's equipment leases (the "EXCLUDED
ASSETS"), except as provided in Section 4 below or except as may be permitted
by Holder.
4. SECURITY AND SENIORITY. The indebtedness evidenced by this Debenture
is senior in right of payment to all other indebtedness of Hybrid, except as
expressly provided herein. The indebtedness evidenced by this Debenture
shall be subordinate in right of payment to the prior payment in full of all
Senior Indebtedness (as defined below).
The term "SENIOR INDEBTEDNESS" means the principal of, interest on and
any other payment due pursuant to all indebtedness of Hybrid borrowed from
Silicon Valley National Bank or Coast Business Credit, or such other
commercial lending institution chosen by Hybrid, subject to Holder's consent
(which consent shall not be unreasonably withheld), at any time after six
months following the date of this Debenture in the principal amount of no
more than $5,000,000. Such Senior Indebtedness may be secured by all or a
portion of Hybrid's assets and any proceeds therefrom; in which case Holder
agrees to subordinate immediately any security interest in such assets and
proceeds on reasonable terms customarily required by such bank or other
lending institution (provided that such subordination does not prohibit the
payment of interest by Hybrid to Holder in accordance with the terms of this
Debenture).
5. TRANSFER. Except as permitted under the Act, or under applicable
state securities laws, pursuant to registration thereunder or exemption from
the registration requirements thereof. Hybrid may place such legends on this
Debenture or any Notes (as defined below) that Hybrid reasonably deems to be
required under the Act or applicable securities laws. Any purported transfer
that is not in compliance with this Section 5 shall be void and of no force
or effect. Before any portion of this Debenture may be transferred to
another person in accordance with this Section 5, Holder shall surrender this
Debenture to Hybrid (as provided in Section 2(b)) together with a written
notice (in accordance with Section (j)) setting forth the portion of this
Debenture that Holder requests to transfer, the identity of the proposed
transferee and the basis on which Holder requests the transfer in accordance
with this Section 5. Holder shall, at Hybrid's request, deliver an opinion of
counsel in support of its request for transfer.
If any transfer of a portion of this Debenture is made in accordance with
this Section 5, Hybrid shall cancel this Debenture and issue (a) a new
Debenture, in the form hereof, to the transfer for the portion transferred
and (b) a new Debenture, in the form hereof, to the transferor for the
portion not transferred. Such new Debentures are referred to herein,
collectively, as the "DEBENTURES" and the holders of the Debentures are
referred to herein as "HOLDERS." No payment of principal will be made by
Hybrid under the Debentures unless a payment of principal is made under each
of the Debentures in an amount equal to the total amount of principal being
paid under all the
9
<PAGE>
Debentures times a fraction, the numerator of which is the principal amount
outstanding under such Debenture and the denominator is the principal amount
outstanding under all of the Debentures. No Payment of interest will be made
by Hybrid under the Debentures unless a payment of interest is made under
each of the Debentures times a fraction, the numerator of which is the
outstanding amount of interest due under such Debenture and the denominator
is the outstanding amount of interest due under all the Debentures.
Except as set forth above, each of the Holders shall be subject to the
obligations, and shall have the rights (reduced proportionately), of Holder
hereunder. The exercise of any security interest granted under Section 3 and
the Security Agreement, the exercise of any and all rights of Holder upon a
default under Section 6, the exercise of any other rights hereunder or under
the Security Agreement, the amendment of any Debenture or the Security
Agreement or the waiver of any provisions of any Debenture or under the
Security Agreement shall be made only by the Holders that then hold
Debentures representing in the aggregate at least a majority of the then
outstanding principal amount of all the Debentures (the "MAJORITY HOLDERS"),
and the Majority Holders shall give prompt written notice of such action to
Hybrid and the other Holders; any such exercise, amendment or waiver, when
approved by the Majority Holders, shall apply and be effective with respect
to all the Holders and all the Notes; it is provided, however, that (a) if
Hybrid reasonably determines that any exercise of any rights hereunder by any
one of the Holders, or that an amendment or waiver of any provisions of any
Note of any one of the Holders, shall not adversely affect any of the other
Holders, (b) if Hybrid gives at least 20-days' advance written notice to the
other Holders setting forth such exercise, amendment or waiver and indicating
the intention that it become effective within 20 days pursuant to this
proviso, and (c) if no other Holder gives such 20-day written notice of such
Holder's objection to such exercise, amendment or waiver, then the exercise,
amendment or waiver shall become effective at the end of such 20-day period
and shall apply only to the specific Holder and Debenture in question.
6. DEFAULT. For the purposes of this Debenture and each of the other
Debentures, the term "DEFAULT" shall refer to any of the following:
(a) Hybrid's failure to meet its payment obligations when due under
this Debenture, including, without limitation, the due and punctual payment
of any principal or interest on the Debenture as such principal or interest
shall become due and payable;
(b) Hybrid commits a breach of default in the due and punctual
performance of its obligations under this Debenture, the Security Agreement
or the Senior Secured Convertible Debenture Purchase Agreement dated the date
hereof between Transferor and Hybrid;
(c) Hybrid commits a breach or default in the due and punctual
performance of any covenant or agreement with respect to indebtedness for
borrowed money and such breach or default permits the holder to accelerate
such indebtedness under the terms thereof, or interest shall become due and
payable or Hybrid commits a material breach under any real property lease
agreement or capital equipment lease agreement to which Hybrid is a party;
(d) A consolidation or merger of Hybrid with or into any other
corporation or corporations or a sale or other disposition of all or
substantially all the assets of Hybrid, if the
10
<PAGE>
surviving corporation or corporations in the merger or consolidation or the
purchaser or other recipient of all or substantially all Hybrid's assets in
such sale or other disposition does not assume all Hybrid's obligations under
this Debenture; or
(e) The filing of a petition in bankruptcy or under any similar
insolvency law by Hybrid, the making of an assignment for the benefit of
creditors, or if any voluntary petition in bankruptcy or under any similar
insolvency law is filed against Hybrid and such petition is not dismissed
within 60 days after the filing thereof.
Except for a default pursuant to (a) or (e), upon any such default Hybrid
shall have 30 days to cure such default after receipt of written notice of
default from Holder specifying the nature of Hybrid's default. If Hybrid is
unable to cure its default within 30 days, Holder may, at Holder's option,
accelerate repayment of the outstanding amount of principal and all accrued
and unpaid interest under this Debenture (or, if there is more than one
Debenture outstanding, the Majority Holders may accelerate repayment of the
outstanding principal and all accrued and unpaid interest under all the
Debentures), in which case the outstanding amount of principal and all
accrued interest under this Debenture (or, if there is more than one
Debenture outstanding, the outstanding amounts of principal and accrued and
unpaid interest under all the Debentures) (in either case, the "OUTSTANDING
BALANCE") shall be due and payable in full on the 30th day following such
written notice of default. It is provided, however, that, if prior to the
date on which such Outstanding Balance becomes due and payable pursuant to
the acceleration provided for above, Holder (or the Majority Holders, as the
case may be) may elect to rescind such acceleration and take such action with
respect to such default as Holder determines (or such Majority Holders, as
the case may be, determine, provided that such Majority Holders give prompt
written notice thereof to Hybrid and the other Holders).
Upon any default of Hybrid under this Debenture, Holder will have, in
addition to Holder's rights and remedies under this Debenture, all the rights
and remedies of a secured party under the California Commercial Code,
including without limitation the right to full recourse against any real,
personal, tangible or intangible assets of Hybrid (other than the Excluded
Assets), and may pursue any legal or equitable remedies that are available to
Holder. Holder shall not have the right to sell or assign this Debenture to
a third party, except as permitted in the Agreement.
7. MISCELLANEOUS. Hybrid waives presentment for payment, protest,
notice of protest and notice of prepayment of this Debenture. Hybrid agrees
to reimburse Holder for all its reasonable costs and expenses, including
reasonable attorneys' fees, in connection with the enforcement of this
Debenture, whether or not any suit is instituted. Should suit be commenced
to collect this Debenture or any portion thereof, such sum as the court may
deem reasonable shall be added hereto as attorneys' fees, including any fees
awarded on any appeal. The term "SUIT" as used herein includes any action
before any United States Bankruptcy Court.
11
<PAGE>
This Debenture shall be governed and construed according to the laws of
the State of California and shall be binding on the successors and assigns of
Hybrid.
Date: April 30, 1997 HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
---------------------------------
Carl S. Ledbetter, President and
Chief Executive Officer
12
<PAGE>
VENTURE
BANKING GROUP
September 16, 1997
Dan E. Steimle
Chief Financial Officer
Hybrid Networks, Inc.
10161 Bubb Road
Cupertino, CA 95014-4167
Dear Dan:
On behalf of Venture Banking Group ("VBG") a division of Cupertino National
Bank, we are pleased to commit the credit facilities as outlined below to
Hybrid Networks, Inc. ("Borrower"). This letter is not meant to be, nor
shall it be construed as an attempt to outline all the terms and conditions
of the subject credit facility.
BORROWER: $4,000,000 Accounts Receivable line of credit with $2,500,000
sub-facility for issuing letters of credit.
PURPOSE: To support growth in accounts receivable.
MATURITY: One year from the date of documents.
REPAYMENT TERMS: Interest only monthly, principal at maturity.
COLLATERAL: Perfected secondary security interest and UCC-1 on all
corporate assets and intellectual property until October 30,
1997, at which time VBG shall be granted a first priority
interest in the same assets.
SUBORDINATION: $5,500,000 note from London Pacific shall be subordinated to
VBG after 10/30/97. Any loans from shareholders (bridge
loans) shall be subordinated until Borrower's IPO in which at
least $32MM is raised.
INTEREST RATE: Prime
LOAN FEE: 0.5%
WARRANTS: As additional consideration for VBG's second security position
through 10/30/97, a warrant representing one percent (1%) of
$2,900,000 shall be granted to VBG (this is equal to the
Borrower's estimated maximum availability on the credit during
that time frame). Price, anti-dilution provisions, and
registration rights to be equal to those granted in the
proposed bridge loan in which current investors shall
participate.
<PAGE>
BORROWING FORMULA: An advance rate of 75% against eligible domestic
receivables (subject to A/R aging report analysis and A/R
audit) shall apply to all borrowings.
Ineligible A/R shall include:
- Accounts aged over 90 days past invoice date.
- Government Accounts or its Agencies.
- Contra Accounts.
- Foreign Accounts (unless pre-approved by VBG. Initial
approval shall be granted for Alcatel.)
- Retentions.
- Progress billing.
- Related Company Accounts.
- 50% Cross-Aged.
- Any account which exceeds 30% of total A/R amount, that
amount which exceeds 30% is excluded from the base.
- Distributor Accounts not pre-approved by VBG in writing.
LOAN AGREEMENT: This commitment shall be governed by VBG's Loan
Agreement, which will include standard definitions,
calculations, conditions precedent, representations and
warranties, positive and negative covenants, events of
default and other miscellaneous items. This document
shall be prepared to the mutual satisfaction of VBG and
Borrower. Covenants shall include, but not be limited to
the following:
FINANCIAL COVENANTS: Required on a monthly basis (unless otherwise noted).
After the Borrower's IPO in which the Borrower raises at
least $32MM, all financial covenants will be monitored
quarterly.
1) Minimum Quick Ratio of 1.25x (measurement to begin
10/31/97)
2) Minimum Tangible Net Worth of $3,500,000
3) Maximum Debt to Tangible Net Worth of 1.75x
(measurement to begin 10/31/97)
4) Maximum Quarterly losses not be exceed the following:
09/30/97 $3,800,000
12/31/97 $2,600,000
03/31/98 $1,500,000
06/30/98 $ 300,000
Tangible Net Worth means, as of any applicable date, the
consolidated total assets of Borrower and its
subsidiaries minus (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such
as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and
research and development expenses except prepaid
expenses, and (c) all reserves not already deducted
from assets, and (ii) total liabilities of Borrower and
subsidiaries.
All debt owing or incurred by Borrower that is
subordinated in security and repayment to Bank on terms
acceptable to Bank shall be subtracted from total
liabilities and added to tangible net worth.
FINANCIAL REPORTING: 1) Audited financial statements within 120 days of FYE
or five days of SEC filing.
2) Monthly financial statement with Compliance
Certificate within 30 days of each month end from
Borrower. After the Borrower's IPO in which the
Borrower raises at least $32MM, financial statements
and Compliance Certificate shall be submitted on a
quarterly basis within 30 days of each quarter end or
five days of SEC filing.
3) Monthly A/R and A/P Agings within 30 days of each
month end along with a Borrowing Base Certificate.
<PAGE>
OTHER CONDITIONS: 1) Loan shall be subject to satisfactory A/R audit at
Borrower's expense. Thereafter, semi-annual A/R audit
at Borrower's expense.
2) Borrower shall maintain primary deposit relationship
with VBG.
3) Borrower to obtain blanket lien insurance naming VBG
as loss payee.
4) Borrower to pay all legal costs incurred by Bank
associated with the extension and maintenance of this
credit facility. The cost of the initial
documentation for this credit shall not exceed $6,000
without the Borrower's consent.
5) All outside indebtedness, excluding debt incurred in
the ordinary course of business and leases for capital
equipment, is not permitted without VBG's prior
written consent.
REPRESENTATIONS AND WARRANTIES:
The signers of this agreement warrant and represent they are authorized to take
such action, and that the financial and other information furnished by Borrower
to the VBG is true and correct in all respects. Borrower also warrants that
there is no contract or other agreement which would be contravened by the
execution of this agreement.
EXPENSES:
Borrower shall pay all VBG's fees and charges in connection with the subject
loans, including fees of VBG's counsel (subject to Item 4 of the Other
Conditions section of this letter). Such costs payable by Borrower are in
addition to the loan fee described above. In the event the loan does not
close, the loan fee refundable to Borrower shall be reduced by the aggregate
of all such expenses and charges.
Upon default by the Borrower under any of the conditions of this agreement,
the above credit facility, at the option of VBG, shall terminate immediately
with all sums of principal and accrued interest shall become immediately due
and payable.
No failure or delay on the part of VBG to exercise any power or right under
this agreement or declare a default hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any other right.
Borrower shall reimburse VBG for all costs, expenses and reasonable
attorney's fees incurred by VBG in enforcing this agreement or in collecting
any sum which becomes due VBG on any loans or notes issued hereunder.
We are delighted to be able to provide this commitment on behalf of Venture
Lending. If the terms and conditions outlined above are agreeable to you and
acceptable by your board of directors, please acknowledge your acceptance by
signing the enclosed copy and return it to this office accompanied by a check
covering the loan fees to this office by September 19, 1997 at which time
this commitment expires.
Sincerely,
VENTURE BANKING GROUP ACCEPTED AND AGREED TO:
Hybrid Networks, Inc.
BY: /S/ JON KROGSTAD BY: /S/ DANIEL E. STEIMLE
---------------------------- ---------------------------------
John Krogstad, VP TITLE: CHIEF FINANCIAL OFFICER
<PAGE>
COLLABORATION AGREEMENT
THIS COLLABORATION AGREEMENT (this "Agreement") is made and entered into
effective as of the 25th day of November, 1996 (the "Effective Date") by and
among Hybrid Networks, Inc., a Delaware corporation, having its principal
place of business at 10161 Bubb Road, Cupertino, California 95014-4167,
U.S.A. ("Hybrid"), Sharp Corporation, a Japanese corporation, having its
principal place of business at 22-22 Nagaike-Chou, Abeno-ku, Osaka, Japan
("Sharp") and ITOCHU Corporation, a Japanese corporation, having its
principal place of business at 5-1, Kita-Aoyama 2-chome, Minato-ku, Tokyo
107-77, Japan ("Itochu"), with reference to the following facts and recitals:
RECITALS:
WHEREAS, Hybrid has developed certain cable modems (Model Numbers
CCM-101/161/201/211) (the "Current Cable Modems") and wishes to develop
certain new cable modems (N-series cable modems), for use in the cable
television environment (the "New Cable Modems"; together with the Current
Cable Modems, collectively, the "Cable Modems"), as more particularly
described in Exhibit A hereto, and is looking for business partners to help
pursue and further the development of the Cable Modems and the business
relating thereto;
WHEREAS, Sharp is a leading manufacturer and supplier of, among other
items, Electronic Components and Systems and is willing to become a business
partner with Hybrid in the field of development in furtherance of the Cable
Modem technology and in pursuit of required commercial productions thereof;
WHEREAS, Itochu is a leading sogoshosha in Japan and is willing to
become a business partner with Hybrid and Sharp in the sales and marketing
aspects of the Cable Modems; and
WHEREAS, Hybrid, Sharp and Itochu (collectively, the "Parties" and each
individually, a "Party") wish to form a business alliance and collaborate
with one another in order to develop and pursue such New Cable Modem business;
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained and for other good and valuable
consideration, adequacy and receipt of which are hereby acknowledged, the
Parties hereby agree as follows:
1. BUSINESS ALLIANCE FOR CABLE MODEM.
Subject to the terms and conditions herein set forth, Hybrid hereby
engages Sharp and Itochu, and Sharp and Itochu shall use their reasonable
efforts, to collaborate with and help Hybrid in order to (i) further develop
and improve the New
<PAGE>
Cable Modems and (ii) develop and procure supply sources and marketing
channels for the Cable Modems. This Agreement shall govern the general terms
and framework pursuant to which the Parties shall achieve the aforementioned
purposes.
2. OEM SUPPLY.
Hybrid shall engage Sharp and Itochu, and Sharp and Itochu shall
act, respectively, as an exclusive OEM supplier and as an exporter to Hybrid
for the New Cable Modems developed under this Collaboration Agreement, upon
terms and conditions to be reasonably agreed in writing among Hybrid, Sharp,
and Itochu. The exclusivity provision of this section shall continue in force
for the entire period of this Collaboration Agreement as long as the volume,
delivery schedule, and price to Hybrid of the New Cable Modems manufactured by
Sharp shall meet reasonable targets to be established and agreed upon
periodically among the Parties.
3. COST REDUCTION EFFORT.
Sharp shall study, examine, and on a reasonable efforts basis
determine a method to achieve a reasonable production cost for the New Cable
Modems at a level that is reasonably necessary to achieve market acceptance
for the New Cable Modems while providing reasonable margins, as agreed to by
the Parties, upon sale to end users, and shall submit a cost reduction
proposal to Hybrid; provided that Sharp shall be provided with the disclosure
pursuant to Section 4 below. Subject to Section 2 above, Sharp shall
manufacture and supply the New Cable Modems in accordance with the proposal
to be submitted by Sharp and Itochu to Hybrid and the terms and conditions to
be agreed upon pursuant to Section 2.
4. DISCLOSURE.
As soon as reasonably practicable after the execution of this
Agreement, Hybrid shall provide to Sharp such adequate disclosure of all
design, engineering and other technical information for the Cable Modems as
Sharp may reasonably request.
5. JOINT DEVELOPMENT OF NEW CABLE MODEMS.
Hybrid and Sharp shall perform a joint development of the New Cable
Modems using the respective technologies of Hybrid and Sharp upon the terms
and conditions to be reasonably agreed in writing between Hybrid and Sharp,
so as to ensure that such New Cable Modems will be competitive in the
marketplace; provided that Sharp shall be provided with the disclosure
pursuant to Section 4 above.
6. LICENSED PRODUCTION.
The New Cable Modems and the technology incorporated therein (other
than Sharp technology or a third party's technology whether used by Sharp
with or without license) shall be the property of Hybrid, Hybrid shall have a
license to use any Sharp technology incorporated in the New Cable Modems and
any derivatives thereof
<PAGE>
under separately agreed-upon terms and conditions. Hybrid agrees to grant a
license under royalty to Sharp to manufacture the New Cable Modems bearing
Sharp's own brand, and to market and supply such New Cable Modems to any
person or entity other than Hybrid, subject to the terms and conditions to be
reasonably agreed upon in writing between Hybrid and Sharp and subject to the
Parties' once entering into agreements concerning OEM supply, joint
development, and the other matters referred to herein, including, without
limitation, license fees and the scope and duration of such licenses.
Royalties will not be due to Hybrid for any New Cable Modems that Sharp
manufactures and supplies to Hybrid, either directly from Sharp or indirectly
through Itochu, either on a OEM or on a licensed production basis, for Hybrid
to sell through its own channels.
7. COOPERATION WITH HYBRID'S MARKETING EFFORT.
Subject to terms and conditions to be reasonably agreed upon in
writing by the respective Parties, Itochu shall cooperate with Hybrid and
Sharp, each, to market and supply the Cable Modems to such customers or
channels and on such terms as the Parties may agree upon.
8. TECHNICAL SUPPORT.
As soon as reasonably practicable after Sharp is provided with the
disclosure pursuant to Section 4 above, Sharp shall send three technical
staff members at the first stage to Hybrid for the purpose of assisting
Hybrid in terms of a cost reduction and mass production design of the Cable
Modems so that Sharp can make an early start of mass production, and also for
the purpose of learning about the PoP that will be required for the mass
production, test, and evaluation of the Cable Modems.
9. TERM.
The term of this Agreement shall commence on the Effective Date and
shall continue in full force until December 31, 1999.
10. FUTURE ASSURANCE.
The Parties shall cooperate with one another in good faith in order
to achieve the purposes and intent of this Agreement.
11. CONFIDENTIALITY.
No Party shall disclose to any third party or use for its own
benefit or for the benefit of any third party any information disclosed by
the other Party or Parties and explicitly designated confidential at the time
of disclosure during the term of this Agreement and for three years
thereafter.
<PAGE>
12. OWNERSHIP OF INTELLECTUAL PROPERTY.
All intellectual property and other proprietary rights developed or
invented by a Party in connection with this Agreement shall belong to the
inventory Party; provided, that such property or right developed or invented
by the joint effort of both Hybrid and Sharp shall belong jointly to Hybrid
and Sharp as co-owners and be separately and independently sub licensable.
13. GENERAL PROVISIONS.
(a) This Agreement sets forth the entire agreement among the
Parties with respect to the subject matter hereof. No amendment to this
Agreement shall be effective unless in writing and signed by duly authorized
representatives of the Parties.
(b) No assignment of rights or delegation of duties under this
Agreement shall be effective unless consented to by the Parties in writing in
advance.
(c) The relationship between and among the Parties under this
Agreement is and remains always that of independent contractors. Nothing
herein contained shall be construed as creating any relationship of agency,
partnership, common enterprise, or fiduciary duty by or among the Parties. No
Party shall have any right, power or authority to incur any liability on
behalf of or in the name of the other Party or Parties.
(d) No Party shall be responsible to the other Party or Parties for
any indirect, special, consequential, incidental or punitive damages of any
nature or kind whatsoever including without limitation loss of profit,
revenue, and business opportunity arising directly or indirectly out of or
connected in any way with this Agreement or any business contemplated herein,
regardless of forms of action, whether by contract, tort, equity or
otherwise, even if it was or should have been aware or advised of the
possibility thereof. No action may be brought against any Party beyond two
(2) years after the cause of action has arisen or should reasonably have been
discovered to have arisen.
(e) This Agreement shall be governed by the laws of California,
U.S.A. Any dispute arising directly or indirectly out of or connected in any
way with this Agreement which shall not be settled among the parties within
30 days after such dispute has been notified by any party shall be submitted
to binding arbitration in San Francisco, California in accordance with the
Rules then in effect of the Arbitration and Condition of International
Chamber of Commerce, whose award or decision shall be final, non-appealable
and binding on the parties and their respective successors and permitted
assigns.
(f) All headings of this Agreement and each Section thereof are for
the purpose of convenience only.
(g) This Agreement shall be binding upon and inure to the benefit
of the parties and their respective successors and permitted assigns.
<PAGE>
IN WITNESS WHEREOF, the Parties shall cause this Agreement to be
executed by their duly authorized officers as of the Effective Date.
Hybrid Networks, Inc.
By: /s/ Carl Ledbetter
-----------------------------------
Its: CEO
-----------------------------------
Sharp Corporation
/s/ Katsuhiro Masui
By: Katsuhiro Masui
-----------------------------------
Its: Division General Manager
-----------------------------------
Electronic Components Division
ITOCHU Corporation
By: /s/ Yoshio Takeda
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Its: Yoshio Takeda
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General Manager
Telecommunication Systems Dept.
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EXHIBIT A
MODEL NUMBER DESCRIPTION
CCM-161 4VSB, phone return, 1000 system software compatible/2000
upgradable
All the following are 2000 system software compatible
CCM-101 4VSB, phone return
CCM-101-S 4VSB, phone return, secure
CCM-201 64QAM, phone return
CCM-201-S 64QAM, phone return, secure
CCM-202 64QAM, phone return internal modem
CCM-202-S 64QAM, phone return internal modem, secure
CCM-211 64QAM, 4VSB cable return
CCM-211-S 64QAM, 4VSB cable return, secure
N-101 4VSB, phone return
N-101-S 4VSB, phone return, secure
N-201 64QAM, phone return
N-201-S 64QAM, phone return, secure
N-202 64QAM, phone return internal modem
N-202-S 64QAM, phone return internal modem, secure
Note all modems listed as cable return, such as CCM-211/211S and N-211/211s,
also support an external phone modem connection
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[Confidential Treatment Requested]
SALES AND PURCHASE AGREEMENT
This Sales and Purchase Agreement (the "Agreement") is made and entered
into effective as of the 10th day of January, 1997 (the "Effective Date") by
and between Hybrid Networks, Inc., a Delaware corporation, having its
principal place of business at 10161 Bubb Road, Cupertino, California
95014-4167, U.S.A. ("Hybrid"), and Itochu Corporation, a Japanese
corporation, having its principal place of business at 5-1, Kita-Aoyama
2-chome, Minato-ku, Tokyo 107-77, Japan ("Itochu"), with reference to the
following facts and recitals:
WHEREAS, Hybrid and Itochu have entered into that certain Collaboration
Agreement on the 25th day of November, 1996 (the "Collaboration Agreement"),
among themselves and Sharp Corporation, a Japanese corporation, having its
principal place of business at 22-22 Nagaike-Cho, Abeno-ku, Osaka 545, Japan
("Sharp") concerning the cable modems referred to therein as the "New Cable
Modems" and referred to herein as the "Cable Modems"; the Cable Modems are
the products designated by Hybrid as Models Nos. N-201, N-201S, N-202,
N-202S, N-201B, and N-201SB (Sharp reference Nos. A1Ci2010H, A1Ci201SH,
A1Ci2020H, A1Ci202SH, A1Ci2010B, and A1Ci201SB respectively), which are more
specifically described in Annex A hereto, and the specifications of which are
set forth in Annex B hereto;
WHEREAS, Hybrid wishes to purchase a certain number of Cable Modems
manufactured by Sharp as described in Section 2 of the Collaboration Agreement;
WHEREAS, Itochu wishes to act as the exporter to Hybrid as foreseen in the
Collaboration Agreement;
WHEREAS, this Agreement constitutes the OEM supply agreement provided for
in the Collaboration Agreement and sets forth the obligations of the parties
with respect thereto;
WHEREAS, Hybrid and Itochu (collectively, the "Parties" and each
individually, the "Party") wish to set the terms and conditions covering the
sales and purchase of the Cable Modems.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the Parties hereby agree
as follows:
1. Terms for Purchase of Cable Modems
1.1.1 Minimum Initial Purchase Order: The initial purchase order (the
"Minimum
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[**Confidential Treatment has been requested with respect to certain portions
of this exhibit. Confidential portions have been omitted from the public
filing and filed separately with the Securities and Exchange Commission].
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Initial Purchase Order") to be issued by Hybrid to Itochu shall be for a
minimum of [**] mass production units of Cable Modems manufactured by
Sharp, subject to the terms and conditions set forth herein. The Minimum
Initial Purchase Order shall include a detailed breakdown of models for the
initial [**] units to be delivered in April , 1997 (delivery terms being
based on FOB Japan), subject to the completion in time of the design and
software for the Cable Modems by Hybrid and by Sharp, with the remaining
[**] units to be delivered over a period of one year, but no later than the
end of March , 1998. The Minimum Initial Purchase Order shall be irrevocable
and non-cancelable. The scheduling of shipment releases for the [**] units
shall be in accordance with Section 1.2 below. The price for the units to be
delivered pursuant to the Minimum Initial Purchase Order shall be determined
in accordance with Section 1.3 below. The Cable Modem warranty shall be in
accordance with Section 1.4 below. Production tooling costs shall be
amortized in accordance with Section 1.5 below.
1.1.2 Further Purchase Orders: Purchase orders beyond the Minimum
Initial Purchase Order described in Section 1.1.1 shall be irrevocable and non-
cancelable, and shall be separately discussed and agreed to between Hybrid and
Itochu, and shall be based on the terms and conditions of this Agreement.
1.2 Production Quantities and Schedules: Subject to the provisions of
this Section 1.2, the schedule for shipment release quantities for [**] units
covered by the Minimum Initial Purchase Order and for all units to be ordered
and shipped thereafter shall be determined by Hybrid, as set forth in written
forecasts that Hybrid will provide to Itochu by the 25th day of each month, and
confirmed by Itochu, covering the number of units by model that Hybrid expects
to purchase hereunder during the six-month period commencing with the month
immediately following the month in which such forecast is given. With respect
to each such forecast;
(a) The amounts set forth for the period covered by the first three
months of the forecast will constitute firm shipment release orders by
Hybrid for such Cable Modems; Itochu shall cause Sharp to manufacture such
Cable Modems in accordance herewith and deliver them to Itochu, and Itochu
shall ship such Cable Modems on or before the last day of the applicable
month;
(b) The amounts set forth for the period covered by the last three
months of the forecast will not constitute firm shipment release orders.
The shipment of the amounts forecasted for those months may be rescheduled
by Hybrid with Itochu's consent which will not be unreasonably withheld,
except that;
(i) Hybrid will pay Itochu on or before the last day of the fourth
month of period covered by the such forecast for all components
purchased by Sharp and required for Sharp's manufacture of the Cable
Modems listed in such forecast for such month.
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(ii) Hybrid will pay Itochu on or before the last day of the fifth month
of period covered by the such forecast for all DES chips purchased by
Sharp and required for Sharp's manufacture of the Cable Modems listed in
such forecast for such month.
(c) For example, the forecast issued by Hybrid on March 25, 1997 will
constitute Hybrid's and Itochu's firm commitment for the complete Cable
Modems listed for shipment at the end of April, May, and June, 1997, will
constitute Hybrid's firm commitment with respect to component procurement
for the Cable Modems listed for shipment at the end of July, 1997, and will
constitute Hybrid's firm commitment with respect to DES chip procurement
for the Cable Modems listed for shipment at the end of August 1997.
Notwithstanding the foregoing, the production schedule shall be
determined in a way that, to the extent practicable, assures Sharp a constant
allocation of monthly production quantity, the capacity of which is set at
[**] units per month at present. It is also understood that the components
procurement lead-time for Sharp is four (4) months for the DES chip and three
(3) months for the remaining items. The lead-time of the manufactured Cable
Modems on an ex-Japan basis is one month additional to the components
lead-time. Notwithstanding the foregoing, no orders will be shipped in
February or March 1997, the number of units ordered in January 1997 (in the
Minimum Initial Purchase Order) for shipment in April will not exceed [**]
and Itochu will ship all those units by the end of April 1997 and will ship
by the end of May 1997 all units that Hybrid orders in February 1997
(provided that the number ordered in February 1997 for shipment in May 1997
does not exceed the number estimated for May 1997 in the January 1997
forecast.)
1.3 Cable Modem Purchase Price: The Cable Modem purchase price (the
"Purchase Price") per unit on the basis of Delivered, Duty Paid, to Hybrid's
designated warehouse in California, U.S.A., for the initial [**] Minimum
Initial Purchase Order shall be as follows, on the basis of the Specifications
as of the Effective Date as described in Section 2.1 hereof:
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Model Sharp Ref. (A) Shipment 9704-9707 (B) Shipment 9708-onwards
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N-201 AlCi2010H US$ [**] US$ [**]
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N-201S A1Ci201SH US$ [**] US$ [**]
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N-202 A1Ci2020H US$ [**] US$ [**]
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N-202S A1Ci202SH US$ [**] US$ [**]
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The above prices are based on transport between Japan and the U.S. West Coast by
sea shipment. In case the transport by air is required, the additional cost
will be added to the above prices.
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The prices in the column (A) apply to Cable Modems, whose shipment schedule is
fixed during a period from April '97 through July '97 on the basis of ex-Japan.
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- ------------------------------------------------------------------------------
The prices in the column (B) apply to Cable Modems, whose shipment schedule is
fixed during a period from August '97 through March '98 on the basis of ex-
Japan.
- ------------------------------------------------------------------------------
Itochu represents to Hybrid that Itochu and Sharp shall continue to seek
ways to reduce the cost of manufacturing the Cable Modems and shall reduce the
Purchase Price for the Cable Modems hereunder as and when such cost reductions
are achieved. Itochu undertakes to report to Hybrid by the end of each calendar
quarter the specific actions that Sharp or Itochu has taken or proposes to take
to reduce the cost of the Cable Modems and the amounts of such reductions, and
Hybrid and Itochu agree to negotiate in good faith the reduction in Purchase
Price as a result thereof.
1.4 Cable Modem Warranty: The warranty of the Cable Modems shall be
governed by the Warranty Agreement concluded among Hybrid, Sharp, and Itochu,
and whose copy is attached to this Agreement as Annex G.
1.5 Tooling Costs: The tooling costs for the Cable Modem as identified as
of the Effective Date for the production capacity as required by the Minimum
Initial Purchase Order of [**] units are US$ [**]. These tooling costs
shall be straight-line amortized over the quantity of [**] units and are
included in the Purchase Price of the Cable Modems. Upon amortization of these
tooling costs, the tooling will become the property of Hybrid. Any un-amortized
tooling costs shall be due and payable by Hybrid, should the total production
and shipment quantity not reach the [**] units by the end of the term of this
Agreement, as specified in Section 8.1 hereof.
The tooling cost amount of US$ [**] is calculated on the basis of the
monthly production capacity of [**] units. When a higher capacity is required
to fulfill the eventual demand of Hybrid, additional tooling cost will be
required. Itochu will provide Hybrid with detailed information as to such cost,
and such cost will be amortized in a similar manner to that described above.
Should there arise additional tooling costs which are not identified as of
the Effective Date, due to such further development as a new version or a new
model of the Cable Modem, such tooling costs and their authorization method
shall be agreed separately but within the framework of this Agreement among the
Parties.
2. Specifications of Cable Modems
2.1 Cable Modem Specifications: The specifications of the Cable Modem
("Specifications") as agreed among Hybrid, Sharp and Itochu provided for in
Section 2.2 will
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be described in Annex B which will be attached hereto in accordance with
Section 2.2. Itochu shall cause Sharp to manufacture Cable Modem in
compliance with the Specifications in Annex B attached hereto. Any
modifications thereto shall be subject to the agreement among all Parties as
described in Section 2.2 hereof.
2.2 Hybrid Deliverables: As soon as reasonably practicable after June 30,
1997, Hybrid shall deliver to Itochu the Specifications in such specificity as
required for the designing and manufacturing of Cable Modem to the reasonable
satisfaction to Itochu. The Specifications shall be subject to change from time
to time as Hybrid modifies the design of the Cable Modem, provided however, that
the revised Specifications shall be mutually agreed upon with consequential
modifications in the price, delivery, and other commercial terms, with such
approval not to be unreasonably withheld. With each material release of revised
Specifications, Hybrid shall deliver to Itochu copies of the revised
Specifications pertaining to the design and manufacture of the Cable Modem. The
Specifications shall be considered as Hybrid's "Confidential Information"
subject to the provisions of Section 10 below.
3. Currency / Delivery / Taxes / Payment
3.1 U.S. Dollars: All payments required to be made hereunder shall be made in
U.S. Dollar Currency.
3.2 Delivery: The delivery shall be deemed to be executed on the basis of FOB
Japan according to the INCOTERMS 1993 and the updated versions thereof, and the
title and risk of the Cable Modem shall pass from Itochu to Hybrid at the point
of the delivery on the condition that the payment for the Cable Modem will have
been fully made by the time of the delivery. In case the physical delivery on
the basis of FOB Japan precedes the full payment to Itochu by Hybrid of the
Cable Modem, the title to the Cable Modem shall be retained by Itochu until such
time that the payment is made in full by Hybrid to Itochu.
3.3 Purchase and Sale of Cable Modems: The purchase price includes all duties,
customs and similar charges and fees, at the tariff as of the Effective Date of
this Agreement, and are exclusive of all sales, use, excise and similar taxes
imposed by any state or local governmental authority within the United States.
Hybrid shall pay all such excluded and applicable taxes in the U.S., including
but not limited to sales, value added, or other taxes applicable to the purchase
and sale of the Cable Modems. In the event that the rate of import duties,
customs and similar charges and fees for importing the Cable Modems into the
United States is increased after the Effective Date, or another or additional
similar such tax or duty is imposed after the Effective Date, and if the amount
of any such increase or new tax exceeds one percent (1%) of the purchase price,
an adjustment shall be made to the purchase price to reflect the actual direct
amount of such increase or other or additional tax or duty, upon thirty (30)
days
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written notice to Hybrid. The current duties, customs and similar such taxes
are set forth in Annex C attached hereto.
3.4 Payment: Hybrid shall pay the Purchase Price provided for hereunder for
the Cable Modems that have been manufactured by Sharp and shipped by Itochu
in accordance with this Agreement. The payment by Hybrid to Itochu shall be
made by an irrevocable letter of credit (the "Letter of Credit") payable at
sight as provided below. The Letter of Credit shall be issued by a first
class bank acceptable to Itochu, in form and substance acceptable to Itochu,
and, for any purchase order by Hybrid hereunder, shall be established in
favor of Itochu at or before the beginning of one (1) week prior to the
ex-Japan scheduled shipment as described in the purchase order. The Purchase
Price for Cable Modems covered by purchase orders which Hybrid has placed
with Itochu shall become due and payable on the relevant shipment date set
forth in each such purchase order. The validity of the Letter of Credit shall
fully cover the agreed ex-Japan shipment schedule and any reschedule, and the
validity period for presentation of the documents to a bank in Japan shall be
fifteen (15) days from the date of each shipment. The Letter of Credit shall
be negotiable at a bank in Japan, upon presentation by Itochu of at sight
draft covering 100% of the purchase price for the Cable Modems sold and
shipped pursuant to the relevant purchase order, with three (3) copies of
commercial invoice, three (3) copies of packing list, and two-thirds (2/3)
set of clean "On Board" Multimodal Transport Bills of Lading. Partial
shipments shall be allowed, and transshipments shall be allowed. Itochu will
negotiate in good faith any other payment method that Hybrid might reasonably
propose in the future, provided that payment to Itochu is adequately secured
thereby.
4. Manufacturing
4.1 Quality Standards: Itochu shall ensure that the Cable Modems manufactured
by Sharp meets at a minimum, the established quality standards of Sharp and the
quality standards set forth in Annex D hereto. Itochu shall cause Sharp to
produce working samples of Cable Modems for initial testing by Sharp and Hybrid
and based upon the conclusions of such tests, to produce new samples for field
tests. These Cable Modems will be accepted or rejected according to criteria to
be developed by Hybrid and Sharp jointly. The Parties assume for the purposes
of this Agreement that the sample Cable Modems will be finally accepted by
Hybrid and Sharp before the end of March , 1997. In order to confirm that the
given Cable Modems so manufactured hereunder meet the quality standards pursuant
hereto, Itochu shall cause Hybrid to be given access, with a reasonable prior
written notice to Itochu, to inspect the manufacturing facilities where such
units of Cable Modems are produced, at any time during normal business hours;
provided that (i) Hybrid shall undertake and cause its employees or
representatives who have access to the manufacturing facilities to undertake and
be bound by the confidentiality obligations as per Section 10 of this Agreement
and the Non-Disclosure Agreement in place between Hybrid and Sharp, whose copy
is shown in Annex E attached
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hereto, and (ii) such inspection shall not disturb or otherwise jeopardize
the development and/or production schedule of Cable Modems nor of other
products of Sharp. The representatives shall have the right to select at
random for examination one or more assemblies, subassemblies and/or
components of each Cable Modem from different production batches. In
addition to the foregoing, the Cable Modems manufactured by Sharp hereunder
will be subject to inspection and acceptance or rejection by Hybrid under
such other procedures as Hybrid may reasonably request and which are agreed
by Sharp and Itochu. Such agreement will not be unreasonably withheld, and
will specify the relevant lot(s) of production to which such other inspection
procedures will apply.. Hybrid shall be entitled to reject the delivery of
any Cable Modems which do not conform to the quality standards, by providing
Itochu with a written report containing reason(s) for rejection, whereupon
Itochu shall, at its own expense, furnish sufficient proof to Hybrid that
such units have been brought into compliance herewith.
4.2 Packaging: Itochu shall cause the Cable Modems purchased by Hybrid
hereunder to be shipped in appropriate packaging reasonably approved by Hybrid.
Such packaging may accommodate ten or a few tens of Cable Modem units with AC
adapters (i.e. separate packages for individual units will not be required.)
4.3 Third Party Cable Modems: Itochu represents to Hybrid that neither Itochu
nor Sharp will manufacture or have manufactured client cable modems that
incorporate or are based on any proprietary information of a technological or
other nature of Hybrid provided to Itochu or Sharp in connection with this
Agreement, the Collaboration Agreement or the Joint Development Agreement
between Hybrid and Sharp pursuant to which the Cable Modems are developed.
Hybrid acknowledges that Sharp or its subsidiaries may manufacture client cable
modems for third parties. Itochu represents to Hybrid that such manufacture for
third parties will not incorporate or be based upon any such Hybrid proprietary
information and will be performed in a way that the confidentiality as described
in section 10 of this Agreement is strictly maintained.
5. Marking
Itochu shall cause Sharp to place on the Cable Modems to be sold by Itochu to
Hybrid hereunder the name "Hybrid" or other Hybrid specified marks. All Cable
Modems to be sold hereunder shall also include a marking as to the country of
origin and such other labeling that Hybrid may reasonably request. Itochu shall
submit to Hybrid, for Hybrid's approval and prior to use of such notice or
marks, drafts of labels showing such notice and marks. Such approval shall not
be unreasonably withheld. If applicable as determined by Hybrid, Itochu agrees
to affix to the exterior or the interior of each Cable Modem and the package
containing such Cable Modem a legible notice reading "Licensed by Hybrid
Networks, Inc. under one or more of the following Patents," followed by a list
of applicable patent numbers taken from the list of Hybrid's patents or as may
otherwise be instructed by Hybrid.
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6. Disclaimer
6.1 Hybrid expressly disclaims all warranties, express or implied, including
but not limited to the implied warranties of merchantability, fitness for a
particular purpose, regarding the Cable Modem specifications, the Cable Modem
technology, and the Cable Modem system.
6.2 Except for the Cable Modem warranty described in Section 1.4 above, Itochu
shall not be responsible to Hybrid for any other warranties, express or implied,
including but not limited to the implied warranties of merchantability, fitness
for a particular purpose, regarding the Cable Modem, the Cable Modem design, and
the Cable Modem design documentation.
7. Limitation of Liability
In no event shall either Party be liable to the other for special, indirect,
incidental or consequential damages (including without limitation, loss of
profits), regardless of whether such liability arises in contract, tort, strict
liability in tort, breach of warranty, indemnification or otherwise, even if
such Party was or should have been aware or advised of the possibility thereof.
8. Term and Termination
8.1 Term: The term of this Agreement shall commence upon the Effective Date
and, unless otherwise terminated in accordance with Section 8.2, shall continue
in full force until December 31, 1999.
8.2 Termination: Either Party shall have the right to forthwith terminate the
Agreement and individual sales and purchase contract by giving the other party a
written notice of termination in the event of any of the followings:
(a) The other Party breaches any of the provisions hereof (such Party being
hereinafter referred to as the "Breaching Party") and fails to rectify such
breach within thirty (30) days after receipt of a written notice to that
effect.
(b) The other Party becomes insolvent or takes bankruptcy or other similar
proceedings, voluntarily or involuntarily, or makes an assignment for the
benefit of creditors or makes a composition with its creditors or passes a
resolution for its dissolution or liquidation.
In the event of occurrence of any of the events stipulated in subparagraph (a)
or (b) of the above on the part of Hybrid, then upon written notice from Itochu
to Hybrid, any outstanding
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balance of the contract price and overdue interest, if any, payable to Itochu
shall become immediately due and payable without presentation, demand or
additional notice to Hybrid.
The right to terminate the Agreement and an individual contract under this
section shall not preclude the terminating Party from seeking recovery of
damages suffered by such Party due to the breach of the Agreement by the other
Party.
8.3 Hybrid's Remedies on Termination: Without limiting any other remedies
available to Hybrid, including the right to direct damages proven, in the event
of any termination of this Agreement by Hybrid by reason of a material breach by
Itochu, unless otherwise notified by Hybrid in writing, Itochu shall immediately
return to Hybrid all of Hybrid's Confidential Information (defined in Section
10) provided by Hybrid, including any copies or updates thereof.
8.4 Itochu's Remedies on Termination: Without limiting any other remedies
available to Itochu, including the right to direct damages proven, in the event
of termination of this Agreement by Itochu by reason of a material breach by
Hybrid, unless otherwise notified by Itochu in writing, Hybrid shall immediately
return to Itochu all of Itochu's Confidential Information (defined in Section
10) provided by Itochu, including any copies or updates thereof.
9. Export Compliance
9.1 The Parties shall comply with all applicable U.S. and Japanese export laws
and regulations, including but not limited to the U.S. Export Administration
Regulations ("EAR"), and the Japanese Export Control Law, as such laws and
regulations may be amended from time to time. Each Party hereby gives its
assurance to the other Party that it will not export or re-export or otherwise
disclose, directly or indirectly, the Cable Modem technology, technical
documentation or design documentation, or any other "technical data" received
from the other Party, nor allow the direct product thereof to be shipped
directly or indirectly to Cuba, Iran, Iraq, Libya, North Korea, Sudan, or Syria
or such other country the U.S. department of Commerce or the Japanese Ministry
of International Trade and Industry shall designate from time to time as
proscribed destinations.
Each Party hereby acknowledges that the Cable Modem technology is subject to the
EAR and Export Control Law, that Each Party's duty to provide the other Party
the Cable Modems or the technical documentation pertaining to the Cable Modem
technology shall be expressly conditioned upon the availability of appropriate
export licenses if any are required from the U.S. Department of Commerce or the
Japanese Ministry of International Trade and Industry.
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9.2 Itochu will be responsible for seeking UL/TUV/BSI safety approval and FCC
approval (Part 15/68), and Hybrid will pay $56,400.00 to Itochu for obtaining
such approval.
9.3 If at any time during the term of this Agreement, any approval with respect
to this Agreement, or the performance, registration or recording thereof, shall
be required by the government or any subdivision of the government of Japan or
the countries or areas where the Cable Modem is manufactured, to make this
Agreement effective or to comply with any exchange control or other legal
requirement, Itochu, at its expense, shall take all further actions and execute
all documents necessary or appropriate for the fulfillment of such requirements
and shall promptly provide Hybrid with written evidence of such compliance.
10. Confidentiality
Each Party acknowledges that the provisions of this Agreement constitute
confidential or proprietary information of the other Party (collectively
hereinafter referred to as "Confidential Information"). All Confidential
Information disclosed by a Party (the "Disclosing Party") is also protected
hereunder as Confidential Information provided that:
(1) If in writing or other tangible form, the information is conspicuously
labeled by the Disclosing Party as proprietary, confidential, company private
or some marking similar in nature at the time of delivery; and
(2) If oral, the information shall be identified by the Disclosing Party as
proprietary and confidential within fifteen (15) business days of its
disclosure, by a writing or other tangible form which identifies such oral
communication as Confidential Information.
The Party who receives Confidential Information (the "Receiving Party") shall
not duplicate, use or disclose to any third party, including but not limited to
any independent contractor, consultant, or supplier, any Confidential
Information (except as permitted under any applicable license agreement or in
the Joint Development Agreement). If either Party desires to hire a contractor
or consultant to perform any services relating to the Cable Modems, such
contractor or consultant shall enter into a confidentiality agreement containing
terms equivalent to those of this Section. The Receiving Party who receives
Confidential Information shall adopt reasonable precautions to protect such
Confidential Information and to prevent its dissemination to unauthorized
persons or entities.
It is expressly acknowledged that Hybrid and Sharp already have entered into a
Non-Disclosure Agreement and that the Joint Development Agreement provides for
the treatment of confidential information provided by either Hybrid or Sharp
pursuant to the development of the Cable Modems.
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The Receiving Party's obligation under this Section shall not apply to any
information which the Receiving Party can demonstrate:
(a) is wholly and independently developed by the Receiving Party without
the use of or access to any Confidential Information; or
(b) is or has become generally available to the public without breach of
this Agreement by the Receiving Party; or
(c) is rightfully received from a third party free of restriction, as
evidenced by documentation in the Receiving Party's possession; or is not
treated as confidential by the Disclosing Party.
11. Arbitration
11.1 Good Faith Resolution: Prior to requesting that any claim or controversy
be arbitrated, the Parties shall attempt to resolve between themselves any
dispute, controversy, or difference concerning the meaning, application,
performance, breach of this Agreement. If such negotiations have not reached
final settlement within thirty (30) days, either Party may pursue arbitration as
provided for below.
11.2 Arbitration: Any controversy, claim or dispute in respect of the
construction of the Agreement, or arising out of, or relating in any manner to
the provisions of the Agreement or the breach thereof, shall be finally settled
by arbitration under the Rules of the American Arbitration Association. The
language of any arbitration will be English, and any such arbitration shall be
held in San Francisco, California, and shall be governed by the laws of the
State of California, U.S.A. A court reporter shall record any arbitration
proceeding, and such reporter's record shall be the official transcript of the
proceeding. The award and decision resulting from the arbitration shall be
conclusive, non-appealable, and binding on the Parties and their respective
successors and permitted assignees.
12. Relationship of the Parties
The relationship of the Parties under this Agreement shall be and at all times
remains one of independent contractors. Neither Hybrid nor Itochu shall have
any authority to bind the other in any respect, and neither Hybrid nor Itochu
shall act as, or be considered as, an agent of the other. Neither Party nor any
agent, employee, officer, representative or independent contractor of or
retained by either Party shall become or be deemed an employee, partner, joint
venture or
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agent of or with the other Party by reason of this Agreement.
13. Licenses
As provided in the Collaboration Agreement, licenses shall be granted by Hybrid
to Sharp for the Hybrid technology and by Sharp to Hybrid for any Sharp
technology incorporated in the Cable Modems pursuant to the Joint Development
Agreement between Hybrid and Sharp under which the Cable Modems were developed.
14. General Provisions
14.1 Force Majeure: Delay and/or failure in performance, other than the
obligation to pay money, shall not be deemed a breach of this Agreement when
such failure or delay is caused by or due to causes beyond reasonable control of
Hybrid or Itochu, including but not limited to; fire, flood, accidents,
strikes, explosions, acts of God and acts of local, state and/or
federal/national governments (including without limitation failure to obtain or
delays in obtaining the approvals referred to in Section 9) or acts of war.
Should a delay occur, the Party claiming force majeure shall notify the other,
in writing, specifying the nature and possible duration of the delay. Any such
delays shall not be deemed a breach of or failure to perform this Agreement or
any part thereof and the date on which a Party's obligations hereunder are due
to be fulfilled shall be extended for a period equal to the time lost as result
of such delays.
14.2 Assignment: This Agreement, and the rights and obligations under this
Agreement, shall not be transferred, assigned or encumbered, in whole or in
part, by either of the Parties without the prior written consent of the other,
which consent shall not be unreasonably withheld. Subject to the restrictions
against assignment set forth in this Section 14.2, this Agreement shall inure to
the benefit of, and shall be binding upon, the successors and assigns of each of
the Parties.
14.3 Severability: The illegality, unenforceability or invalidity of any one or
more covenants, phrases, clauses, sentences or paragraphs of this Agreement,
shall not affect the remaining portions of this Agreement, or any part thereof;
and in case of any such illegality, unenforceability or invalidity, this
Agreement shall be construed as if such illegal, unenforceable or invalid
covenants, phrases, clauses, sentences or paragraphs, had not been inserted.
14.4 Headings: The headings and titles of the paragraphs of this Agreement are
inserted solely for convenience of reference and are not a part of and are not
intended to govern, limit or aid in the construction of any term or provision
hereof.
12
<PAGE>
14.5 Counterparts: This Agreement may be executed in any number of identical
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument when each Party has
signed one such counterpart.
14.6 Entire Agreement: This Agreement constitutes the entire agreement between
the Parties and supersedes all prior agreements and understandings, oral and
written, between the Parties hereto with respect to the subject matter hereof
and the transactions contemplated hereby. No modification, variation or
amendment of this Agreement shall be effective without the written consent of
all of the Parties to this Agreement at the time of such modification, variation
or amendment.
14.7 Notice: All notices, requests, demands and other communications required
or permitted to be given under this Agreement shall be in writing and shall be
sent to the Party to whom the notice is to be given, by telex, e-mail, or
facsimile, and confirmed by first class mail, postage prepaid, and properly
addressed as follows (in which case such notice shall be deemed to have been
duly given on the day the notice is first received by the Party):
Hybrid Networks, Inc. Itochu Corporation
10161 Bubb Road 5-1, Kita-Aoyama 2-chome
Cupertino, CA 95014-4167 Minato-ku, Tokyo 107-77
U.S.A. Japan
Attn: Carl Ledbetter Attn: Yoshio Takeda
Chief Executive Officer General Manager, TOKKX
Telecommunication Systems Dept.
Tel. No.: +1.408.725.3250 Tel. No. +81.3.3497.3069
Fax. No.: +1.408.725.2439 Fax. No.: +81.3.3497.3131
e-mail: [email protected] e-mail: [email protected]
14.8 Waiver: Failure by either Party hereto to enforce at any time any term or
condition under this Agreement shall not be a waiver of that Party's right
thereafter to enforce each and every term and condition of this Agreement.
14.9 Necessary Acts: Each Party to this Agreement agrees to perform any further
acts and to execute and deliver any further documents that may be reasonably
necessary to carry out the provisions of this Agreement and the transactions
contemplated thereby.
13
<PAGE>
14.10 Survivability: The terms and conditions contained herein that by their
sense and context are intended to survive the termination or expiration of
this Agreement (specifically, without limitation, Sections 1.4 Cable Modem
Warranty, 6. Disclaimer, 7. Limitation of Liability, 8.3 Hybrid's Remedies on
Termination or 8.4 Itochu's Remedies on Termination as applicable, 9. Export
Compliance, 10. Confidentiality, 11. Arbitration, 12. Relationships of the
Parties, and 14. General Provisions) shall so survive the termination or
expiration of this Agreement.
14.11 Publicity and Disclosure: All notices to third parties and all other
publicity concerning the transactions contemplated by this Agreement shall be
jointly planned and coordinated by and between the Parties hereto.
14.12 Limitation on Actions: No action, regardless of form, arising out of
or relating to this Agreement, may be brought by either Party more than two
(2) years after the cause of action has accrued. A cause of action shall be
considered to have accrued when the injured Party discovers, or in the
exercise of due diligence should have discovered, a default or breach of this
Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed
as of the date first above written.
Hybrid Networks, Inc. Itochu Corporation
By: By:
- ---------------------------------- ------------------------------
Print: Carl S. Ledbetter Print:
---------------------------- ---------------------------
Title: Chairman, President & CEO Title:
---------------------------- ---------------------------
14
<PAGE>
- ---------------------------------------------------------------------------
Annex A List of Models - Cable Modems
- ---------------------------------------------------------------------------
Annex B Technical Specifications of Cable Modems
- ---------------------------------------------------------------------------
Annex C Current Duties, Customs and Similar Taxes
- ---------------------------------------------------------------------------
Annex D Quality Standards Agreement (Hybrid/Sharp/Itochu)
- ---------------------------------------------------------------------------
Annex E Non-Disclosure Agreement (Hybrid/Sharp)
- ---------------------------------------------------------------------------
Annex F Agreement on Proprietary Rights Warranty and Indemnification
(Hybrid/Sharp/Itochu)
- ---------------------------------------------------------------------------
Annex G Agreement on Products Warranty (Hybrid/Sharp/Itochu)
- ---------------------------------------------------------------------------
15
<PAGE>
ANNEX A
LIST OF MODELS - CABLE MODEMS
N201: SH3 processor based, modem with a 2MHz, 64 QAM downstream; and RS232
interface for an external telephone modem return
N201S: SH3 processor based, modem with a 2MHz, 64 QAM downstream; RS232
interface for an external telephone return; and downstream DES
encryption
N202X: SH3 processor based, modem with a 2MHz, 64 QAM downstream; and
internal V.32 telephone modem ready
N202XS: SH3 processor based, modem with a 2MHz, 64 QAM downstream; internal
V.32 telephone modem ready; and downstream DES encryption
N201E: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream;
RS232 interface for an external telephone modem return; enhanced
memory; diplexor tuner and QPSK transmitter circuit interface
N201ES: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream;
RS232 interface for an external telephone modem return; enhanced
memory; diplexor tuner and QPSK transmitter circuit interface and
downstream DES encryption
N202E: SH3 processor based, modem with a 2MHz, 64 QAM downstream; internal
V.32 telephone modem; enhanced memory; diplexor tuner; QPSK
transmitter circuit interface
N202ES: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream;
internal V.32 telephone modem; return; enhanced memory; diplexor
tuner; QPSK transmitter circuit interface and downstream DES
encryption
N231: SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream;
internal QPSK cable return; and RS232 interface for an external
telephone modem return
N231S SH3 processor based, multi-user modem with a 2MHz, 64 QAM downstream;
internal QPSK cable return; RS232 interface for an external telephone
modem return; and downstream DES encryption
<PAGE>
ANNEX B
- -------------------------------------------------------------------------------
PREPARED BY: DATE: SPEC NO. EU-97203 Rev1.6
--------------------------
SHARP FILE NO.
--------------------------
- ------------------------ ISSUE 11 JUNE 1997
CHECKED BY: DATE: ELECTRONIC COMPONENTS --------------------------
GROUP PAGE 9
SHARP CORPORATION --------------------------
- ------------------------ REPRESENTATIVE DIVISION
APPROVED BY: DATE: / / ELECTRONIC COMPONENTS DIV.
/ / OPTICAL DEVICE DIV.
/ / PHOTO VOLTAICS DIV.
SPECIFICATION
- -------------------------------------------------------------------------------
-------------------------------
DEVICE SPECIFICATION FOR
Cable modem
N-201(A1CI2010H)
Model No. N-202X(A1CI202XH)
-------------------------------
/ / CUSTOMER'S APPROVAL
DATE
-------------------------------------
BY
-------------------------------------
Frederick Enns
Hybrid Networks
-------------------------------------
/ / CUSTOMER'S APPROVAL PRESENTED
BY
DATE
------------------------------------- ----------------------------
BY KATSUHIRO MIICHI
-------------------------------------
ENGINEERING DEPARTMENT 2
ELECTRONIC COMPONENTS DIVISION
ELECTRONIC COMPONENTS (ELECOM) GROUP
Ken Matsushima
Itochu Corp.
- -------------------------------------------------------------------------------
SHARP CONFIDENTIAL AND PROPRIETARY
<PAGE>
[The next 59 pages, comprising the remainder of this Annex B have been omitted
as the Company is seeking confidential treatment for such information].**
<PAGE>
ANNEX C
DUTIES AND CUSTOMS' FEES AND TAXES
1. Import Duty
Non-DES Version Cable Modem
3.3% (Heading or code no. of Non DES Version Cable
Modem in HARMONIZED TARIFF SCHEDULE of the
United States (1997) IS 8517.50.1000)
DES Version Cable Modem
Unknown (Heading or code no. Of DES Version Cable
Modem in HARMONIZED TARIFF SCHEDULE of the
United States 91997) is to be advised later)
2. Harbor Maintenance Fee
0.125%
3. Merchandise Processing Fee
0.21%
<PAGE>
ANNEX D
- -------------------------------------------------------------------------------
PREPARED BY: Date: Spec No. QBMN018
--------------------------
SHARP File No.
--------------------------
- -------------------------- Issued: August 06, 1997
APPROVED BY: Date: ELECTRONIC --------------------------
COMPONENTS GROUP Page: 1/4
SHARP CORPORATION --------------------------
- -------------------------- Applicable Division
/ / Electronic Components Div.
SPECIFICATION / / Photovoltaics Div.
/ / Opti-electronic Device Div.
- -------------------------------------------------------------------------------
---------------------------------------
OUTGOING INSPECTION STANDARDS
FOR CABLE MODEM
Model No.: N-201/N-202X
---------------------------------------
/ / CUSTOMER'S APPROVAL
DATE
----------------------------
BY PRESENTED
---------------------------- BY
------------------------------------------ --------------------------
/ / CUSTOMER'S APPROVAL T. Inokuchi, General Manager
Electronic Components Div.
DATE Elecom Group
--------------------------- Sharp Corporation
BY
---------------------------
- -------------------------------------------------------------------------------
2
<PAGE>
[The next 16 pages, comprising the remainder of this Annex D have been omitted
as the Company is seeking confidential treatment for such information].**
<PAGE>
ANNEX E
NON-DISCLOSURE AGREEMENT
This Agreement made and entered into this 10th day of July, 1996
("Effective Date"), by and between SHARP CORPORATION, a Japanese corporation,
having its principal place of business at 22-22, Nagaike-cho, Abeno-ku, Osaka,
Japan (hereinafter called "Sharp") and Hybrid Networks, Inc., an American
corporation, having its principal place of business at 10161 Bubb Road,
Cupertino, California 95014-4167 (hereinafter called "Hybrid Networks").
WITNESSETH:
WHEREAS, Sharp and Hybrid Networks both have as their purpose an interest
in exploring a possible business relationship and in order for the parties to
explore this relationship, it may be necessary for the parties to disclose
certain of their proprietary and other information to each other, which
information each of the parties regards as confidential. This confidential
information relates to Cable Data Modem.
NOW, THEREFORE, the parties hereto agree as follows:
1. (a) All of the confidential information (hereinafter
"Confidential Information"), including, without limitation,
all information relating to business plans, financial or
technical matters, trade secrets, designs, know-how,
inventions, operations and any other information received or
acquired by one party ("Receiving Party") from the other
("Disclosing Party") in the course of exploring the possible
business relationship shall be in written form and marked
"Confidential," with the name of the Disclosing Party and
the date of disclosure. If the Confidential Information is
initially disclosed orally, it shall be reduced to written
form by the Disclosing Party (including the date of the oral
disclosure and name of the Disclosing Party) and presented
or mailed to the Receiving Party within fifteen (15) days of
the first oral disclosure.
(b) The Confidential Information shall remain the property of
the Disclosing Party.
(c) All information disclosed which is not marked
"Confidential," or not reduced to written form and marked
"Confidential" if initially disclosed orally shall be
considered to be non-confidential and shall not be subject
to the obligations imposed by this Agreement. All
Confidential Information disclosed under this Agreement
shall be limited to the subject matter mentioned in the
Recital. The existence and terms of this Agreement shall be
treated as Confidential Information.
1
<PAGE>
2. The Receiving Party shall:
(a) hold the Confidential Information in confidence and not
disclose it to third parties, except in the limited cases
referred to in paragraph "6"; and
(b) not use the Confidential Information for any purpose other
than exploring or examining the possibility of a business
relationship between the parties.
3. Either party hereto shall have the right, at any time, to
terminate in writing and discussions and exchange of information
in connection with the exploration of the possibilities of a
business relationship between the parties without any further
obligations or liabilities to the other party, other than the
obligations of confidentiality hereunder, or any right or
obligation relating to the Confidential Information hereunder.
4.(i) The obligations of the above paragraph "2" shall not apply
to any information which:
(a) is available to the public through no breach of this
Agreement by the Receiving Party; or
(b) was in the possession of the Receiving Party prior to
receipt from the Disclosing Party; or
(c) is received independently from a third party who is free to
disclose such information to the Receiving Party; or
(d) is subsequently independently developed by the Receiving
Party; or
(e) has been or is made public by the Disclosing Party, such as
by commercial use or sale or by publications or patents, or
otherwise; or
(f) is approved for release by written consent of the Disclosing
Party.
(ii) Disclosure of Confidential Information shall not be
precluded if such disclosure is pursuant to the requirement
or request of a governmental agency or by operation of law.
Provided, however, the Receiving Party shall promptly give a
written notice to the Disclosing party so that the
Disclosing Party may seek an appropriate protective order.
5. All Confidential Information delivered to and/or in the
possession of the Receiving Party shall be returned or delivered
to the Disclosing Party, with all copies made thereof, in
whatever form, if the Disclosing Party so requests.
6. The Receiving Party agrees that the Confidential Information
shall be disclosed to only those people within its respective
organizations or its agents, consultants, representatives or
advisors who have a need to know the information
2
<PAGE>
and who are obligated under terms no less restrictive than those
imposed by this Agreement on the Receiving Party.
7. Each party shall have the right to refuse to accept any
information under this Agreement, and nothing herein shall
obligate either party to disclose to the other party any
particular information. Further, each party acknowledges that no
contract or agreement providing for a business relationship, of
any nature, shall be deemed to exist unless and until a final
definitive agreement has been executed and delivered.
8. If any official approval is required by a government authority or
disclose the Confidential Information hereunder, such disclosure
is subject to that approval. Both parties shall comply in all
respects with applicable laws, regulations and court orders,
including but not limited to laws and regulations on export
control, in both parties' countries and other applicable
countries.
9. Disclosure of any information under this Agreement, or otherwise,
shall not be construed as granting, directly or by implication,
any license under or interest of any kind in any patent, patent
application, copyright or other intellectual property rights.
10. The Disclosing Party represents and warrants that it has the
right to disclose the information disclosed under the terms of
this Agreement and that disclosure of this information does not
conflict with the terms of any agreement between the Disclosing
Party and a third party.
11. The parties hereto shall not be obligated to compensate each
other for the disclosure and/or use pursuant to the terms of this
Agreement of any information exchanged in connection with this
Agreement or the discussions between the parties.
12. This Agreement supersedes all prior agreements, understandings,
representations and statements, whether oral or written, between
the parties relating to the disclosure of the Confidential
Information. The terms of this Agreement may not be changed
except by subsequent written agreement duly signed by an officer
of each of the parties.
13. Subject to Paragraph "4" hereof, the obligation of the Receiving
Party provided in Paragraph "2" hereof shall continue for three
(3) years from the date of each receipt of the Confidential
Information, even after termination of this Agreement according
to paragraph "3" hereof.
14. This Agreement shall be governed, construed and interpreted in
accordance with the laws of Japan.
15. The Receiving Party acknowledges that remedies of damages may be
inadequate to protect against breach of this Agreement and the
Receiving Party agrees in
3
<PAGE>
advance to the granting of injunctive or other equitable relief
to the Disclosing Party in addition to any other remedy which may
be available to the Disclosing Party.
16. The Disclosing Party does not make any representation or
warranty, except as may be specifically provided in writing, as
to the accuracy or completeness of the Confidential Information,
or as to its utility or suitability for any purpose of the
Receiving Party and the Disclosing Party expressly disclaims any
right of the Receiving Party to rely thereon, or any liability to
the Receiving Party resulting from the use of the Confidential
Information.
IN WITNESS WHEREOF, the parties by their duly authorized representatives
have executed this Agreement as of the Effective Date first set forth above.
HYBRID NETWORKS, INC. SHARP CORPORATION
By: /s/ Carl S. Ledbetter By: /s/ Akira Mitarai
---------------------------- -----------------------------
Typed Name: Carl S. Ledbetter Typed Name: Akira Mitarai
-------------------- --------------------
Title: President & CFO Title: Corporate Director
------------------------- -------------------------
Date: 10 July, 1996 Date: 10 July 1996
------------------------- -------------------------
4
<PAGE>
Annex F
AGREEMENT ON
PROPRIETARY RIGHTS AND INDEMNIFICATION
THIS AGREEMENT (the "Agreement") is made and entered into effective as
of the 10th day of January, 1997 (the "Effective Date") by and among Hybrid
Networks, Inc., a Delaware corporation, having its principal place of
business at 10161 Bubb Road, Cupertino, California 95014-4167, U.S.A.
("Hybrid"), Sharp Corporation, a Japanese corporation, having its principal
place of business at 22-22 Nagaike-Cho, Abeno-ku, Osaka 545, Japan ("Sharp"),
and Itochu Corporation, a Japanese corporation, having its principal place of
business at 5-1, Kita-Aoyama 2-chome, Minato-ku, Tokyo 107-77, Japan
("Itochu"), (hereinafter referred to collectively as "Parties" and each
individually as "Party") with reference to the following facts and recitals:
RECITALS
WHEREAS, Hybrid, Sharp, and Itochu have entered into Collaboration
Agreement on the 25th day of November, 1996 Collaboration Agreement" concerning
the collaboration among the Parties on the Cable Modem defined in the
Collaboration Agreement, including but not limited to development,
manufacturing, licensing, sales and marketing, and have entered into or are
entering into development, purchase and sales and licensing agreements pursuant
thereto,
WHEREAS, the Parties hereby recognize that the Cable Modem is of a highly
technical nature based on advanced technologies as developed by the individual
or collective efforts of the Parties and third parties,
WHEREAS, the Parties wish to clarify the position of each Party
concerning the proprietary nature of the technologies so involved in the Cable
Modem,
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained and for other good and valuable consideration,
adequacy and receipt of which are hereby acknowledged, the Parties hereby agree
as follows:
1. Hybrid Proprietary Rights Warranty: Hybrid hereby warrants to Sharp
and Itochu that, to its knowledge as of the date of the Effective Date, there
is no substantial or unavoidable claim, legal action or other proceeding
pending or threatened against Hybrid raised by any third party, alleging that
the Cable Modem technology or Cable Modem specification provided by Hybrid,
which is the subject of the Collaboration Agreement infringes or will
infringe any third party's patent(s), copyright(s) or any other intellectual
property right(s). Hybrid's sole and exclusive obligation to indemnify and
defend as a result of any infringement, claim or
1
<PAGE>
Annex F
proceeding shall be set forth in Section 2.
2. Hybrid Indemnification: If Hybrid breaches its proprietary rights
warranty set forth in Section 1 above, and if any such claim, suit or proceeding
arising therefrom is brought against Sharp or Itochu, then upon request by Sharp
or Itochu, Hybrid shall, at its expense, select counsel of Hybrid's choice and
settle or defend any such claim, suit or proceeding arising therefrom and pay
all damages, settlements (provided that such settlements are agreed to by
Hybrid) and costs awarded therein to a third party against Sharp, Itochu and
their subcontractors. In addition, if Hybrid desires to attempt to reduce its
liability hereunder, Hybrid may (i) substitute a comparable non-infringing Cable
Modem technology or Cable Modem specification, (ii) modify the Cable Modem
technology or Cable Modem specification to make it non-infringing, or (iii)
obtain a right for Sharp and Itochu to continue the use of the Cable Modem
technology or Cable Modem specification to develop, manufacture, license, sell
or market the Cable Modem, all at the expense of Hybrid. Notwithstanding the
above, the said indemnification shall not apply to claims resulting from
modifications to the Cable Modem technology or Cable Modem specification by any
Party other than Hybrid or to combinations with other products not supplied by
Hybrid or to specifications provided by Sharp or Itochu. The foregoing sets
forth Hybrid's entire indemnification obligation.
3. Sharp Proprietary Rights Warranty: Sharp hereby warrants to Hybrid and
Itochu that, to its knowledge as of the date of the Effective Date, there is no
substantial or unavoidable claim, legal action or other proceeding pending or
threatened against or affecting Sharp raised by any third party, alleging that
the Cable Modem technology or Cable Modem specification provided by Sharp, which
is the subject of the Collaboration Agreement infringes or will infringe any
third party's patent(s), copyright(s) or any other intellectual property
right(s). Sharp's sole and exclusive obligation to indemnify and defend as a
result of any infringement, claim or proceeding shall be set forth in Section 4.
4. Sharp Indemnification: If Sharp breaches its proprietary rights warranty
set forth in Section 3 above, and if any such claim, suit or proceeding arising
therefrom is brought against Hybrid or Itochu, then upon request by Hybrid or
Itochu, Sharp shall, at its expense, select counsel of Sharp's choice and settle
or defend any such claim, suit or proceeding arising therefrom and pay all
damages, settlements (provided that such settlements are agreed to by Hybrid)
and costs awarded therein to a third party against Hybrid, Itochu and their
subcontractors. In addition, if Sharp desires to attempt to reduce its
liability hereunder, Sharp may (i) substitute a comparable non-infringing Cable
Modem technology or Cable Modem specification, (ii) modify the Cable Modem
technology or Cable Modem specification to make it non-infringing, or (iii)
obtain a right for Hybrid and Itochu to continue the use of the Cable Modem
technology or Cable Modem specification to develop, manufacture, license, sell
or market the Cable Modem, all at the expense of Sharp. Notwithstanding the
above, the said indemnification shall not apply to claims resulting from
modifications to the Cable Modem technology or Cable Modem specification by any
Party other than Sharp or to combinations
2
<PAGE>
Annex F
with other products not supplied by Sharp or to specifications provided by
Hybrid or Itochu. The foregoing sets forth Sharp's entire indemnification
obligation.
5. Disclaimer
All Parties expressly disclaim all warranties except for that provided herein,
express or implied, including but not limited to the implied warranties of
merchantability, fitness for a particular purpose, regarding the Cable Modem
specification, the Cable Modem technology, and the Cable Modem system, which are
the subject of the Collaboration Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed
as of the date first above written.
Hybrid Networks Inc. Sharp Corporation
By: By:
-------------------------------- ------------------------------
Print: Carl S. Ledbetter Print:
---------------------------- ------------------------
Title: Chairman, President & CEO Title:
---------------------------- --------------------------
Itochu Corporation
By:
-------------------------------
Print:
----------------------------
Title:
----------------------------
3
<PAGE>
Annex G
WARRANTY AGREEMENT
This Warranty Agreement (the "Agreement") is made and entered into
effective as of the 10th day of January, 1997 (the "Effective Date") by and
between Hybrid Networks, Inc., a Delaware corporation having its principal
place of business at 10161 Bubb Road, Cupertino, California 95014-4167,
U.S.A. ("Hybrid"), Sharp Corporation, a Japanese corporation, having its
principal place of business at 22-22 Nagaike-cho, Abeno-ku, Osaka 545, Japan
("Sharp"), and Itochu Corporation, a Japanese corporation, having its
principal place of business at 5-1, Kita-Aoyama 2-chome, Minato-ku, Tokyo
107-77, Japan ("Itochu"), hereinafter referred to as "Parties" collectively
and as "Party" individually, with reference to the following facts and
recitals:
RECITALS:
WHEREAS, Hybrid and Itochu have entered into that certain Sales and
Purchase Agreement on the 10th day of January, 1997 (the "HybIto S&P
Agreement") concerning the sales and purchase of the cable modems, and
WHEREAS, Sharp and Itochu have entered into that certain Sales and Purchase
Agreement on the _____ day of ________, 1997 (the "SharpIto S&P Agreement")
concerning the sales and purchase of the cable modems,
WHEREAS, the Parties wish to set the terms and conditions covering the
warranty of the cable modems whose supply is defined in the two agreements,
HybIto S&P Agreement and SharpIto S&P Agreement,
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained and for other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the Parties hereby agree
as follows:
1. Scope of Application
This Agreement covers the warranty as provided by Sharp on the cable modems
which are supplied under the SharpIto S&P Agreement and/or the HybIto S&P
Agreement; more specifically the cable modems with Hybrid's denominations
(Sharp's denominations) of N-201 (A1Ci2010H), N-201S (A1Ci201SH), N-202
(A1Ci2020H), N-202S (A1Ci202SH), N-201B (A1Ci2010B), and N-201SB (A1Ci201SB),
hereinafter referred to as "Product" individually and "Products" collectively.
When cable modems of different denominations than above enter into the scope of
the SharpIto S&P Agreement and HybIto S&P Agreement, such cable modems will also
be covered by this Agreement.
2. Quality Standards, Testing and Inspection Methods
2.1 The quality standards of the Products, as well as the testing and
inspection methods shall be governed by the related documents as separately
agreed among the Parties to this Agreement, namely "Device Specification for
Cable Modem Model No. N-201 (A1CI2010H) / N-202X (A1CI202XH)" and "Outgoing
Inspection Standards for Cable Modem Model No. N-201 / N-202X" (hereinafter,
"Quality Standards" and "Testing and Inspection Methods" respectively, each of
which may be subject to
1
<PAGE>
revisions and additions based on agreements among the Parties to this
Agreement).
2.2 Sharp's obligations to Hybrid under this agreement are independent and are
not affected by the terms (or performance) of any agreement between Itochu and
Sharp.
3. Delivery
3.1. Sharp warrants to Itochu, and Itochu warrants to Hybrid, that the Products
satisfy the requirements of the Quality Standards, which may be subject to
revisions and additions based on agreements among the Parties to this Agreement.
3.2. The delivery is deemed to be done on the basis of ex-godown Itochu's
warehouse between Sharp and Itochu, and on the basis of FOB Japan between Hybrid
and Itochu, at each of which points the title and risk of the Products are
deemed to have passed from Sharp to Itochu and from Itochu to Hybrid
respectively. Nevertheless, Hybrid and Itochu individually reserve the right to
reject the delivery of the Products in case they fail the Quality Standards by
the incoming inspection performed according to the Testing and Inspection
Methods. Such rejection must be informed by Hybrid to Itochu within 45 days of
the FOB Japan delivery, and by Itochu to Sharp within 60 days of the ex-godown
delivery. The Products so rejected shall be repaired or replaced by Sharp upon
notification of failure by Hybrid or Itochu. Upon such rejection, Sharp
reserves the right to contest the rejection judgment by Hybrid, in which case
the Parties to this Agreement shall enter without unreasonable delay into
consultation as to the settlement of such rejection.
4. After-Sales Service
4.1. The After-Sales Service of the Products shall be performed by Hybrid under
its responsibility and cost, except for the cases as provided hereafter in
Sections 6 and 7 of this Agreement.
4.2. When Hybrid and/or Itochu requires the documentation for the preparation of
Service Manuals and/or the Spare Parts List, Sharp shall comply with such
request to the best of its ability. The content as well as the sharing of the
cost of such documentation shall be agreed separately among the Parties.
5. Supply of Service Parts
5.1. As regards the Service Parts which are procured originally by Sharp for the
manufacturing of the Products, they will be delivered (FOB Japan) to Hybrid from
Sharp and Itochu at cost within hundred (100) days upon receipt of such Service
Parts Order by Sharp. Such order of Service Parts shall consist of the integer
multiples of the Order-Unit Quantity as described in Annex 1 of this Agreement,
and the price of each Service Part shall be based on the Service Parts List, as
provided by Sharp to Itochu and by Itochu to Hybrid.
5.2. The period of last time buy of the Service Parts shall be for a period of
one (1) year after the last delivery of the Products as regards the supply of
individual parts, and shall be on or before the last delivery of the
corresponding Product.
However, the Service Parts in the form of Printed Circuit Board Assembly shall
be ordered latest by the time of the purchase order for the last delivery lot of
the corresponding Product, and shall cover the total
2
<PAGE>
quantity as required to cover the lifetime of the corresponding Product.
In case Sharp experiences difficulty in further supply of any of the Service
Parts earlier than the period as stated above, Sharp shall notify the other
Parties of such eventuality giving them a period of at least three (3) months to
consider the last bulk order of such Service Parts, which order shall be duly
respected by Sharp.
6. Warranty Period
6.1. For a period within sixteen (16) months of the manufacturing of the
Product, which date shall be identified by the serial number or other methods
attached to the Product by Sharp, if the Product fails in quality and
performance due to defects attributable to Sharp, Hybrid shall repair such
Product and Sharp shall refund Hybrid the cost of the repair work and of the
Service Parts consumed in such repair. The refund of the Service Parts shall
cover the electrical and mechanical parts, but shall exclude the Printed Circuit
Board Assembly, except for the cases in which the Printed Circuit Board itself
is defective by manufacture.
For the purpose of executing this clause, the cost of the repair work is fixed
and agreed as US$50.00 for each case of repair, and the cost of the Service
Parts consumed shall be based on the Service Parts List as provided by Sharp and
Itochu to Hybrid.
6.2. In case Hybrid requires the refund by Sharp, Hybrid shall inform Itochu and
Sharp without unreasonable delay the details of the failure and repair. Sharp
reserves the right, upon review of such details of the failure and repair, to
contest such requirement for refund, in which case the Parties to this Agreement
shall enter without unreasonable delay into consultation as to the attribution
of the defects and as to the settlement of the refund.
6.3. This section for the execution of the Warranty by Sharp shall be reviewed
by the Parties to this Agreement as to its actual application rules within six
(6) months of the Effective Date of this Agreement.
7. Epidemic Failure
7.1. In case epidemic failure takes place in the market due to defects clearly
attributable to Sharp, Hybrid shall inform Itochu and Sharp without unreasonable
delay of such facts, and Sharp shall repair or replace the affected Products at
its own cost. Such repair cost shall include the transportation cost between
Hybrid and Sharp. In the event of the epidemic failure, all Parties agree to
discuss to establish the economic and reasonable countermeasures for the prompt
resolving of the situation.
7.2. Epidemic Failure shall be defined by the following criteria.
a. That the failure is within three (3) years of the manufacturing of the
Product.
b. That the symptom of the failures is the same and is due to the defect
of the same part or material, and the ratio of the failures satisfies the
following criterion:
(Aggregate Failed Quantity per Year) / (Aggregate Hybrid's Sales Quantity
per Year) GREATER THAN 2%
3
<PAGE>
c. Aggregate sales quantity per year should be more than 10,000 units.
8. General Provisions
Other terms and conditions including the effective period of this Agreement
shall be governed by the HybIto S&P Agreement and the SharpIto S&P Agreement.
Hybrid Networks Inc. Sharp Corporation Itochu Corporation
- ------------------------- ------------------------ ------------------------
By: Carl S. Ledbetter By: By:
Title: Chairman, President & Title:
Chief Executive Officer
4
<PAGE>
[Confidential Treatment Requested]
VALUE ADDED RESELLER AGREEMENT
THIS AGREEMENT ("Agreement") is made this 1st day of July, 1996 by and
between HYBRID NETWORKS, INC. ("Hybrid") having its principal place of
business at 10161 Bubb Road, Cupertino, CA 95014 and Internet Ventures ("VAR")
having its principal place of business at 10850 Wilshire Blvd #1010, Los
Angeles, CA 90029.
RECITALS
WHEREAS, Hybrid is engaged in the design and manufacture of certain computer
networking systems and software ("Products"), and desires to appoint VAR as its
value added reseller for such Products within the territory hereinafter
specified; and
WHEREAS, VAR is experienced in system design, sale, installation and
maintenance of products compatible with Hybrid's Products, and desires to serve
as Hybrid's value added reseller within the territory hereinafter specified;
NOW THEREFORE, in consideration of the mutual agreements and covenants herein
contained, the parties, intending to be legally bound, agree as follows:
1. APPOINTMENT AS VAR
Hybrid hereby appoints VAR, and VAR hereby accepts appointment as a Hybrid
value added reseller to sell, install, maintain, carry inventory and provide
system design and site certification services for the Products, such
appointment to be fully subject to the terms and conditions hereinafter
provided. Notwithstanding anything contained herein to the contrary, Hybrid
maintains the right to sell Products directly or through third parties to
end-users in the territory described in Paragraph 5 of this Agreement without
any compensation due VAR.
2. TERM OF AGREEMENT
This Agreement shall come into force on the date first written above
("Effective Date") and shall remain valid for orders placed during the period
of 12 months beginning on the Effective Date ("Ordering Period") for delivery
during the period of 14 months beginning on the Effective Date ("Delivery
Period").
3. GRANT OF DISCOUNTS
The prices for any Products ordered from Hybrid by VAR shall be discounted
according to the schedule of prices as shown on Appendix A.
4. ORDERING
[**Confidential Treatment has been requested with respect to certain portions
of this exhibit. Confidential portions have been omitted from the public
filing and filed separately with the Securities and Exchange Commission].
<PAGE>
Orders placed by VAR, in writing, for Products will be accepted by Hybrid
provided that:
a) VAR complies with all of the provisions of this Agreement;
b) the order is received and accepted by Hybrid during the Ordering Period
for delivery during the Delivery Period;
c) the order contains an express reference to this Agreement;
d) the value of any single order is no less than $5,000.00; and
e) the order specifies the Products ordered, purchase price(s), exact "ship-
to" and "bill-to" address and requested delivery schedule.
5. TERRITORY
VAR is hereby granted authority to sell, install, maintain, carry inventory
and provide system design and site certification services for Hybrid products
in the following territory:
North America
6. WARRANTY
6.1 Hybrid warrants all Products will be free from defects of material and
workmanship for a period of ninety (90) days under normal operating
conditions, from the date of delivery to VAR's customer, or for a period of
one hundred eighty (180) days from date of shipment by Hybrid, whichever
comes first.
Should a Product fail within this warranty period, Hybrid will repair or
replace, at its discretion, the defective Product when it is returned to
Hybrid, shipping prepaid. Replacement Products may be refurbished or contain
refurbished materials. Proof of date of delivery of the returned Product is
required.
This warranty will apply to all repaired or replaced Products for ninety (90)
days following delivery of the Product to VAR's customer or its
representative. This warranty does not apply if, in Hybrid's judgment,
the Product failure was caused by abuse or misuse by the VAR or customer,
accidental or otherwise.
Repair or modification by anyone other than Hybrid or an approved agent is
expressly prohibited and will result in voiding this warranty. The maximum
liability of Hybrid is limited to the purchase price of the Product covered
by the warranty.
EXCEPT FOR THE EXPRESS WARRANTY STATED HEREIN, HYBRID DISCLAIMS ALL
WARRANTIES OF PRODUCTS FURNISHED HEREUNDER, INCLUDING, WITHOUT LIMITATION,
ALL IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
2
<PAGE>
6.2 VAR shall have no right or authority, express or implied, directly or
indirectly, to alter, enlarge or limit the representations or guarantees
beyond those expressly contained in Paragraph 5.1. In the event that VAR
makes unauthorized representations or guarantees beyond those contained in
Paragraph 5.1 in connection with the sale, distribution, or handling of the
Products, VAR shall hold harmless and indemnify Hybrid for any expenses,
claims, damages or liability of any nature whatsoever arising from or related
to such unauthorized representations or guarantees, including without
limitation, attorney's fees.
7. REPRESENTATIONS AND WARRANTIES OF VAR
7.1 VAR warrants and represents that:
a) it is a Value Added Reseller;
b) it is an experienced user of computer networking equipment and software
and will not require any significant assistance from Hybrid in
the incorporation of Products supplied by Hybrid; and
c) it will rely largely on its own skill and expertise in selection of
Products suitable for its purposes.
7.2 In a manner satisfactory to Hybrid and at VAR's sole expense, VAR
agrees to:
a) employ a competent and aggressive sales and technical support
organization;
b) maintain adequate manpower and facilities to assure prompt handling of
inquiries, orders and shipments of Products;
c) carry an adequate inventory in order to assure timely "off-the-shelf"
delivery;
d) assist VARs with system design and site certification;
e) sell, install and secure acceptance of Hybrid's Products;
f) keep Hybrid informed as to problems encountered and resolutions
and to communicate promptly to Hybrid any and all modifications,
design changes or improvements of the Products suggested by any
customer, or any employees or agent of customer, and VAR further
agrees that Hybrid shall be and remain the exclusive owner of such
information; and
g) submit a monthly sales forecast of Products covering the next three
months by the third week of each month.
8. TERMS AND CONDITIONS OF SALE
Terms of payment will be Net 30 days from date of invoice. All amounts are
payable to Hybrid Networks, Inc. at the address set forth on the invoice.
Delivery will be F.O.B. point of shipment. Shipments will be made to the place
or places specified on VAR's orders. VAR has a period of thirty (30) days
following date of shipment or ten (10) days after receipt of Product, whichever
is earlier, within which to notify Hybrid in writing of any discrepancies in
the shipment.
3
<PAGE>
If VAR fails to satisfy Hybrid on payment arrangements, Hybrid may refuse to
accept an order or may allow VAR to make other arrangements satisfactory to
Hybrid prior to shipment.
9. PROPRIETARY INFORMATION; NONDISCLOSURE
VAR acknowledges that, in the course of selling the Products and performing its
duties under this Agreement, it may obtain information relating to the Products
and to Hybrid which is of a confidential and proprietary nature ("Proprietary
Information"). Such Proprietary Information may include, but is not limited
to, trade secrets, know-how, invention techniques, processes, programs,
schematics, software source documents, data, customer lists, financial
information, and sales and marketing plans. VAR shall at all times, both
during the term of this Agreement and for a period of at least three (3)
years after its termination, keep in trust and confidence all such
Proprietary Information, and shall not use such Proprietary Information other
than in the course of its duties under this Agreement, nor shall VAR disclose
any of such Proprietary Information without Hybrid's written consent. VAR
further agrees to immediately return to Hybrid all Proprietary Information
(including copies thereof) in VAR's possession, custody, or control upon
termination of this Agreement at any time and for any reason.
10. TERMINATION
10.1 This Agreement will automatically terminate 1 year from the date first
written above. It may be sooner canceled as herein set forth and it may be
renewed or extended in writing by mutual agreement. Hybrid neither
represents nor implies its intention to grant such renewals or extensions.
10.2 Either party may terminate this Agreement immediately if the other
party becomes insolvent or if there is instituted by or against the other
party any proceedings in bankruptcy or if the other party shall make an
assignment for the benefit of creditors.
10.3 Either party may terminate this Agreement upon the breach of any
material warranty or representation or the default or non-performance by the
other party of its material obligations under this Agreement or any other
agreements or instruments executed and delivered in connection with this
Agreement, if such breach, default or non-performance continues uncured for a
period of thirty (30) days after the other party's receipt of written notice
thereof from the other party giving such notice.
10.4 Upon termination of this Agreement pursuant to Paragraph 9.2 and
Paragraph 9.3, all invoices submitted to VAR in respect of orders shall
immediately become due for payment and all outstanding orders for Products
shall automatically terminate insofar as they relate to Products not
delivered as of the date of termination.
11. MISCELLANEOUS
11.1 ROLE OF PARTIES; INDEPENDENT CONTRACTORS: Hybrid and VAR are and at
all times shall be and remain independent contractors as to each other, and
at no time shall either be deemed to
4
<PAGE>
be the agent of the other and no joint ventures, partnership, agency or other
relationship shall be created or implied hereby or herefrom. Except as is
expressly set forth herein, each party shall bear full and sole
responsibility for its own expenses, liabilities, costs of operation, and
the like.
11.2 ASSIGNMENT: This Agreement may not be assigned or transferred by VAR
without Hybrid's prior written consent, executed by an authorized official of
Hybrid.
11.3 BINDING EFFECT: Subject to subparagraph 11.2 above, this Agreement
shall be binding upon and shall insure to the benefits of the parties, their
successors and assigns.
11.4 FORCE MAJEURE: Notwithstanding anything contained in this Agreement to
the contrary, neither party shall be liable to the other for failure to
perform any obligation under this Agreement (nor shall any charge or
payments be made in respect thereof) if prevented from doing so by reason of
acts of God, strikes, labor unrest, embargoes, civil commotion, rationing or
other governmental orders or requirements, acts of civil or military
authorities, or other contingencies if and to the extent such cause is beyond
the reasonable control of such party and all requirements as to notice,
another performance required hereunder within a specified period, shall be
automatically extended to accommodate the period of any such cause which
shall interfere with such performance.
11.5 DISCLAIMER AND LIMITATION OF LIABILITY: In no event will Hybrid be
liable for special, indirect or consequential damages or any damages
whatsoever resulting from loss of use, data or profits arising out of or in
connection with the contract between VAR and VAR's customer. Hybrid's
liability for damage to property shall be limited to physical damage directly
caused by the sole negligence of Hybrid and in no event shall exceed the
value of the order between Hybrid and VAR.
11.6 NOTICES: Any notice required to be given by either party to the other
party shall be in writing and shall be deemed given if personally delivered,
if sent by facsimile (with receipt acknowledged) to the facsimile number the
other party set forth below or if mailed postage prepaid, to:
5
<PAGE>
If to HYBRID: If to VAR
10161 Bubb Road _________________________
Cupertino, CA 95014 _________________________
ATTN.: Craig Stein ATTN.: __________________
Fax no. 408/725-2439 Fax no. _________________
or such other address as the party to which the notice is sent shall have
provided to the other party by written notice in accordance with this Section
11.6.
11.7 ANNOUNCEMENTS: No announcement to the press or to any third party of
the transactions contemplated herein or to the provisions of this Agreement
shall be made by either party unless the same shall be approved in advance in
writing by both VAR and Hybrid.
11.8 SEVERABILITY OF PROVISIONS: If any provision of this Agreement is held
invalid, the remainder of this Agreement shall not be affected thereby.
11.9 ENTIRE AGREEMENT: This Agreement states the entire agreement as of
this date between VAR and Hybrid with respect to the subject matter hereof
and supersedes all pre-existing oral, letter or other agreements or
commitments with respect hereto. This Agreement may be modified only by
agreement in writing executed by both parties hereto.
11.10 COUNTERPARTS: This Agreement shall be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument and shall be effective
when each of the parties hereto shall have duly executed this Agreement.
11.11 GOVERNING LAW: This Agreement shall be governed by, and construed and
enforced in accordance with, applicable federal law and the laws of the State
of California.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
day and year first above written:
INTERNET VENTURES HYBRID NETWORKS, INC.
By: /s/ DONALD JACKSON
________________________________ _____________________________________
Robert E. Zimmerman
Its: ________________________________ Vice President, Marketing & Sales
6
<PAGE>
APPENDIX A
HYBRID PRICE LIST
<TABLE>
<CAPTION>
PRODUCT LIST PRICE VAR PRICES
------- ---------- ----------
BASIC TIER 2 TIER 3
<S> <C> <C> <C> <C>
Model 111 RLA [ ** ] [ ** ]
Tier 2: firm orders of 2,500 units [ ** ]
Tier 3: firm orders of 5,000 units [ ** ]
Series 1000 Point of Presence [ ** ] [ ** ]
SPARC 2 workstation w/monitor
HSB 210 S-bus card
HEM 1110 encoder modulator
Hybridware-TM- software
7" rack w/power strip
Ethernet hub and transceiver
10 port terminal server
C6M modulator
System integration
Series 2000 Point of Presence [ ** ] [ ** ]
SPARC 5 workstation w/monitor
HSB 210 S-bus card
HEM 2004 encoder modulator
Hybridware-TM- software
7" rack w/power strip
Ethernet hub and transceiver
10 port terminal server
C6M modulator
System integration
Additional RF Channel [ ** ] [ ** ]
HSB 210 S-bus card
HEM 2004 encoder modulator
C6M modulator
System integration
7" rack w/power strip [ ** ] [ ** ]
Ethernet hub and transceiver [ ** ] [ ** ]
10 port terminal server [ ** ] [ ** ]
20 port terminal server [ ** ] [ ** ]
30 port terminal server [ ** ] [ ** ]
C6M modulator [ ** ] [ ** ]
</TABLE>
7
<PAGE>
[HYBRID LETTERHEAD]
ADDENDUM TO VAR AGREEMENT
Between Internet Ventures and Hybrid Networks
The VAR agreement, dated July 1, 1996 is in force for 90 days beginning July
1, 1996. The balance of the 12 month term is contingent upon entering into a
first installation of at least 100 users.
HYBRID NETWORKS, INC.
/s/ Robert E. Zimmerman
- ----------------------------------------
Vice President, Marketing & Sales
<PAGE>
[Confidential Treatment Requested]
VALUE ADDED RESELLER AGREEMENT
THIS AGREEMENT ("Agreement") is made this 25th day of November, 1996 by and
between HYBRID NETWORKS, INC., ("Hybrid") having its principal place of
business at 10161 Bubb Road, Cupertino, CA 95014 and Network System Technologies
("VAR") having its principal place of business at 3509 Mt. Davidson Ct., San
Jose, CA 95124.
RECITALS
WHEREAS, Hybrid is engaged in the design and manufacture of certain computer
networking systems and software ("Products"), and desires to appoint VAR as its
value added reseller for such Products within the territory hereinafter
specified; and
WHEREAS, VAR is experienced in system design, sale, installation and maintenance
of products compatible with Hybrid's Products, and desires to serve as Hybrid's
value added reseller within the territory hereinafter specified;
NOW THEREFORE, in consideration of the premises and mutual promises,
undertakings, covenants and conditions herein set forth, the parties hereby
agree as follows:
1. APPOINTMENT AS VAR
Hybrid hereby appoints VAR, and VAR hereby accepts appointment as Hybrid's
non-exclusive, worldwide value added reseller to sell, install, maintain,
carry inventory and provide system design and site certification services for
the Products, such appointment to be fully subject to the terms and
conditions hereinafter provided. Notwithstanding anything contained herein
to the contrary, Hybrid maintains the right to sell Products directly or
through third parties to end-users in the territory described in Paragraph 5
of this Agreement without any compensation due VAR.
2. TERM OF AGREEMENT
This Agreement shall come into force on the date first written above
("Effective Date") and shall remain valid for orders placed during the period
of 12 months beginning on the Effective Date ("Ordering Period") for delivery
during the period of 14 months beginning on the Effective Date ("Delivery
Period").
3. GRANT OF DISCOUNTS
The prices for any Products ordered from Hybrid by VAR shall be discounted by
[**]% from Hybrid's list prices as shown on Appendix A.
4. ORDERING
[**Confidential Treatment has been requested with respect to certain portions
of this exhibit. Confidential portions have been omitted from the public
filing and filed separately with the Securities and Exchange Commission].
<PAGE>
Orders placed by VAR for Products will be accepted by Hybrid provided that:
a) VAR complies with all of the provisions of this Agreement;
b) the order is received and accepted by Hybrid during the Ordering Period
for delivery during the Delivery Period;
c) the order contains an express reference to this Agreement;
d) the value of any single order is no less than $5,000.00; and
e) the order specifies the Products ordered, purchase price(s), exact
"ship-to" and "bill-to" address and requested delivery schedule.
5. WARRANTY
5.1 Hybrid warrants all Products will be free from defects of material and
workmanship for a period of ninety (90) days under normal operating
conditions, from the date of delivery to VAR's customer, or for a period of
one hundred eighty (180) days from date of shipment by Hybrid, whichever comes
first.
Should a product fail within this warranty period, Hybrid will repair or
replace, at its discretion, the defective Product when it is returned to
Hybrid, shipping prepaid. Replacement Products may be refurbished or
contain refurbished materials. Proof of date of delivery of the returned
Product is required.
This warranty will apply to all repaired or replaced Products for ninety
(90) days following delivery of the Product to VAR's customer or its
representative. This warranty does not apply if, in Hybrid's judgment, the
Product failure was caused by abuse or misuse by the VAR or customer,
accidental or otherwise.
Repair or modification by anyone other than Hybrid or an approved agent is
expressly prohibited and will result in voiding this warranty. The maximum
liability of Hybrid is limited to the purchase price of the Product covered
by the warranty.
EXCEPT FOR THE EXPRESS WARRANTY STATED HEREIN, HYBRID DISCLAIMS ALL
WARRANTIES OF PRODUCTS FURNISHED HEREUNDER, INCLUDING, WITHOUT LIMITATION,
ALL IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
2
<PAGE>
5.2 VAR shall have no right or authority, express or implied, directly or
indirectly, to alter, enlarge or limit the representations or guarantees
beyond those expressly contained in Paragraph 5.1. In the event that VAR
makes unauthorized representations or guarantees beyond those contained in
Paragraph 5.1 in connection with the sale, distribution, or handling of the
Products, VAR shall hold harmless and indemnify Hybrid for any expenses,
claims, damages or liability of any nature whatsoever arising from or
related to such unauthorized representations or guarantees, including
without limitation, attorney's fees.
6. REPRESENTATIONS AND WARRANTIES OF VAR
6.1 VAR warrants and represents that:
a) it is a Value Added Reseller;
b) it is an experienced user of computer networking equipment and
software and will not require any significant assistance from
Hybrid in the incorporation of Products supplied by Hybrid; and,
c) it will rely largely on its own skill and expertise in selection
of Products suitable for its purposes.
6.2 In a manner satisfactory to Hybrid and at VAR's sole expense, VAR
agrees to:
a) employ a competent and aggressive sales and technical support
organization;
b) maintain adequate manpower and facilities to assure prompt handling
of inquiries, orders and shipments of Products;
c) carry an adequate inventory in order to assure timely
"off-the-shelf" delivery;
d) assist customers with system design and site certification;
e) sell, install and secure acceptance of Hybrid's Products;
f) keep Hybrid informed as to problems encountered and resolutions
and to communicate promptly to Hybrid any and all modifications,
design changes or improvements of the Products suggested by any
customer, or any employees or agent of VAR, and VAR further agrees
that Hybrid shall be and remain the exclusive owner of such
information; and
g) submit a monthly sales forecast of Products covering the next three
months by the third week of each month.
6.3 VAR agrees to act and perform with reasonable efforts in the best
interest of Hybrid and at no time do, cause or permit to be done,
published or said, any information, act or thing which is or may be
detrimental to the best interests or business reputation of Hybrid.
3
<PAGE>
7. TERMS AND CONDITIONS OF SALE
Terms of payment will be Net 30 days from date of shipment. All amounts are
payable to Hybrid Networks, Inc. at the address set forth on the invoice.
Delivery will be F.O.B. point of shipment. Shipments will be made to the place
or places specified on VAR's orders. VAR has a period of thirty (30) days
following date of shipment or ten (10) days after receipt of Product, whichever
is earlier, within which to notify Hybrid in writing of any discrepancies in the
shipment.
If VAR fails to satisfy Hybrid on payment arrangements, Hybrid may refuse to
accept an order or may allow VAR to make other arrangements satisfactory to
Hybrid prior to shipment.
8. PROPRIETARY INFORMATION; NONDISCLOSURE
VAR acknowledges that, in the course of selling the Products and performing its
duties under this Agreement, it may obtain information relating to the Products
and to Hybrid which is of a confidential and proprietary nature ("Proprietary
Information"). Such Proprietary Information may include, but is not limited to,
trade secrets, know-how, invention techniques, processes, programs, schematics,
software source documents, data, VAR lists, financial information, and sales and
marketing plans. VAR shall at all times, both during the term of this Agreement
and for a period of at least three (3) years after its termination, keep in
trust and confidence all such Proprietary Information, and shall not use such
Proprietary Information other than in the course of its duties under this
Agreement, nor shall VAR disclose any of such Proprietary Information without
Hybrid's written consent. VAR further agrees to immediately return to Hybrid
all Proprietary Information (including copies thereof) in VAR's possession,
custody, or control upon termination of this Agreement at any time and for any
reason.
9. TERMINATION
9.1 This Agreement will automatically terminate 1 year from the date first
written above. It may be sooner canceled as herein set forth and it may be
renewed or extended in writing by mutual agreement. Hybrid neither
represents nor implies its intention to grant such renewals or extensions.
9.2 Either party may terminate this Agreement immediately if the other
party becomes insolvent or if there is instituted by or against the other
party any proceedings in bankruptcy or if the other party shall make an
assignment for the benefit of creditors.
9.3 Either party may terminate this Agreement upon the breach of any
material warranty or representation or the default or non-performance by
the other party of its material obligations under this Agreement or any
other agreements or instruments executed and delivered in connection with
this Agreement, if such breach, default or non-performance continues
uncured for a period of thirty (30) days after the other party's receipt of
written notice thereof from the other party giving such notice.
4
<PAGE>
9.4 Upon termination of this Agreement pursuant to Paragraph 9.2 and
Paragraph 9.3, all invoices submitted to VAR in respect of orders shall
immediately become due for payment and all outstanding orders for Products
shall automatically terminate insofar as they relate to Products not
delivered as of the date of termination.
10. MISCELLANEOUS
10.1 ROLE OF PARTIES; INDEPENDENT CONTRACTORS: Hybrid and VAR are and at
all times shall be and remain independent contractors as to each other. and
at no time shall either be deemed to be the agent of the other and no joint
ventures, partnership, agency or other relationship shall be created or
implied hereby or herefrom. Except as is expressly set forth herein, each
party shall bear full and sole responsibility for its own expenses,
liabilities, costs of operation, and the like.
10.2 ASSIGNMENT: This Agreement may not be assigned or transferred by VAR
without Hybrid's prior written consent, executed by an authorized official
of Hybrid.
10.3 BINDING EFFECT: Subject to subparagraph 10.2 above, this Agreement
shall be binding upon and shall insure to the benefits of the parties,
their successors and assigns.
10.4 FORCE MAJEURE: Notwithstanding anything contained in this Agreement to
the contrary, neither party shall be liable to the other for failure to
perform any obligation under this Agreement (nor shall any charge or
payments be made in respect thereof) if prevented from doing so by reason
of acts of God, strikes, labor unrest, embargoes, civil commotion,
rationing or other governmental orders or requirements, acts of civil or
military authorities, or other contingencies if and to the extent such
cause is beyond the reasonable control of such party and all requirements
as to notice, another performance required hereunder within a specified
period, shall be automatically extended to accommodate the period of any
such cause which shall interfere with such performance.
10.5 DISCLAIMER AND LIMITATION OF LIABILITY: In no event will Hybrid be
liable for special, indirect or consequential damages or any damages
whatsoever resulting from loss of use, data or profits arising out of or in
connection with the contract between VAR and VAR's customer. Hybrid's
liability for damage to property shall be limited to physical damage directly
caused by the sole negligence of Hybrid and in no event shall exceed the
value of the order between Hybrid and VAR.
10.6 NOTICES: Any notice required to be given by either party to the other
party shall be in writing and shall be deemed given if personally
delivered, if sent by facsimile (with receipt acknowledged) to the
facsimile number the other party set forth below or if mailed postage
prepaid, to:
5
<PAGE>
If to HYBRID: If to Network System Technologies:
10161 Bubb Road 3509 Mt. Davidson Ct.
Cupertino, CA 95014 San Jose, CA 95124
ATTN.: Craig Stein ATTN.: Ed Moura
Fax no. 408/725-2439 Fax no.: (408) 371-2991
or such other address as the party to which the notice is sent shall have
provided to the other party by written notice in accordance with this
Section 10.6.
10.7 ANNOUNCEMENTS: No announcement to the press or to any third party of
the transactions contemplated herein or to the provisions of this Agreement
shall be made by either party unless the same shall be approved in advance
in writing by both VAR and Hybrid.
10.8 SEVERABILITY OF PROVISIONS: If any provision of this Agreement is held
invalid, the remainder of this Agreement shall not be affected thereby.
10.9 ENTIRE AGREEMENT: This Agreement states the entire agreement as of
this date between VAR and Hybrid with respect to the subject matter hereof
and supersedes all pre-existing oral, letter or other agreements or
commitments with respect hereto. This Agreement may be modified only by
agreement in writing executed by both parties hereto.
10.10 COUNTERPARTS: This Agreement shall be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument and shall be
effective when each of the parties hereto shall have duly executed this
Agreement.
10.11 GOVERNING LAW: This Agreement shall be governed by, and construed and
enforced in accordance with, applicable federal law and the laws of the
State of California.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written:
ED MOURA HYBRID NETWORKS, INC.
By: /s/ Ed Moura /s/ Carl Ledbetter 12/3/96
-------------------------------- ----------------------------------
Carl Ledbetter
Its: President and CEO President
------------------------------
Date: November 25, 1996
------------------------------
6
<PAGE>
APPENDIX A
HYBRID'S PRICE LIST
SEE ATTACHED PRICE SHEETS
<PAGE>
Form A
Series 2000 Entry Level - Wireless Dow, Telephone Return
<TABLE>
<CAPTION>
Product Configuration Price
Code Component Min Max (US$) Discount
<S> <C> <C> <C> <C> <C>
HYBRID POP EQUIPMENT
ELS-2101 CyberManager 2000 Entry Level System Package 1 1 [**] [**]
(includes: Sparc 5 workstation & monitor, HSB-210,
HEM 2004. HybridWare + SW for 300 Subscribers
and System Integration
ELS-2100 Additional RF Channel (4VSB) Package (includes:
HSB-210, HEM 2004, OCM-160 & System Integration 0 As Required [**] [**]
SPARE AND SPECIAL ITEMS
HSB-210 Secure Encryption Card (SBUS) 1 1 [**] [**]
HEM-2004 Encoder/Modulator (4-VSB) NOTE 1 1 per 6 MHz [**] [**]
HEM-2004-B Encoder-Baseband (4-VSB) NOTE 1 1 per 6 MHz [**] [**]
HEM-2004-I Modulator-IF (4-VSB) NOTE 1 1 per 6 MHz [**] [**]
COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OEH-024 Ethernet Hub (Allied telesys 3024 TR 24-port) 1 1 [**] [**]
OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 2 [**] [**]
OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 2 [**] [**]
OLP-110 Terminal Server (Portmaster) 10 Port [**] [**]
OLP-120 Terminal Server (Portmaster) 20 Port [**] [**]
OLP-130 Terminal Server (Portmaster) 30 Port [**] [**]
ORK-719 7-foot, 19-inch rack 1 [**] [**]
HYBRID CLIENT CABLE MODEMS
RLA-111 CCM (4-VSB) (flat Package) NOTE [**] [**]
CCM-201 Client Cable Modem As required [**] [**]
CCM-201-S Client Cable Modem, encryption support (DES) As required [**] [**]
COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required [**] [**]
OEH-005 Ethernet Hub (5-port support for five computers) As required [**] [**]
(price varies depending on port requirements
OAD-001 Attune/Downconverter (PMI) As required [**] [**]
HYBRID TECHNICAL SUPPORT AND TRAINING
TRN-201 4 Day Installation & Operations Training Pgrm [**] [**]
System Integration
</TABLE>
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997
Notes:
1. For local transmitter use HEM 2004. For remote transmitter, a HEM 2004-B
and HEM-2004-1 pair with an STL microwave link is used.
2. One C6M is required per downstream carrier frequency; one C6U is required
per 2 downstream carrier frequencies.
3. For existing systems: additions and maintenance (A&M) only.
Per agreed upon discount schedule: LESS THAN 1000 [**]% discount
1000-3000 [**]% discount
3000-10000 [**]% discount
<PAGE>
Form B
Series 2000 - Cable Down, Telephone and Router Return
<TABLE>
<CAPTION>
Product Configuration Price
Code Component Min Max (US$) Discount
<S> <C> <C> <C> <C> <C>
HYBRID POP EQUIPMENT
CMG-2000 CyberManager 2000 with HybridWare + SW for 500 1 1 [**] [**]
Subscribers
SWP-0500 Subscriber Software Package for 500 add. Subs. NOTE 1 As Required [**] [**]
SWP-2500 Software Package for 2,500 Subscribers As Required [**] [**]
CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required [**] [**]
SEC-010 Secure Encryption Card (DES) TBD [**] [**]
SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) 1 2 per CMD [**] [**]
QMC-200-3 84 QAM Modulator Card, 3-channel (each 10 Mbps) 1 2 per CMD [**] [**]
CMU-2000-8T CM Upstream Router with HybridWare + SW 1 As Required [**] [**]
TDC-001-8 Phone Demodulator Card, 8 lines per card (USA spec) 1 8 per CMU [**] [**]
COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) 1 [**] [**]
OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 2 [**] [**]
OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 2 [**] [**]
ORK-719 7-foot, 19-inch rack 1 [**] [**]
SPARE PARTS
LAC-010 10/100 BaseT LAN Interface Card [**] [**]
HYBRID CLIENT CABLE MODEMS
CCM-201 Client Cable Modem As required [**] [**]
CCM-201-S Client Cable Modem, encryption support (DES) As required [**] [**]
COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required [**] [**]
OEH-005 Ethernet Hub (5-port support for five computers) As required [**] [**]
(price varies depending on port requirements
HYBRID TECHNICAL SUPPORT AND TRAINING
TRN-201 4 Day Installation & Operations Training Pgrm [**] [**]
System Integration
</TABLE>
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997
Notes:
1. Price as listed when purchased with the CMG-2000.
2. One C6M is required per downstream carrier frequency; one C6U is required
per 2 downstream carrier frequencies.
Per agreed upon discount schedule: LESS THAN 1000 [**]% discount
1000-3000 [**]% discount
3000-10000 [**]% discount
<PAGE>
Form C
Series 2000 - Cable Down, Cable Return
<TABLE>
<CAPTION>
Product Configuration Price
Code Component Min Max (US$) Discount
<S> <C> <C> <C> <C> <C>
HYBRID POP EQUIPMENT
CMG-2000 CyberManager 2000 with HybridWare + SW for 500 1 1 [**] [**]
Subscribers
SWP-0500 Subscriber Software Package for 500 add. Subs. NOTE 1 As Required [**] [**]
SWP-2500 Software Package for 2,500 Subscribers As Required [**] [**]
CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required [**] [**]
SEC-010 Secure Encryption Card (DES) TBD [**] [**]
SQC-200-3 SIF (QAM) Card, 3-channel (each 10 Mbps) 1 2 per CMD [**] [**]
QMC-200-3 84 QAM Modulator Card, 3-channel (each 10 Mbps) 1 2 per CMD [**] [**]
CMU-2000-14C CM Upstream Router with HybridWare + SW 1 As Required [**] [**]
VDC-010-2 4-VSB Demodulator Card, 2 channels per card 1 14 per CMU [**] [**]
VBU-010-x Hybrid Block Upconverter 1 NOTE 2 [**] [**]
COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) 1 [**] [**]
OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 3 [**] [**]
OCM-260 C6U Modulator/Upconverter (USA and International) 1 NOTE 3 [**] [**]
OCS-016 16-way Splitter 1 1 per CMU Pending [**]
ODF-280 Diplex Filter 1 Pending [**]
ORK-719 7-foot, 19-inch rack 1 [**] [**]
SPARE PARTS
LAC-010 10/100 BaseT LAN Interface Card [**] [**]
HYBRID CLIENT CABLE MODEMS
CCM-211 Client Cable Modem As required [**] [**]
CCM-211-S Client Cable Modem, encryption support (DES) As required [**] [**]
COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required [**] [**]
OEH-005 Ethernet Hub (5-port support for five computers) As required [**] [**]
(price varies depending on port requirements
HYBRID TECHNICAL SUPPORT AND TRAINING
TRN-211 5 Day Installation & Operations Training Pgrm [**] [**]
System Integration
</TABLE>
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997
1. Price as listed when purchased with the CMG-2000.
2. One Hybrid Block Upconverter is required per block group of upstream
frequencies.
3. One C6M is required per downstream carrier frequency; one C6U is
required per 2 downstream carrier frequencies.
Per agreed upon discount schedule: LESS THAN 1000 [**]% discount
1000-3000 [**]% discount
3000-10000 [**]% discount
<PAGE>>
Form D
Series 2000 - Wireless Down, Telephone or Router Return
<TABLE>
<CAPTION>
Product Configuration Price
Code Component Min Max (US$) Discount
<C> <C> <C> <C> <C> <C>
HYBRID POP EQUIPMENT
CMG-2000 CyberManager 2000 with HybridWare + SW for 500 1 1 [**] [**]
Subscribers
SWP-0500 Subscriber Software Package for 500 add. Subs. NOTE 1 As Required [**] [**]
SWP-2500 Software Package for 2,500 Subscribers As Required [**] [**]
CMD-2000 CM Downstream Router with HybridWare + SW 1 As Required [**] [**]
SVC-010 Secure Encryption Card (DES) 1 2 per CMD [**] [**]
HEM-2004 Encoder/Modulator (4-VSB) NOTE 2 1 per 5 MHz [**] [**]
HEM-2004-B Encoder-Baseband (4-VSB) NOTE 2 1 per 6 MHz [**] [**]
HEM-2004-1 Modulator-IF (4-VSB) NOTE 2 1 per 8 MHz [**] [**]
CMU-2000-8T CM Upstream Router with HybridWare + SW 1 As Required [**] [**]
TDC-001-8 Phone Demodulator Card, 8 lines per card (USA spec) 1 8 per CMU [**] [**]
COMMERCIAL POP EQUIPMENT ALSO AVAILABLE FROM HYBRID (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OFS-200 Fast Ethernet Switch (Cisco Catalyst 2800) 1 [**] [**]
OCM-160 C6M Modulator/Upconverter (USA Spec) 1 NOTE 3 [**] [**]
OCM-280 C6U Modulator/Upconverter (USA and International) 1 NOTE 3 [**] [**]
ORK-719 7-foot, 19-inch rack 1 [**] [**]
SPARE PARTS
LAC-010 10/100 BaseT LAN Interface Card NOTE 1 1 per 6 MHz [**] [**]
HYBRID CLIENT CABLE MODEMS
CCM-101 Client Cable Modem As required [**] [**]
CCM-101-S Client Cable Mode, encryption support (DES) As required [**] [**]
CCM-161 CCM (4-VSB), Series 1000 compatible As required [**] [**]
CCM-161-S CCM (4-VSB), Series 1000 compatible and encryption As required [**] [**]
support (DES)
COMMERCIAL CABLE MODEM ACCESSORIES (TYPICAL PRICES, NO DISCOUNTS, PRICES MAY CHANGE WITHOUT NOTICE)
OTM-001 V.34 14.4 or 28.8 Phone Modem (typ. US Robotics) As required [**] [**]
OEH-005 Ethernet Hub (5-port support for five computers) As required [**] [**]
(price varies depending on port requirements
OAD-001 Antenna/Downconverter (PMI) As required [**] [**]
HYBRID TECHNICAL SUPPORT AND TRAINING
TRN-201 4 Day Installation & Operations Training Pgrm [**] [**]
System Integration
</TABLE>
PRICES ONLY VALID FOR ORDERS PLACED BEFORE DECEMBER 1, 1997
Notes:
1. Price as listed when purchased with the CMG-2000.
2. For local transmitter use HEM-2004. For remote transmitter, a HEM-2004-B
& HEM-2004-1 pair with an STL microwave link is used.
3. One C8M is required per 6MHz channel: one C8U is required per two 6 MHz
channels.
Per agreed upon discount schedule: LESS THAN 1000 [**]% discount
1000-3000 [**]% discount
3000-10000 [**]% discount
<PAGE>
HYBRID NETWORKS, INC.
INCENTIVE BASED COMPENSATION PROGRAM
Effective for Each of the Three Quarters Ended December 31, 1997
1. PURPOSE. The purpose of this Hybrid Networks, Inc. Incentive Based
Compensation Program (this "PLAN") is to enable Hybrid Networks, Inc. (the
"COMPANY") to (i) attract, retain and motivate employees who contribute to
the success of the Company, (ii) reward individual and group employee
performance in the achievement of corporate objectives and (iii) provide an
incentive to employees to increase the profitability and advance the
interests of the Company through participation in a bonus program in
accordance with the provisions of this Plan.
2. DEFINITIONS. For purposes of this Plan, the following terms shall be
defined as follows:
a. "AWARD" means an Incentive Award that may be granted to a
Participant upon satisfaction of certain performance conditions set forth in
this Plan.
b. "AWARD CYCLE" means a period during which the Company and
individual performance is measured as determined by the Board of Directors of
the Company (the "BOARD") from time to time. The first Award Cycle will
commence on April 1, 1997 and end on June 30, 1997, and continue quarterly to
December 31, 1997, unless changed by the Company's Board of Directors.
c. "COMPANY OBJECTIVES" means the criteria of measurement of division,
department or company-wide performance goals established by the Company's
Compensation Committee (the "COMPENSATION COMMITTEE") pursuant to Section 3
of this Plan for each Award Cycle.
d. "INCENTIVE AWARD" means an Award that may be granted to a
Participant upon satisfaction of the Company Objectives pursuant to the terms
of Sections 3, 4 and 5 of this Plan.
e. "INCENTIVE PERCENTAGES" means the target percentage, maximum
percentage (not to exceed 135% of the target percentage) and minimum
percentage of the total base salary of any Participant, as determined by the
Compensation Committee for each Award Cycle as provided in Section 4 of this
Plan.
f. "PARTICIPANT" means any officer, manager or other employee of the
Company designated as a Participant by the Compensation Committee.<PAGE>
<PAGE>
3. DETERMINATION OF COMPANY PERFORMANCE OBJECTIVES.
a. COMPANY OBJECTIVES. With respect to each Award Cycle, the
Compensation Committee shall establish the Company Objectives for each Award
Cycle, and for the 12-month period initially covered by this Plan, based on
performance of the Company in the categories of operating income, net sales and
other categories (which may include gross margin, cash balance, expenses and
other categories of financial performance). Each participant's Incentive
Percentages will be based on the Company's achievement of the Company Objectives
in three categories: operating income, net sales and a third category selected
for that Participant by the Compensation Committee or the Company's Chief
Executive Officer.
b. WRITTEN DESCRIPTION. The Company Objectives shall be set forth in
writing for each Participant during each Award Cycle.
4. DETERMINATION OF INCENTIVE PERCENTAGES. With respect to each Award Cycle,
the Company's Chief Executive Officer or the Compensation Committee shall
establish for all Participants the Incentive Percentages to be paid to each
Participant for achievement of the Company Objectives. The Incentive
Percentages shall include, for each Company Objective, a maximum percentage and
a target percentage, depending on the Company's performance with respect to each
Company Objective, and a minimum percentage below which no Award with respect to
that Company Objective will be made.
5. GRANT OF THE INCENTIVE AWARDS. As soon as practicable after the end of an
Award Cycle, the Compensation Committee shall determine with respect to each
Participant whether the Company has achieved any of the Company Objectives.
Based upon (A) the degree of achievement of Company Objectives and (B) the
applicable Incentive Percentages for the Award Cycle, the Participant shall be
entitled to an Incentive Award.
6. TERMINATION OF SERVICE. If, during an Award Cycle, a Participant's
employment with the Company terminates by reason of death, permanent disability
(as defined in the Company's group long-term disability plan) or retirement, the
Board in its sole discretion may pay to the Participant or his or her designated
beneficiary a pro-rated share of an Award, if any, based upon the service
performed during the Award Cycle and upon the degree of achievement of the
Participant's Company Objectives for such Award Cycle. Any such payment of an
Award shall be made to the Participant or his or her beneficiary in the Award
Cycle next following permanent disability, death or retirement. A Participant
who terminates employment with the Company prior to the end of an Award Cycle
for any reason other than death, permanent disability or retirement shall not be
entitled to receive any Award. A Participant who commences employment after the
commencement of any Award Cycle shall not be eligible for a pro-rated share of
an Award with respect to such Award Cycle.
7. TIME AND FORM OF PAYMENT. For the Award Cycles ended June 30, 1997 and
September 30, 1997, Awards shall be paid to the Participants or their designated
beneficiaries as soon as practicable after the end of such Award Cycle in a
combination of 50% cash and 50% Common Stock of the Company. For the Award
Cycle ended December 31, 1997, Awards shall
2
<PAGE>
be paid entirely in cash. Prior to an initial public offering of the Common
Stock of the Company, the fair market value of the Company's Common Stock
shall be determined by the Company's Board of Directors. After the Company's
initial public offering, the fair market value of the Company's Common Stock
shall be the closing price of the Company's Common Stock on the Nasdaq
National Market on the last day of the Award Cycle.
8. DESIGNATION OF BENEFICIARY. The effective designation of a beneficiary
under the Company's Section 401(k) plan (including any required spousal
consent) shall for all purposes also be deemed a designation of beneficiary
under this Plan. If no such beneficiary designation is in effect at the time
of a Participant's death, or if no designated beneficiary survives the
Participant, or if such designation conflicts with the law, the payment of
the amount, if any, payable under the Plan upon the Participant's death shall
be made to the Participant's estate. If the Company is in doubt as to the
right of any person to receive any amount, the Company may retain such
amount, without liability for any interest thereon, until the rights thereto
are determined, or the Company may pay such amount into any court of
appropriate jurisdiction, and such payment shall be a complete discharge of
the liability of the Company.
9. NO CONTINUED EMPLOYMENT. Nothing in this Plan or any award granted
hereunder shall confer upon any participant any right to continue in the
employ of the Company or interfere in any way with the right of the Company
to terminate his or her employment at any time. No Award payable under the
Plan shall be deemed salary or compensation for the purpose of computing
benefits under any other employee benefit plan or other arrangement of the
Company for the benefit of its employees unless the Company shall determine
otherwise.
10. LEAVE OF ABSENCE. Absence on leave approved by the Company shall not be
considered interruption or termination of employment for any purposes of the
Plan unless the Compensation Committee determines otherwise; provided,
however, that no Award may be granted to an employee while he or she is
absent on leave.
11. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee or such other committee appointed by the Board. The Compensation
Committee shall have full power, discretion and authority to interpret,
review and administer the Plan. The Compensation Committee's interpretation
and application of the Plan shall be binding and conclusive for all persons
for all purposes. The Compensation Committee may conclusively rely upon any
opinion, computations or other advice received from any such counsel,
independent auditors or consultants. The Compensation Committee's actions
may include, but not be limited to, the determination of:
a. the employees of the Company to be designated as Participants upon
recommendation of the President of the Company;
b. the Incentive Percentages for each Award Cycle;
c. the achievement of Company Objectives by Participants; and
3
<PAGE>
d. the specific terms, conditions and restrictions of any Award
consistent with the terms of this Plan.
12. WITHHOLDING. The amount payable to a participant or his or her
beneficiary shall be reduced by any amount that the Company is required to
withhold with respect to such payments under the then applicable provisions
of federal, foreign, state or local income tax laws unless the Participant
satisfies such withholding requirements in some other manner approved by the
Board.
13. UNFUNDED PLAN; GOVERNING LAW. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to
create a trust of any kind, or a fiduciary relationship between the Company
or the Compensation Committee, or both, on the one hand, and any Participant
or other person on the other. To the extent that any person acquires a right
to receive payments from the Company under this Plan, such right shall be no
greater than the right of an unsecured general creditor of the Company. All
payments to be made hereunder shall be paid from the general funds of the
Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payments of such amounts. The
Plan is an unfunded incentive compensation program and all rights hereunder
shall be governed by and construed in accordance with the laws of California.
14. AMENDMENT OR TERMINATION OF THE PLAN. The Plan shall be effective for
the nine months ended December 31, 1997. The Board, or the Compensation
Committee with the approval of the Board, may terminate this Plan at any
time, or amend it from time to time.
4
<PAGE>
EXHIBIT 11.01
HYBRID NETWORKS, INC.
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average common shares outstanding for the period... 2,226 2,223 2,534 2,541 2,550
Common equivalent shares pursuant to Staff Accounting
Bulletin No. 83........................................... 668 668 668 668 668
--------- --------- --------- --------- ---------
Shares used in per share calculation........................ 2,894 2,891 3,202 3,209 3,218
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss.................................................... $ (2,897) $ (5,269) $ (8,515) $ (3,550) $ (7,253)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share.......................................... $ (1.00) $ (1.82) $ (2.66) $ (1.11) $ (2.25)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
There is no difference between primarily and fully dilutive loss per share
for each period.
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. ) of our report dated August 28, 1997, on our audit of the financial
statements of Hybrid Networks, Inc. We also consent to the references to our
firm under the captions "Experts" and "Selected Financial Data."
Coopers & Lybrand L.L.P.
San Jose, California
September 19, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HYBRID
NETWORKS, INC. BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 6,886 3,836
<SECURITIES> 0 0
<RECEIVABLES> 1,348 3,896
<ALLOWANCES> 0 690
<INVENTORY> 943 1,799
<CURRENT-ASSETS> 9,302 9,197
<PP&E> 1,736 1,708
<DEPRECIATION> 558 0
<TOTAL-ASSETS> 10,539 11,479
<CURRENT-LIABILITIES> 2,358 2,752
<BONDS> 0 0
0 0
12 13
<COMMON> 2 2
<OTHER-SE> 7,695 2,475
<TOTAL-LIABILITY-AND-EQUITY> 10,539 11,479
<SALES> 2,962 4,905
<TOTAL-REVENUES> 2,962 4,905
<CGS> 3,130 4,689
<TOTAL-COSTS> 8,576 7,445
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28 159
<INCOME-PRETAX> (8,515) (7,253)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,515) (7,253)
<EPS-PRIMARY> (2.66) (2.25)
<EPS-DILUTED> 0 0
</TABLE>
