<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION NO. 333-36001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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. / / ______
--------------------------
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 OCTOBER 22, 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 COMMON STOCK OF
THE COMPANY HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "HYBR" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
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) CERTAIN OF THE COMPANY'S STOCKHOLDERS (THE "SELLING STOCKHOLDERS") HAVE
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.
THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES BY THE
SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." IF THE
UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL
$ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , THE PROCEEDS TO
COMPANY WILL TOTAL $ AND THE PROCEEDS TO SELLING STOCKHOLDERS 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 NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT ,
1997.
-------------------
NATIONSBANC MONTGOMERY SECURITIES, INC. 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. The Company is currently generating, and
expects to continue to generate in the near term, substantially all of its net
sales from its Series 2000 product line and related support and networking
services. 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...................................... 9,973,311 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------------
1994 1995 1996 1997
--------- --------- --------- 1996 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.............................................. $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152
Loss from operations................................... (2,826) (5,131) (8,744) (6,256) (9,886)
Net loss............................................... (2,897) (5,269) (8,515) (6,132) (10,082)
Pro forma net loss per share(2)........................ $ (1.24) $ (1.33)
Pro forma number of shares used in per share
calculation(2)....................................... 6,873 7,607
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED(4)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................................... $ 5,314 $ 30,225
Working capital...................................................................... 3,565 35,108
Total assets......................................................................... 16,190 41,101
Long-term debt(3).................................................................... 6,223 6,223
Total stockholders' equity (deficit)................................................. (3) 31,540
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of September 30, 1997. Does not include (i)
1,974,242 shares of Common Stock issuable upon exercise of stock options
outstanding as of September 30, 1997, at a weighted average exercise price
of $2.72 per share, (ii) 2,046,213 shares of Common Stock available for
future grant or issuance as of September 30, 1997 under the Company's 1993
Equity Incentive Plan, 1996 Equity Incentive Plan, Executive Officer
Incentive Plan, 1997 Equity Incentive Plan, 1997 Directors Stock Option Plan
and 1997 Employee Stock Purchase Plan, (iii) 1,160,558 shares of Common
Stock issuable upon the exercise of warrants outstanding as of September 30,
1997 at a weighted average exercise price of $6.38 per share, (iv) 513,423
shares of Common Stock issuable as of September 30, 1997 upon the conversion
of a debenture with an outstanding aggregate principal amount of $5.5
million (the "$5.5 Million Debenture") or (v) a warrant to purchase 2,659
shares of Common Stock at an exercise price of $10.91 per share issued in
October 1997 in connection with obtaining 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, 6 and 10 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the pro forma number of shares used to compute pro forma
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 6 of Notes to
Financial Statements.
(4) 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 APPROXIMATELY $6.9 MILLION OF SUBORDINATED NOTES (THE
"SUBORDINATED NOTES") IMMEDIATELY FOLLOWING THE CLOSING OF THIS OFFERING AND THE
ISSUANCE OF WARRANTS FOR THE PURCHASE OF 252,381 SHARES OF COMMON STOCK IN
CONNECTION THEREWITH.
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 September 30, 1997, the Company had an accumulated
deficit of approximately $27.4 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
extended payment terms, 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
by customers; customers' delay in or failure to pay accounts receivable; 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 and a portion of the
third 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 the second 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. Due to current customer demand, the Company anticipates that the sales
mix of modems will continue to be weighted toward lower-margin single-user
modems in the foreseeable future. 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
6
<PAGE>
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 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). The Company is
currently generating, and expects to continue to generate in the near term,
substantially all of its net sales from its Series 2000 product line and related
support and networking services. 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. In addition, as the Company introduces new products that cause
existing products to become obsolete, the Company could experience inventory
writeoffs, which 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 and Development."
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 extended payment, 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 provided certain broadband wireless
system operators and other customers 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. In addition, as the
market for high speed Internet and corporate intranet access over cable and
broadband wireless systems continues to evolve, the composition of companies
participating in this market will continue to change. For instance, in
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1994, 1995 and 1996, Intel accounted for 59.6%, 51.6% and 20.7%, 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. However, in 1996 Intel stopped purchasing products from
the Company as it scaled back its direct participation in the cable and wireless
market, though it continues to be a significant stockholder of the Company and
maintains certain licensing and manufacturing rights to certain of the Company's
products. Should Intel decide to purchase or support designs or products from
competitors of the Company it could have a material adverse effect on the
Company's business, operating results and financial condition. The loss of any
one of the Company's major customers could have a material adverse effect on the
Company's business, financial 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 provided customers extended payment,
promotional pricing or other terms. For instance, Internet Ventures, Inc., which
accounted for 10.2% of the Company's net sales for the nine months ended
September 30, 1997, has recently been provided extended payment terms and
accounted for 12% of the Company's accounts receivable as of September 30, 1997.
The provision of extended payment terms, or the extension of promotional
payment, pricing or other terms could have a material adverse effect on the
Company's business, operating results and financial condition. 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, or any significant customer delays payment or fails
to pay, the Company's business, operating results and financial condition could
be materially adversely affected. Further, 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. 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. In addition, the Company could face potential
competition from certain of its suppliers, such as Sharp if it were to develop
or license modems for sale to others. In addition, suppliers such as Cisco
Systems, which
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manufactures routers, and Stanford Telecom, which manufactures QPSK components,
could become competitors should they decide to enter the Company's market
directly. 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 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
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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
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 and a
portion of the third 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.
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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
program to develop with certain of the Company's competitors high-speed cable
data modems and headend equipment based on BroadCom's MCNS compliant
semiconductor. As a result of such program, certain of BroadCom's 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."
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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-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
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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."
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. Mr.
Ledbetter is a party to an employment agreement with the Company, and the
Company carries a $1.5 million "key man" life insurance policy on him. 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
15
<PAGE>
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 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.
16
<PAGE>
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 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 current executive officers,
directors and greater than 5% stockholders (and their affiliates) will, in the
aggregate, beneficially own approximately 56.8% of the Company's outstanding
Common Stock. 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. In September 1997, the
Company entered into the Subordinated Notes which have restrictive covenants
that limit the amount of capital expenditures it may incur in any 12 month
period and the borrowing of additional funds and prohibit the Company from,
among other things, declaring dividends and distributing assets so long as the
Subordinated Notes are outstanding. In addition, in October 1997, the Company
entered into the Credit Facility, which prohibits the Company from declaring
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation," "Certain Transactions," "Description of Capital
Stock--Convertible $5.5 Million Debenture" and "--Subordinated Notes" and Notes
5, 6 and 16 of Notes to Financial Statements.
17
<PAGE>
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
7,273,311 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 7,273,311 Restricted Shares will be available for
sale in the public market following the expiration of 180-day lock-up
agreements. 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 1,163,217 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." NationsBanc Montgomery Securities, Inc. 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 1,148,949 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, assuming no exercise
of the Underwriters' over-allotment option. 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.
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 Incentive 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."
18
<PAGE>
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.
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
19
<PAGE>
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 $9.92 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."
20
<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. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders if the
over-allotment option is exercised. 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 and the Subordinated
Notes prohibit the Company from paying any cash dividends for so long as the
$5.5 Million Debenture or the Subordinated Notes, as the case may be, remain
outstanding. In addition, the Credit Facility prohibits the Company from paying
any cash dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1997 and (ii) the actual capitalization 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>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt(1)........................................................................ $ 6,223 $ 6,223
---------- -----------
Stockholders' equity (deficit)(2):
Convertible Preferred Stock, $0.001 par value per share: 18,000,000 shares authorized,
actual; 5,000,000 shares authorized, as adjusted; 12,562,868 shares issued and
outstanding, actual; no shares issued or outstanding, as adjusted.................... 13 --
Common Stock, $0.001 par value per share:
34,000,000 shares authorized, actual; 100,000,000 shares authorized, as adjusted;
2,619,726 shares issued and outstanding, actual; 9,973,311 shares issued and
outstanding, as adjusted............................................................. 2 18
Additional paid-in capital............................................................. 27,406 59,196
Accumulated deficit.................................................................... (27,424) (27,674)
---------- -----------
Total stockholders' equity (deficit)................................................. (3) 31,540
---------- -----------
Total capitalization............................................................... $ 6,220 $ 37,763
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
(1) 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 6 of Notes to Financial Statements.
(2) Does not include (i) 1,974,242 shares of Common Stock issuable upon exercise
of stock options outstanding as of September 30, 1997 at a weighted average
exercise price of $2.72 per share, (ii) 2,046,213 shares of Common Stock
available for future grant or issuance as of September 30, 1997 under the
Company's 1993 Equity Incentive Plan, 1996 Equity Incentive Plan, Executive
Officer Incentive Plan, 1997 Equity Incentive Plan, 1997 Directors Stock
Option Plan and 1997 Employee Stock Purchase Plan, (iii) 1,160,558 shares of
Common Stock issuable upon the exercise of warrants outstanding as of
September 30, 1997 at a weighted average exercise price of $6.38 per share,
(iv) 513,423 shares of Common Stock issuable as of September 30, 1997 upon
the conversion of the $5.5 Million Debenture or (v) a warrant to purchase
2,659 shares of Common Stock at an exercise price of $10.91 per share issued
in October 1997 in connection with obtaining a credit facility for $4.0
million (the "Credit Facility"). See "Management--Director Compensation,"
"Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 5, 6 and 10 of Notes to Financial Statements.
22
<PAGE>
DILUTION
The pro forma net tangible book deficit of the Company as of September 30,
1997, assuming the conversion of all outstanding shares of Preferred Stock into
shares of Common Stock, was $(870,000), or $(0.12) per share of Common Stock.
"Pro forma net tangible book deficit per share" is determined by dividing the
number of outstanding shares of Common Stock into the net tangible book deficit
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), and the repayment of approximately $6.9 million in Subordinated
Notes, the pro forma net tangible book value of the Company as of September 30,
1997 would have been approximately $30,673,000, or $3.08 per share. This
represents an immediate increase in pro forma net tangible book value of $3.20
per share to existing stockholders and an immediate dilution of $9.92 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 deficit per share as of September 30, 1997...... $ (0.12)
Increase per share attributable to new investors............................ 3.20
---------
Pro forma net tangible book value per share after offering.................. 3.08
---------
Dilution per share to new investors......................................... $ 9.92
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 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(1)........... 7,273,311 72.9% $ 27,171,000 43.6% $ 3.74
New investors(1)................... 2,700,000 27.1 35,100,000 56.4 13.00
---------- ----- ------------- -----
Total............................ 9,973,311 100.0% $ 62,271,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of shares held by existing stockholders will be reduced by 405,000 shares to
6,868,311, or 68.9% of the total shares of Common Stock to be outstanding
after this offering, and the number of shares held by new investors will be
increased to 3,105,000, or 31.1% of the total shares of Common Stock to be
outstanding after this offering.
As of September 30, 1997, there were options outstanding to purchase a total
of 1,974,242 shares of Common Stock at a weighted average exercise price of
$2.72 per share, warrants outstanding to purchase a total of 1,160,558 shares of
Common Stock at a weighted average exercise price of $6.38 per share and 513,423
shares of Common Stock issuable upon the conversion of the $5.5 Million
Debenture. In addition, in October 1997 the Company issued a warrant to purchase
2,659 shares of Common Stock at an exercise price of $10.91 per share in
connection with obtaining 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, 6 and 10 of Notes to Financial
Statements.
23
<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 for the nine months
ended September 30, 1997 and the balance sheet data as of December 31, 1995 and
1996 and September 30, 1997 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 statements of operations data for the nine months ended
September 30, 1996 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 results of
operations for the period. Operating results for the nine months ended September
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ----------------------
STATEMENTS OF OPERATIONS DATA: 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................... $ 436 $ 1,010 $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152
Cost of sales................................ 294 746 1,362 761 3,130 1,602 8,214
--------- --------- --------- --------- --------- ----------- ---------
Gross profit (loss)...................... 142 264 (694) (131) (168) (349) 938
--------- --------- --------- --------- --------- ----------- ---------
Operating expenses:
Research and development................... 5 271 1,251 3,862 5,076 3,757 5,170
Sales and marketing........................ 67 133 348 390 1,786 954 3,138
General and administrative................. 154 250 533 748 1,714 1,196 2,516
--------- --------- --------- --------- --------- ----------- ---------
Total operating expenses................. 226 654 2,132 5,000 8,576 5,907 10,824
--------- --------- --------- --------- --------- ----------- ---------
Loss from operations................... (84) (390) (2,826) (5,131) (8,744) (6,256) (9,886)
Interest income and other expense, net....... 3 5 30 166 257 146 183
Interest expense............................. -- -- (101) (304) (28) (22) (379)
--------- --------- --------- --------- --------- ----------- ---------
Net loss............................... $ (81) $ (385) $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082)
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Net loss per share(1)........................ $ (0.04) $ (0.14) $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12)
Shares used in per share calculation(1)...... 1,886 2,748 2,880 2,877 3,189 3,196 3,229
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Pro forma net loss per share(1).............. (1.24) (1.33)
--------- ---------
--------- ---------
Pro forma shares used in per share
calculation(1)............................. 6,873 7,607
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 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 $ 5,314
Working capital................................... 361 484 1,129 3,149 6,944 3,565
Total assets...................................... 677 1,353 1,892 4,586 10,539 16,190
Long-term debt.................................... -- 604 2,108 228 472 6,223
Total stockholders' equity (deficit).............. 369 1 (708) 3,661 7,709 (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 and
pro forma net loss per share.
24
<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 nine months ended September 30, 1997, the Company sold a
limited number of PoPs and cable modems from both product series, which
generated an aggregate of $13,412,000 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, or any significant customer delays payment or fails to pay,
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 provided customers
extended payment, promotional pricing or other terms. For instance, Internet
Ventures, Inc., which accounted for 10.2% of the Company's net sales for the
nine months ended September 30, 1997, has recently been provided extended
payment terms and accounted for 12% of the Company's accounts receivable as of
September 30, 1997. The provision of extended payment terms, or the extension of
promotional payment, pricing or other terms could have a material adverse effect
on the Company's business, operating results and financial condition. See "Risk
Factors--Inexperience in Emerging Market," "Risk Factors--Customer
Concentration," "Risk Factors-- Dependence on Broadband Wireless System
Operators" and "Risk Factors--Competition."
25
<PAGE>
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 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. Due to current customer demand, the Company anticipates that the sales
mix of modems will be weighted toward lower-margin single-user modems in the
foreseeable future. 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 nine months of 1997 of $2,897,000, $5,269,000, $8,515,000
and $10,082,000, respectively. As a result, the Company had an accumulated
deficit of $27,424,000 as of September 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 September 30, 1997, the Company had approximately $12,516,000 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 11 of Notes to
Financial Statements.
26
<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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1997
--------- --------- --------- 1996 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 203.9 120.8 105.7 127.9 89.8
--------- --------- --------- ----------- ---------
Gross margin....................................... (103.9) (20.8) (5.7) (27.9) 10.2
--------- --------- --------- ----------- ---------
Operating expenses:
Research and development............................. 187.3 613.0 171.4 299.8 56.5
Sales and marketing.................................. 52.1 61.9 60.3 76.1 34.2
General and administrative........................... 79.8 118.7 57.8 95.5 27.5
--------- --------- --------- ----------- ---------
Total operating expenses........................... 319.2 793.6 289.5 471.4 118.2
--------- --------- --------- ----------- ---------
Loss from operations............................. (423.1) (814.4) (295.2) (499.3) (108.0)
Interest income and other expense, net............... 4.5 26.3 8.7 11.7 2.0
Interest expense..................................... (15.1) (48.2) (1.0) (1.8) (4.2)
--------- --------- --------- ----------- ---------
Net loss......................................... (433.7)% (836.3)% (287.5)% (489.4)% (110.2)%
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET SALES. Net sales increased to $9,152,000 for the first nine months of
1997, compared to net sales of $1,253,000 for the same period in 1996. The
significant growth in net sales was primarily due to increased unit shipments as
a result of the introduction of the Series 2000 product line in October 1996
offset in part by price declines on certain products in connection with volume
purchases. For the first nine months of 1997, broadband wireless system
operators accounted for 62.2% of net sales, cable systems operators accounted
for 24.5% of net sales and ISPs accounted for 13.3% of net sales. For the first
nine months of 1996, cable system operators accounted for 80.3% of net sales,
ISPs accounted for 11.8% of net sales and broadband wireless system operators
accounted for 7.9% of net sales. International sales accounted for 10.8% and
13.2% of net sales for the first nine months of 1997 and 1996, respectively. The
Company had one customer that accounted for 10.2% of net sales during the first
nine months of 1997. The Company had two customers that accounted for 48.9% and
11.8%, respectively, of net sales during the first nine months of 1996.
GROSS PROFIT. Gross margin was 10.2% and negative 27.9%, for the first nine
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 $5,170,000 and $3,757,000 during the first nine months of 1997 and 1996,
respectively, representing 56.5% and 299.8% 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
27
<PAGE>
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 marketing expenses
were $3,138,000 and $954,000 during the first nine months of 1997 and 1996,
respectively, representing 34.2% and 76.1% 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 $2,516,000 and
$1,196,000 during the first nine months of 1997 and 1996, respectively,
representing 27.5% and 95.5% of net sales, respectively. The increase in
absolute dollars was due to increased charges to the provision for doubtful
accounts headcount, increased legal costs to support the reissuance of the
Company's Patents and related payroll costs.
INTEREST INCOME (EXPENSE). The Company incurred net interest expense during
the first nine months of 1997 of $196,000 and earned interest income of $124,000
during the first nine months of 1996. Net interest expense incurred during the
first nine 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 nine 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 increase in
unit sales due 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
28
<PAGE>
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.
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.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for the seven quarters ended September 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
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................................ $ 303 $ 455 $ 495 $ 1,709 $ 1,852 $ 3,053 $ 4,247
Cost of sales........................................ 408 528 666 1,528 1,974 2,715 3,525
-------- -------- --------- -------- -------- -------- ---------
Gross profit (loss).............................. (105) (73) (171) 181 (122) 338 722
-------- -------- --------- -------- -------- -------- ---------
Operating expenses:
Research and development........................... 1,102 1,167 1,488 1,319 1,726 1,653 1,791
Sales and marketing................................ 103 286 565 832 1,274 990 874
General and administrative......................... 308 437 451 518 1,233 569 714
-------- -------- --------- -------- -------- -------- ---------
Total operating expenses......................... 1,513 1,890 2,504 2,669 4,233 3,212 3,379
-------- -------- --------- -------- -------- -------- ---------
Loss from operations........................... (1,618) (1,963) (2,675) (2,488) (4,355) (2,874) (2,657)
Interest income and other expense, net............... 34 19 93 111 87 48 48
Interest expense..................................... (5) (17) -- (6) (12) (147) (220)
-------- -------- --------- -------- -------- -------- ---------
Net loss....................................... $(1,589) $(1,961) $(2,582) $ (2,383) $(4,280) $(2,973) $(2,829)
-------- -------- --------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- ---------
Net loss per share(1)................................ $ (0.50) $ (0.61) $ (0.81) $ (0.75) $ (1.33) $ (0.92) $ (0.87)
-------- -------- --------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- ---------
Shares used in per share calculations(1)............. 3,182 3,209 3,191 3,172 3,214 3,228 3,245
-------- -------- --------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 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 83.0
-------- -------- --------- -------- -------- -------- ---------
Gross margin....................................... (34.7) (16.0) (34.5) 10.6 (6.6) 11.1 17.0
-------- -------- --------- -------- -------- -------- ---------
Operating expenses:
Research and development........................... 363.7 256.5 300.6 77.2 93.2 54.2 42.2
Sales and marketing................................ 34.0 62.9 114.2 48.7 68.8 32.4 20.6
General and administrative......................... 101.6 96.0 91.1 30.3 66.6 18.6 16.8
-------- -------- --------- -------- -------- -------- ---------
Total operating expenses......................... 499.3 415.4 505.9 156.2 228.6 105.2 79.6
-------- -------- --------- -------- -------- -------- ---------
Loss from operations........................... (534.0) (431.4) (540.4) (145.6) (235.2) (94.1) (62.6)
Interest income and other expense, net............... 11.2 4.2 18.8 6.7 4.7 1.6 1.1
Interest expense..................................... (1.6) (3.8) -- (0.6) (0.7) (4.8) (5.2)
-------- -------- --------- -------- -------- -------- ---------
Net loss....................................... (524.4)% (431.0)% (521.6)% (139.5)% (231.2)% (97.3)% (66.7)%
-------- -------- --------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- ---------
</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.
30
<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 increase in operating expenses for the quarter ended
March 31, 1997 was primarily due to higher charges to the provision for doubtful
accounts, increased promotion costs and higher 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 and a portion of the third 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 the second
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
September 30, 1997, the Company had working capital of $3,565,000, including
$5,314,000 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 equivalents during the first nine months of 1997
was primarily due to support for the growth in accounts receivable and increased
operating expenditures. The decrease in working capital during the first nine
months of 1997 was due to the Subordinated Notes entered into in September 1997
and net losses incurred.
31
<PAGE>
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 for the first nine months of 1997 was $2,642,000,
$3,339,000, $8,577,000 and $14,822,000, respectively. Cash used in operating
activities during 1994, 1995 and 1996 was primarily the result of net losses.
For the first nine months of 1997, cash used in operating activities was the
result of operating losses of $10,082,000, the increase in accounts receivable
of $5,257,000 as a result of higher net sales made late in the quarter and
extended payment terms given to certain customers and the increase in
inventories of $1,125,000 to support higher sales volumes.
Cash used in investing activities during 1994 and 1995 and for the first
nine months of 1997 was $417,000, $608,000 and $434,000, respectively. Cash used
in investing activities during 1994 and 1995 was a result of purchases of short
term investments and purchases of property and equipment. During the first nine
months of 1997, cash used in investing activities resulted principally from
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, primarily for computers, furniture,
fixtures and engineering test equipment, during 1994, 1995 and 1996 and the
first nine months of 1997 were $218,000, $295,000, $321,000 and $400,000,
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. As of September 30, 1997, the Company has no material
commitments for capital expenditures but expects capital expenditures for the
next twelve months to be between $1.0 million to $1.5 million.
Cash provided by financing activities during 1994, 1995 and 1996 and the
first nine months of 1997 was $3,255,000, $5,583,000, $12,457,000 and
$13,684,000, respectively. During 1994 and 1996, cash provided by investing
activities resulted principally from net proceeds from the issuance of
convertible debentures, 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 nine months of 1997,
cash provided by financing activities resulted primarily from net proceeds from
the sale of Preferred Stock, the $5.5 Million Debenture and the sale of $6.9
million of Subordinated Notes.
The Company's principal source of liquidity at September 30, 1997 was cash
and cash equivalents of $5,314,000. In October 1997, the Company also entered
into a commitment for a $4.0 million Credit Facility. The Credit Facility, which
expires in October 1998, will bear interest at the prime rate and will be
collateralized by substantially all of the Company's assets. To date, the
Company has no borrowings outstanding under the Credit Facility. 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."
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 so long as the $5.5
Million Debenture remains outstanding. Under the Subordinated Notes, the Company
is limited in the amount of capital expenditures it may incur in any 12 month
period and in the borrowing of additional funds, and is prevented from, among
other things, declaring dividends and distributing assets so long as the
Subordinated Notes are outstanding. In addition, under the Credit Facility, the
Company may not declare dividends. The $5.5 Million Debenture and the Credit
Facility are collateralized by substantially all of the Company's assets. See
"Risk Factors--Restrictive Debt Covenants" and Notes 5, 6 and 16 of Notes to
Financial Statements.
32
<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
33
<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-
34
<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.
35
<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
36
<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."
37
<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]
38
<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.
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
39
<PAGE>
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.
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
40
<PAGE>
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 and AT&T WorldNet Alcatel Telecom and
Communication, Inc. Inc. DirectNet, Inc. Alcatel Bell N.V.
RCN Corporation CS Wireless Systems, Inc. InterjetNet, Inc. Itochu Corporation
Jones Intercable, Inc. Digital Scientific Inc. Internet Ventures, Inc. Lucent Technologies, Inc.
CableNet Corporation People's Choice TV Media City World, Inc. Network Systems
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 nine months of 1997, Internet
Ventures, Inc. accounted for 10.2% of the Company's net sales. The Company on
occasion has provided customers extended payment, promotional pricing or other
terms. For instance, Internet Ventures, Inc., which accounted for 12% of the
Company's accounts receivable as of September 30, 1997, has recently been
provided extended payment terms. The provision of extended payment terms, or the
extension of promotional payment, pricing or other terms could have a material
adverse effect on the Company's business, operating results and financial
condition. 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 Emerging
Market," "Risk Factors--Dependence on Cable System Operators," "Risk
Factors--Dependence on Broadband Wireless System Operators and "Risk
Factors--Customer Concentration."
41
<PAGE>
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.
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, or any significant customer delays
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payment or fails to pay, 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 provided customers 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.
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. During the second
quarter and a portion of the third 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
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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 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
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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 September 30, 1997, the Company's research and development staff
consisted of 35 full-time employees. The Company's total research and
development expenses for 1994, 1995 and 1996 and the first nine months of 1997
were $1,251,000, $3,862,000, $5,076,000 and $5,170,000, 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."
In addition, from time to time, the Company considers collaborative
relationships with other entities to gain access to certain technologies that
could enhance the Company's product offerings, broaden the market for the
Company's products or accelerate time to market. In connection with such
collaborative relationships, the Company may seek to jointly develop products,
share its technology with other entities and license technology from such
entities.
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."
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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. In addition, the Company could face potential
competition from certain of its suppliers, such as Sharp, if it were to develop
or license modems for sale to others. In addition, suppliers such as Cisco
Systems, which manufactures routers, and Stanford Telecom, which manufactures
QPSK components, could become competitors should they decide to enter the
Company's markets directly. 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 extended payment, pricing,
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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 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
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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 and costly
and therefore have a material adverse effect on the Company's business,
operating results and financial condition.
EMPLOYEES
As of September 30, 1997, the Company had 83 full-time employees of whom 35
were primarily engaged in research and development, 25 in operations, 16 in
sales and marketing and 7 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.
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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 30, 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............................. 59 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 Corporate 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
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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 and was
promoted to Corporate Controller in October 1997. 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.
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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 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.
51
<PAGE>
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 approved the Directors Plan in October 1997. Members of
the Board who are not employees of the Company, or any parent, subsidiary or
affiliate of the Company, are eligible to participate in the Directors Plan.
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.
52
<PAGE>
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. 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>
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
53
<PAGE>
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 September 30, 1997, the Company made no cash payments and issued no 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
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 approved the 1997 Incentive Plan in
October 1997. The 1997 Incentive Plan will become effective upon the Effective
Date and will serve as the successor to the 1992 Plan, 1993 Plan, the Executive
Officer Plan and the 1996 Plan (the "Prior Plans"). Options granted under the
Prior Plans
54
<PAGE>
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. 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. In
addition, any shares issued under the Prior Plans that are repurchased or
forfeited will be available for grant or 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, unless the Board
determines that such increases will not occur for a particular 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. The 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. Over the term of the 1997 Incentive Plan, no
more than 2,750,000 shares may be issued upon the exercise of incentive stock
options. 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 adopted the
Purchase Plan and reserved a total of 225,000 shares of the Company's Common
Stock for issuance thereunder. The Company's stockholders approved the Purchase
Plan in October 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 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
55
<PAGE>
Board. Except for the first Offering Period, each Offering Period will consist
of four purchase periods, each six months in length ("Purchase Period"). The
Compensation Committee 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.
56
<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 nine 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
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<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, a
subsidiary 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
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<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 nine 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 at a face value of $6,882,201 and related
warrants to acquire 252,381 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 were issued to Mr. Steimle's wife.
During the nine months ended September 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 $578,000.
59
<PAGE>
PRINCIPAL AND SELLING 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 September
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 (as defined in "Management--
Executive Compensation") 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 16.6% 12.1%
Strachman Family Revocable Trust(4)....................... 916,710 12.6 9.2
James R. Flach
Accel Partners(5)....................................... 879,562 11.6 8.6
Douglas M. Leone
Sequoia Capital(6)...................................... 870,691 11.5 8.5
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)........................................ 491,159 6.7 4.9
Venture Fund I, L.P.(10).................................. 439,274 5.9 4.3
Gary M. Lauder(11)........................................ 294,569 4.0 2.9
Carl S. Ledbetter(12)..................................... 210,681 2.8 2.1
William H. Fry(13)........................................ 43,431 * *
Gustavo Ezcurra(14)....................................... 26,007 * *
Stephen E. Halprin(15).................................... 5,708 * *
All executive officers and directors as a group (9
persons)(16)............................................. 3,302,732 40.0% 30.1%
</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 September 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. If the Underwriters'
over-allotment option is exercised in full, the total number of shares to be
sold by each Selling Stockholder, the number of shares beneficially owned
before and after the offering by each Selling Stockholder, and the
percentage of shares beneficially owned before and after the offering by
each Selling Stockholder, would be as follows:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
---------------------------- ----------------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE
- ------------------------------------------ ----------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
NextLevel Systems, Inc.................... 282,109 3.9% 195,803 86,306 1.2%
MOD Fund.................................. 279,760 3.8 69,940 209,820 2.9
Kistler Associates........................ 29,630 * 20,565 9,065 *
Susan Harman Niethold..................... 28,573 * 19,512 9,061 *
Catherine P. Lego......................... 78,922 1.1 16,218 62,704 *
Aubrey K. McClendon....................... 19,341 * 13,424 5,917 *
Howard E. Rachofsky....................... 19,341 * 13,424 5,917 *
Milton M. Shiffman........................ 19,341 * 13,424 5,917 *
TLW Investments, Inc...................... 19,341 * 13,424 5,917 *
ABS Employees' Venture Fund L.P........... 40,717 * 11,389 29,328 *
HBA Partnership........................... 24,075 * 7,223 16,852 *
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
---------------------------- ----------------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE
- ------------------------------------------ ----------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Kim S. Peyser............................. 24,260 * 3,704 20,556 *
Needham Capital Group Inc................. 4,836 * 3,356 1,480 *
Cardiovascular Medical Group of Southern
California.............................. 4,836 * 1,852 2,984 *
Edward D. Baker........................... 9,704 * 1,742 7,962 *
-----------
405,000
</TABLE>
(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 250,677 shares subject to warrants held by
Accel IV, L.P., 25,594 shares and 11,769 shares subject to warrants held by
Accel Investors '95 L.P., 13,095 shares and 6,022 shares subject to warrants
held by Ellmore C. Patterson Partners, 11,309 shares and 5,202 shares
subject to warrants held by Accel Keiretsu L.P. Also includes 10,701 shares
subject to options exercisable within 60 days of September 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 250,703 shares subject to warrants held by
Sequoia Capital VI, 29,761 shares and 13,776 shares subject to warrants held
by Sequoia Technology Partners VI, ("STP VI"), 16,932 shares and 440 shares
subject to warrants held by Sequoia XXIV and 6,877 shares and 10,581 shares
subject to warrants 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 66,553 shares subject to warrants. The address of OSCCO III, L.P.
is 3000 Sand Hill Road, 1-290, Menlo Park, CA 94025.
(10) Includes 141,680 shares subject to warrants. The address of Venture Fund I,
L.P., is 3000 Sand Hill Road, Menlo Park, CA 94025.
(11) Includes 83,018 shares subject to warrants and 18,518 shares subject to
options exercisable within 60 days of September 30, 1997. Mr. Lauder is a
director of the Company.
(12) Includes 209,584 shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Ledbetter is the President, Chief Executive Officer
and Chairman of the Board of Directors of the Company.
(13) Includes 38,386 shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Fry is Vice President, Operations of the Company.
(14) Includes 25,799 shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Ezcurra is Vice President, Sales of the Company.
(15) Includes 462 shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Halprin is a director of the Company.
(16) Includes 650,524 shares subject to warrants and 340,487 shares subject to
options exercisable within 60 days of September 30, 1997 held by executive
officers and directors of the Company.
61
<PAGE>
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 September 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 7,273,311 shares of Common Stock held
of record by 161 stockholders, warrants to purchase 1,160,558 shares of Common
Stock, options to purchase 1,974,242 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 September 30, 1997, the Company had outstanding exercisable warrants
to purchase 844,353 shares of Common Stock at $4.73 per share. Warrants to
purchase 835,887 and 8,466 of such shares expire in June 2001 and August 2005,
respectively. 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 addition, warrants to
purchase 252,381 shares of Common Stock (assuming that the Subordinated Notes
and all accrued interest thereon are repayed in full with the proceeds of this
offering) at $10.91 per share expire in September 2002 and a warrant to purchase
2,659 shares of Common Stock at $10.91 per share expires in October 2002.
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
62
<PAGE>
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 6 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. The Subordinated Notes contain certain
restrictive covenants that limit the amount of capital expenditures the Company
may incur in any 12 month period and the borrowing of additional funds and
prohibit the Company from, among other things, declaring dividends and
distributing assets so long as the Subordinated Notes are oustanding. See Note 5
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 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
63
<PAGE>
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 1,148,949
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, assuming no exercise of the Underwriters' over-allotment
option. 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 the Credit Facility 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.
64
<PAGE>
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
9,973,311 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 7,273,311 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 7,273,311 Restricted Shares will be eligible for
sale in the public market, although all but 3,067,038 shares will be subject to
certain volume limitations. Holders of warrants for 1,148,949 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 100,000 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
65
<PAGE>
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 Incentive Plan, the Directors
Plan and the Purchase Plan. Based on the number of shares subject to outstanding
options at September 30, 1997 and currently reserved for issuance under all such
plans, such registration statement would cover approximately 4,020,455 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."
66
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities, Inc. 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>
NationsBanc Montgomery Securities, Inc...........................................
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 Selling Stockholders have 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 and, to the extent the
Underwriters' over-allotment option is exercised, the Selling Stockholders 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 NationsBanc Montgomery Securities, Inc., 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 NationsBanc Montgomery Securities, Inc., 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.
67
<PAGE>
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 balance sheets of Hybrid Network, Inc. as of December 31, 1995 and 1996
and September 30, 1997 and the statement of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996 and the nine months ended September 30, 1997 included in this
Prospectus and the financial statement schedule for the aforementioned periods
included in the registration statement for the offering have been included in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in auditing and accounting.
68
<PAGE>
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.
69
<PAGE>
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.
70
<PAGE>
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).
71
<PAGE>
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.
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.
72
<PAGE>
QPSK
Quadrature Phase Shift Keying. A modulation technique used to transmit
digital signals.
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 digital signal at a
rate of 1.544 Mbps.
T-3
A digital carrier facility capable of transmitting a digital signal at a
rate of 44.746 Mbps.
TCP/IP
Transport Control Protocol/Internet Protocol. 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, which converts a data stream into a format suitable for transmission.
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).
73
<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 September 30, 1997..................................... F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 (unaudited) and 1997.................................................................. F-4
Statements for Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996 and for
the Nine Months Ended September 30, 1997................................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 (unaudited) and 1997.................................................................. 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 September 30, 1997, and the related statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1996 and for the nine months ended
September 30, 1997. 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 September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
October 16, 1997, except
for Note 16, for
which the date is
October 21, 1997.
F-2
<PAGE>
HYBRID NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, SEPTEMBER 30, DEFICIT
-------------------- ------------- (NOTE 15)
1995 1996 1997 SEPTEMBER 30, 1997
--------- --------- ------------- ------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,863 $ 6,886 $ 5,314
Short-term investments.................................... 490 -- --
Accounts receivable, net of allowance for doubtful
accounts of none in 1995 and 1996 and $675 in 1997...... 287 1,348 5,954
Inventories............................................... 196 943 2,068
Prepaid expenses and other current assets................. 10 125 199
--------- --------- -------------
Total current assets.................................... 3,846 9,302 13,535
Property and equipment, net................................. 707 1,178 1,767
Deferred financing costs.................................... -- -- 490
Other assets................................................ 33 59 398
--------- --------- -------------
Total assets............................................ $ 4,586 $ 10,539 $ 16,190
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible subordinated note payable..................... $ -- $ -- $ 6,632
Accounts payable.......................................... 280 1,424 1,712
Accrued liabilities....................................... 307 712 1,222
Current portion of capital lease obligations.............. 110 222 404
--------- --------- -------------
Total current liabilities............................... 697 2,358 9,970
Convertible debenture....................................... -- -- 5,500
Capital lease obligations, less current portion............. 184 438 723
Other liabilities........................................... 44 34 --
--------- --------- -------------
Total liabilities....................................... 925 2,830 16,193
--------- --------- -------------
Commitments (Note 9)
Stockholders' equity (deficit):
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: $27,750 at September 30, 1997)
Common stock, $.001 par value:
Authorized: 34,000 shares;
Issued and outstanding: 2,497 shares in 1995, 2,520
shares in 1996 and 2,620 shares in 1997; 7,273 pro
forma shares.......................................... 2 2 2 $ 15
Additional paid-in capital.................................. 12,478 25,037 27,406 27,406
Accumulated deficit......................................... (8,827) (17,342) (27,424) (27,424)
--------- --------- ------------- --------
Total stockholders' equity (deficit).................... 3,661 7,709 (3) $ (3)
--------- --------- ------------- --------
--------
Total liabilities and stockholders' equity
(deficit)........................................... $ 4,586 $ 10,539 $ 16,190
--------- --------- -------------
--------- --------- -------------
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------------
1994 1995 1996 1997
--------- --------- --------- 1996 ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................................... $ 668 $ 630 $ 2,962 $ 1,253 $ 9,152
Cost of sales........................................... 1,362 761 3,130 1,602 8,214
--------- --------- --------- ----------- ----------
Gross profit (loss)................................. (694) (131) (168) (349) 938
--------- --------- --------- ----------- ----------
Operating expenses:
Research and development.............................. 1,251 3,862 5,076 3,757 5,170
Sales and marketing................................... 348 390 1,786 954 3,138
General and administrative............................ 533 748 1,714 1,196 2,516
--------- --------- --------- ----------- ----------
Total operating expenses............................ 2,132 5,000 8,576 5,907 10,824
--------- --------- --------- ----------- ----------
Loss from operations.............................. (2,826) (5,131) (8,744) (6,256) (9,886)
Interest income and other expense, net.................. 30 166 257 146 183
Interest expense........................................ (101) (304) (28) (22) (379)
--------- --------- --------- ----------- ----------
Net loss.......................................... $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082)
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Net loss per share...................................... $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12)
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Shares used in per share calculation.................... 2,880 2,877 3,189 3,196 3,229
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Pro forma net loss per share............................ $ (1.24) $ (1.33)
--------- ----------
--------- ----------
Pro forma shares used in per share calculation.......... 6,873 7,607
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HYBRID NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<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.................... -- -- 6 -- 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 2,497 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 2,520 2 25,037 (17,342) 7,709
Exercise of common stock
options................... -- -- 93 -- 55 -- 55
Repurchase of common
stock..................... -- -- (12) -- (7) -- (7)
Grant of stock bonus
awards.................... -- -- 13 -- 38 -- 38
Issuance of common stock for
services rendered......... -- -- 6 -- 34 -- 34
Issuance of Series H
preferred stock........... 494 1 -- -- 1,999 -- 2,000
Issuance of warrants in
connection with
convertible subordinated
notes payable............. -- -- -- -- 250 -- 250
Net loss.................... -- -- -- -- -- (10,082) (10,082)
------ ------ ------ --- ----------- ----------- -------
Balances, September 30,
1997........................ 12,563 $13 2,620 $ 2 $27,406 $(27,424) $ (3)
------ ------ ------ --- ----------- ----------- -------
------ ------ ------ --- ----------- ----------- -------
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1994 1995 1996 1997
--------- --------- --------- 1996 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 70 162 322 230 530
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 -- -- 72
Change in assets and liabilities:
Accounts receivable.......................................... 51 (224) (1,061) 13 (5,257)
Inventories.................................................. (50) (81) (747) (247) (1,125)
Prepaid expenses and other current assets.................... 5 7 (115) (106) (34)
Accounts payable............................................. 78 102 1,144 384 (92)
Accrued liabilities and other................................ 101 1,418 395 89 476
--------- --------- --------- ----------- ---------
Net cash used in operating activities...................... (2,642) (3,339) (8,577) (5,769) (14,822)
--------- --------- --------- ----------- ---------
Cash flows from investing activities:
Purchase of property and equipment............................... (218) (295) (321) (288) (400)
Change in other assets........................................... -- (22) (26) (26) (34)
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) 143 176 (434)
--------- --------- --------- ----------- ---------
Cash flows from financing activities:
Repayment of capital lease obligations........................... -- (20) (106) (15) (208)
Repayment of notes payable....................................... (25) -- -- -- --
Proceeds from issuance of preferred stock warrants............... -- 18 -- -- --
Proceeds from convertible subordinated note payable.............. -- -- -- -- 6,844
Net proceeds from issuance of convertible debenture.............. 2,344 -- 3,160 3,160 5,000
Net proceeds from issuance of preferred stock.................... 944 5,558 9,378 9,378 2,000
Proceeds from issuance of common stock........................... -- 27 34 24 55
Repurchase of common stock....................................... (8) -- (9) -- (7)
--------- --------- --------- ----------- ---------
Net cash provided by financing activities.................. 3,255 5,583 12,457 12,547 13,684
--------- --------- --------- ----------- ---------
Increase (decrease) in cash and cash equivalents................... 196 1,636 4,023 6,954 (1,572)
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 $ 9,817 $ 5,314
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
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............. -- 314 472 259 $ 675
Capitalization of finance costs.................................. -- -- -- --
Capitalization of initial public offering costs.................. -- -- -- -- 340
Issuance of warrants in connection with subordinated notes
payable........................................................ -- -- -- -- 250
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................... $ 5 $ 5 $ 28 $ 18 $ 379
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
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. The Company performs ongoing credit evaluations of
its customers and does not require collateral. The Company also maintains
allowances for potential losses on collectibility of accounts receivable and
such losses have been within Management's expectations. 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. As of September 30, 1997, two customers represented
12% and 11% 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 and
September 30, 1997 are in
F-7
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
three demand accounts 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 are amortized over
the five year life of the debenture (see Note 6).
REVENUE RECOGNITION
The Company recognizes revenue and accrues for estimated warranty costs upon
shipment of products. Actual warranty costs incurred have not materially
differed from those provided.
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 provides the required pro forma disclosures (see Note 10).
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
anticipated initial public offering price). Pro forma net loss per share assumes
that the common shares
F-8
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
issuable upon conversion of the outstanding convertible preferred stock have
been outstanding during such periods.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim statement of operations and cash flow for the nine
months ended September 30, 1996 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 results of operations
and cash flows for the period ended September 30, 1996. Results for the nine
months ended September 30, 1996 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)
3. INVENTORIES
Inventories are comprised of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Raw materials............................................ $ 98 $ 526 $ 1,557
Work in progress......................................... 93 267 246
Finished goods........................................... 5 150 265
--------- --------- ------
$ 196 $ 943 $ 2,068
--------- --------- ------
--------- --------- ------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, including furniture and equipment under capital
leases, (cost of $314,000, $786,000 and $1,461,000 accumulated amortization of
$36,000, $177,000 and $437,000 as of December 31, 1995 and 1996 and September
30, 1997, respectively) consist of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Machinery and equipment..................................... $ 755 $ 1,440 $ 2,538
Office furniture and fixtures............................... 91 107 163
Leasehold improvements...................................... 97 189 110
--------- --------- -------------
943 1,736 2,811
Less accumulated depreciation and amortization.............. (236) (558) (1,044)
--------- --------- -------------
$ 707 $ 1,178 $ 1,767
--------- --------- -------------
--------- --------- -------------
</TABLE>
5. CONVERTIBLE SUBORDINATED NOTE PAYABLE
In September 1997, the Company entered into a Convertible Subordinated
Promissory Note Purchase Agreement to issue $6,882,000 of subordinated notes at
10% interest (increasing to 18% after March 30, 1998 under certain
circumstances). The principal amount of the notes are payable at the earliest of
September 30, 1998 or the effective date of an initial public offering of the
Company's common stock. The notes may become due earlier under certain
circumstances. At the option of the holders, the outstanding balance of the
subordinated notes may be converted to equity capital of the Company. In
connection with the Convertible Subordinated Note Purchase Agreement, the
Company issued 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 252,381.
However if the debt is repaid at a later date the number of shares exercisable
under the warrants can increase to a maximum of 630,932 shares. The amount
attributed to the value of the warrants is $250,000 which has been allocated to
stockholders' equity and will be amortized to interest expense over the term of
the note. The Company must comply with certain restrictive covenants, including
non-payment of dividends, as long as the notes are outstanding.
F-10
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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 debt other than in accordance with its terms, or distribute its
assets to any stockholder as long as the debenture remains outstanding.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Accrued payroll and related accruals........................... $ 244 $ 425 $ 768
Other liabilities.............................................. 63 287 454
--------- --------- ------
$ 307 $ 712 $ 1,222
--------- --------- ------
--------- --------- ------
</TABLE>
8. 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 September 30, 1997, no amount remained available under this
lease line, which expired on September 15, 1997. Capital leases at September 30,
1997 expire at various dates through March 2002 and bear interest ranging from
7.6% to 10.8%.
F-11
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments under all capital leases are as follows (in
thousands):
<TABLE>
<S> <C>
1997................................................................ $ 119
1998................................................................ 474
1999................................................................ 407
2000................................................................ 244
2001................................................................ 10
---------
1,254
Less amount representing interest................................... (127)
---------
1,127
Less current portion................................................ (404)
---------
$ 723
---------
---------
</TABLE>
9. 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.
Future minimum lease payments are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
1997................................................................. $ 118
1998................................................................. 216
1999................................................................. 57
2000................................................................. 55
2001................................................................. 52
Thereafter........................................................... 9
---------
$ 507
---------
---------
</TABLE>
Rent expense for 1994, 1995, 1996 and nine months ended September 30, 1997
was approximately $115,000, $191,000, $263,000, and $341,000 respectively.
10. STOCKHOLDERS' EQUITY (DEFICIT)
REVERSE STOCK SPLIT
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 Certificate of Incorporation which eliminates the existing convertible
preferred stock and changes the number of authorized preferred stock to
5,000,000 shares, $0.001 per 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-12
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INITIAL PUBLIC OFFERING
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.
CONVERTIBLE PREFERRED STOCK
The convertible preferred stock as of December 31, 1996 and September 30,
1997 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, September 30, 1997........................ 18,000 12,563 $ 26,391 $ 27,750
----------- ----------- --------- -----------
----------- ----------- --------- -----------
</TABLE>
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 September 30, 1997.
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. 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 ($18.10 at September 30, 1997 after giving
F-13
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
effect to a 1-for-2.7 reverse split), 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
4,653,585 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 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
The Company has historically issued warrants in connection with its various
rounds of financing, equipment lease lines, and transfers of technology. The
value of the warrants was assessed using the Black-Scholes Model and determined
to be insignificant for financial reporting purposes.
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
F-14
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS (CONTINUED)
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.
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 13 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.
In September 1997 the Company issued warrants to purchase 252,381 shares of
common stock in connection with their convertible subordinated note payable.
(See Note 5).
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 September 30,
1997, no 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.
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 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.
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
F-15
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
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-16
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (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 PURCHASE AVERAGE
SHARES RIGHTS EXERCISE PRICE RIGHTS EXERCISE
AVAILABLE OUTSTANDING PER SHARE OUTSTANDING PRICE
----------- ------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994........................ 359 24 -- -- --
Additional shares reserved..................... 185 -- -- -- --
Restricted stock issued........................ (226) -- -- -- --
Options granted................................ (200) 200 $0.27-$0.54 $ 71 $ 0.36
Options canceled............................... 51 (51) 0.27 (14) 0.27
----------- ----- ------
Balances, December 31, 1994...................... 169 173 0.27-0.54 57 0.33
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............................. (6) -- 0.54 -- 0.54
Options canceled............................... 90 (90) 0.27-0.54 (35) 0.39
Options exercised.............................. -- (9) 0.27-0.54 (3) 0.33
----------- ----- ------
Balances, December 31, 1995...................... 696 309 0.27-0.54 146 0.47
Additional shares reserved..................... 741 -- -- -- --
Options granted................................ (1,267) 1,267 0.54-1.08 865 0.68
Stock repurchased.............................. 11 -- 0.54 -- --
Options canceled............................... 32 (32) 0.27-0.54 (14) 0.44
Options exercised.............................. -- (65) 0.54 (35) 0.54
----------- ----- ------
Balances, December 31, 1996...................... 213 1,479 0.27-1.08 962 0.65
Additional shares reserved..................... 2,409 -- -- -- --
Options granted................................ (801) 801 1.08-11.04 4,658 5.82
Stock bonus awards............................. (13) 13 1.08-5.40 -- 2.97
Stock repurchased.............................. 12 -- 0.58 -- --
Options canceled............................... 226 (226) 0.54-2.16 (199) 0.88
Options exercised.............................. -- (93) 0.27-1.08 (55) 0.59
----------- ----- ------
Balances, September 30, 1997..................... 2,046 1,974 $0.27-$11.04 $ 5,366 $ 2.72
----------- ----- ------
----------- ----- ------
</TABLE>
For the years ended December 31, 1995 and 1996 and nine months ended
September 30, 1997, the weighted average fair value of options granted was
$0.42, $0.81 and $3.44 per share, respectively.
F-17
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
As of September 30, 1997, 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 57 1.78 $ 0.27 50 $ 0.27
0.54 904 3.40 0.54 357 0.54
1.08 294 4.08 1.08 74 1.08
2.16 75 4.48 2.16 10 2.16
2.70 159 4.64 2.70 1 2.70
5.40 201 4.79 5.40 -- 5.40
8.78 114 4.92 8.78 -- 8.78
11.04 170 4.96 11.04 -- 11.04
----- ---
1,974 $ 2.73 492 $ 0.62
----- ---
----- ---
</TABLE>
As of December 31, 1995 and 1996, options to purchase 125,000 and 294,000
shares were exercisable at an average weighted exercise price of $0.46 and
$0.54, respectively.
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, 1996
and the nine months ended September 30, 1997 consistent with the provisions of
SFAS No. 123, the Company's net loss and net loss per share for 1995, 1996, and
the nine months ended September 30, 1997 would have been increased to the pro
forma amounts indicated below (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- ------------------
1995 1996 1997
--------- --------- ------------------
<S> <C> <C> <C>
Net loss--as reported...................................... $ 5,269 $ 8,515 $ 10,082
--------- --------- -------
--------- --------- -------
Net loss--pro forma........................................ $ 5,275 $ 8,548 $ 10,259
--------- --------- -------
--------- --------- -------
Net loss per share--as reported............................ $ (1.83) $ (2.67) $ (3.12)
--------- --------- -------
--------- --------- -------
Net loss per share--pro forma.............................. $ (1.83) $ (2.68) $ (3.18)
--------- --------- -------
--------- --------- -------
</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 and the nine months ended September 30,
F-18
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
1997; dividend yield of 0%, volatility of 0%, risk-free interest rates of 5.18%
to 7.68% at the date of grant and an expected term of four years.
11. INCOME TAXES
Temporary differences which gave rise to significant portions of deferred
tax assets are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards......................... $ 2,120 $ 4,119 $ 6,557
Capitalized research expenditures........................ 1,501 3,553 4,415
Tax credit carryforwards................................. 221 637 855
Inventory reserves....................................... 67 103 197
Other accrued liabilities................................ 46 104 492
--------- --------- -------------
Total deferred asset................................... 3,955 8,516 12,516
Valuation allowance...................................... (3,955) (8,516) (12,516)
--------- --------- -------------
Net deferred asset..................................... $ -- $ -- $ --
--------- --------- -------------
--------- --------- -------------
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is 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, $4,561,000 and $4,000,000 in 1994, 1995, 1996 and for
the nine months ended September 30, 1997, respectively. The Company had federal
and state net operating loss carryforwards of approximately $28,000,000 and
$18,000,000, respectively, as of September 30, 1997 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..................................... $ 535,000 2007-2010
State research and development credit............................... $ 320,000 1997-2011
</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.
12. 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 1994, 1995, 1996 and
for the nine months of 1997, the Company made no employer contributions.
F-19
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. 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, 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 accrued interest of $402,000 as an additional capital
contribution related to the issuance of the Series E preferred stock.
In connection with these borrowing 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 $578,000 and $288,000,
respectively, for the nine months ending September 30, 1997.
An executive officer of the Company contributed $500,000 or 7% of the
proceeds received from the issuance of the $6,882,000 convertible subordinated
note payable as referred to at Note 5.
14. 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>
NINE MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
--------- --------- --------- ---------------------
<S> <C> <C> <C> <C>
A.............................. 24% 28% 41% 10%
B.............................. 60 52 21 --
C.............................. 12 -- -- --
</TABLE>
15. 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 10. 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
September 30, 1997.
16. SUBSEQUENT EVENTS
In October 1997, the Company entered into a credit facility agreement with a
bank which provides for borrowings up to a maximum of $4,000,000. Borrowings
under the line of credit, which expires in October 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.
F-20
<PAGE>
HYBRID NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (CONTINUED)
In October 1997, the stockholders of the Company approved a 1-for-2.7
reverse split of the Company's common stock and a corresponding change in the
preferred stock conversion ratios.
F-21
<PAGE>
BACK INSIDE COVER
[PHOTO OF COMPUTER SCREEN, KEYBOARD AND MODEM]
WE MAKE THE INTERNET FLY-TM-
<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........................................................... 21
DIVIDEND POLICY........................................................... 21
CAPITALIZATION............................................................ 22
DILUTION.................................................................. 23
SELECTED FINANCIAL DATA................................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 25
BUSINESS.................................................................. 33
MANAGEMENT................................................................ 49
CERTAIN TRANSACTIONS...................................................... 57
PRINCIPAL AND SELLING STOCKHOLDERS........................................ 60
DESCRIPTION OF CAPITAL STOCK.............................................. 62
SHARES ELIGIBLE FOR FUTURE SALE........................................... 65
UNDERWRITING.............................................................. 67
LEGAL MATTERS............................................................. 68
EXPERTS................................................................... 68
ADDITIONAL INFORMATION.................................................... 69
GLOSSARY OF TERMS......................................................... 70
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
------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
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................................. 42,320
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..................................................... 54,660
---------
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 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 in connection with defending a civil or criminal
action, suit or proceeding (except if the agent is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board of
Directors 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 willful and
deliberate breach in bad faith of such agent's duty to the corporation or its
stockholders; and (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.
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 actually
and 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 or officers of the Registrant or as directors or officers
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
II-1
<PAGE>
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, the charter documents or any
other statute or law or otherwise although indemnification may be provided by
the Company in specific cases if the Board of Directors finds it appropriate,
(ii) for any amounts paid in settlement of a proceeding unless the Registrant
consents in advance in writing 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 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 Certificate of Incorporation, 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.
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 October 21, 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>
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant since October 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
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
Nineteen (19) investors including
certain affiliates of the
Company.......................... 9/97 Subordinated Notes and Warrants $6,882,201 6,882,201(1)
to purchase Common Stock at face value
$10.91 per share 252,387
Officers, directors, employees and
consultants...................... 10/94-9/97 Exercise of options to purchase 205,518 144,007(13)
Common Stock restricted stock
awards and stock bonuses (12)
Venture Bank Group................. 10/97 Warrant to purchase Common Stock 2,659 -- (14)
at $10.91 per share
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
II-3
<PAGE>
- ------------------------------
(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.
(13) In consideration for cash and services rendered to the Company.
(14) In consideration for extending a credit facility to the Registrant in the
amount of $4.0 million.
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 October 21, 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 September 18,
1997 between Registrant and certain investors, as amended October 13,
1997.
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 18, 1997, form of
Convertible Subordinated 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* and Addendum No. 1 thereto dated
November 25, 1996.
10.16 -- Sales and Purchase Agreement between Registrant and Itochu Corporation
dated January 10, 1997.*/**
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
10.17 -- Value Added Reseller Agreement between Registrant and Internet Ventures,
Inc. dated July 1, 1996.*/**
<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.*
10.20 -- Loan and Security Agreement between Venture Banking Group and Registrant
dated October 16, 1997, Form of Common Stock Purchase Warrant and
Subordination Agreements among the Registrant and certain
securityholders of the Registrant dated October 16, 1997.
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.*
27.01 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ To be filed 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) The following financial statement schedule is included on pages S-1 and
S-2:
Report on Financial Statement Schedule.
Valuation allowance for doubtful accounts.
Valuation allowance for deferred tax asset.
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.
II-6
<PAGE>
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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Cupertino, State of
California, on the 22nd day of October, 1997.
HYBRID NETWORKS, INC.
By: /s/ CARL S. LEDBETTER
-----------------------------------------
Carl S. Ledbetter
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Act, this Amendment to
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 October 22, 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 October 22, 1997
Dan E. Steimle and Secretary
ADDITIONAL DIRECTORS:
/s/ JAMES R. FLACH*
- ------------------------------ Director October 22, 1997
James R. Flach
/s/ STEPHEN E. HALPRIN*
- ------------------------------ Director October 22, 1997
Stephen E. Halprin
/s/ GARY M. LAUDER*
- ------------------------------ Director October 22, 1997
Gary M. Lauder
/s/ DOUGLAS M. LEONE*
- ------------------------------ Director October 22, 1997
Douglas M. Leone
- ------------------------------ Director October 22, 1997
Howard L. Strachman
*By: /s/ DAN E. STEIMLE
-------------------------
Dan E. Steimle
ATTORNEY-IN-FACT
II-8
<PAGE>
REPORT ON FINANCIAL SCHEDULE
Our report on the financial statements is included on page F-2 of this Form
S-1. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on page S-2
of this Form S-1.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
San Jose, CA
October 16, 1997
S-1
<PAGE>
HYBRID NETWORKS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
VALUATION ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
FOR THE YEAR ENDED: OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------------------------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1994........................................ -- -- -- -- --
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
December 31, 1995........................................ -- -- -- -- --
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
December 31, 1996........................................ -- -- -- -- --
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
<CAPTION>
FOR THE NINE MONTHS ENDED:
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1997....................................... -- $ 690 -- $ 15 $ 675
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
VALUATION ALLOWANCE FOR DEFERRED TAX ASSET
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
FOR THE YEAR ENDED: OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------------------------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1994........................................ $ 474 $ 1,136 -- -- $ 1,610
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
December 31, 1995........................................ $ 1,610 $ 2,345 -- -- $ 3,955
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
December 31, 1996........................................ $ 3,955 $ 4,561 -- -- $ 8,516
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
<CAPTION>
FOR THE NINE MONTHS ENDED:
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1997....................................... $ 8,516 $ 4,000 -- -- $ 12,516
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <C> <S>
1.01 -- Underwriting Agreement (draft dated October 21, 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 September 18,
1997 between Registrant and certain investors, as amended October 13,
1997.
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 18, 1997, form of
Convertible Subordinated 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* and Addendum No. 1 thereto 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.*/**
10.18 -- Value Added Reseller Agreement between Registrant and Network System
Technologies dated November 25, 1996.*/**
10.19 -- Registrant's Incentive Based Compensation Program.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <C> <S>
10.20 -- Loan and Security Agreement between Venture Banking Group and Registrant
dated October 16, 1997, Form of Common Stock Purchase Warrant and
Subordination Agreements among the Registrant and certain
securityholders of the Registrant dated October 16, 1997.
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.*
27.01 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ To be filed 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>
WSGR DRAFT DATED 10/21/97
2,700,000 SHARES
HYBRID NETWORKS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED [___]
<PAGE>
UNDERWRITING AGREEMENT
[Date]
NATIONSBANC MONTGOMERY SECURITIES, INC.
UBS SECURITIES LLC
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
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,
certain stockholders of the Company named on SCHEDULE B (the "Selling
Stockholders") have severally granted to the Underwriters an option to purchase
up to an additional [___________] shares of Common Stock, each Selling
Stockholder selling up to the amount set forth opposite such Selling
Stockholder's name in SCHEDULE B, all as provided in Section 2. The additional
[_____________] shares to be sold by the Selling Stockholders pursuant to such
option are exclusively called the "Optional Common Shares." The Firm Common
Shares and, if and to the extent such option is exercised, the Optional Common
Shares are collectively called the "Common Shares." NationsBanc Montgomery
Securities, Inc. 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. 333-36001), 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 NationsBanc Montgomery
Securities, Inc., elected to rely upon Rule 434 under the Securities Act,
-2-
<PAGE>
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 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 and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
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.
-3-
<PAGE>
(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.
(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.
-4-
<PAGE>
(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 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 (including the shares of
Common Stock owned by the Selling Stockholders) 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
-5-
<PAGE>
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 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.
-6-
<PAGE>
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.
(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
-7-
<PAGE>
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 and destruction. 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.
(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
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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 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.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder represents, warrants and covenants to each Underwriter
as follows:
(a) THE UNDERWRITING AGREEMENT. This Agreement has been duly authorized,
executed and delivered by or on behalf of such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof
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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.
(b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the
(i) Custody Agreement signed by such Selling Stockholder and Boston Equiserve,
as custodian (the "Custodian"), relating to the deposit of the Common Shares to
be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of
Attorney appointing certain individuals named therein as such Selling
Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set
forth therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification 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 the rights and remedies of creditors or by general
equitable principles.
(c) TITLE TO COMMON SHARES TO BE SOLD; ALL AUTHORIZATIONS OBTAINED. Such
Selling Stockholder has, and on the First Closing Date and the Second Closing
Date (as defined below) will have, good and valid title to all of the Common
Shares which may be sold by such Selling Stockholder pursuant to this Agreement
on such date and the legal right and power, and all authorizations and approvals
required by law and under its charter or by-laws, or other organizational
documents to enter into this Agreement and its Custody Agreement and Power of
Attorney, to sell, transfer and deliver all of the Common Shares which may be
sold by such Selling Stockholder pursuant to this Agreement and to comply with
its other obligations hereunder and thereunder.
(d) DELIVERY OF THE COMMON SHARES TO BE SOLD. Delivery of the Common
Shares which are sold by such Selling Stockholder pursuant to this Agreement
will pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other claim.
(e) NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED.
The execution and delivery by such Selling Stockholder of, and the performance
by such Selling Stockholder of its obligations under, this Agreement, the
Custody Agreement and the Power of Attorney will not contravene or conflict
with, result in a breach of, or constitute a Default under, or require the
consent of any other party to, the charter or by-laws, or other organizational
documents of such Selling Stockholder or any other agreement or instrument to
which such Selling Stockholder is a party or by which it is bound or under which
it is entitled to any right or benefit, any provision of applicable law or any
judgment, order, decree or regulation applicable to such Selling Stockholder of
any court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over such Selling Stockholder. 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
consummation by such Selling Stockholder of the transactions contemplated in
this Agreement, except such as have been obtained or made and are in full force
and effect under the Securities Act, applicable state securities or blue sky
laws and from the NASD.
(f) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such Selling Stockholder
does not have any registration or other similar rights to have any equity or
debt securities registered for sale by the
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Company under the Registration Statement or included in the offering
contemplated by this Agreement, except for such rights as are described in the
Prospectus under "Shares Eligible for Future Sale."
(g) NO FURTHER CONSENTS, ETC. Except for the (i) exercise by such
Selling Stockholder of certain registration rights pursuant to the Investor
Rights Agreement originally dated as of September 16, 1992 and last amended as
of April 30, 1997 (the "Rights Agreement") (which registration rights have been
duly exercised pursuant thereto), (ii) consent of such Selling Stockholder to
the respective number of Common Shares to be sold by all of the Selling
Stockholders pursuant to this Agreement and (iii) waiver by certain other
holders of Common Stock of certain registration rights pursuant to such Rights
Agreement no consent, approval or waiver is required under any instrument or
agreement to which such Selling Stockholder is a party or by which it is bound
or under which it is entitled to any right or benefit, in connection with the
offering, sale or purchase by the Underwriters of any of the Common Shares which
may be sold by such Selling Stockholder under this Agreement or the consummation
by such Selling Stockholder of any of the other transactions contemplated
hereby.
(h) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS. All
information furnished by or on behalf of such Selling Stockholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
First Closing Date and the Second Closing Date will be, true, correct, and
complete in all material respects, and does not, and on the First Closing Date
and the Second Closing Date will not, contain any untrue statement of a material
fact or omit to state any material fact necessary to make such information not
misleading. Such Selling Stockholder confirms as accurate the number of shares
of Common Stock set forth opposite such Selling Stockholder's name in the
Prospectus under the caption "Principal and Selling Stockholders" (both prior to
and after giving effect to the sale of the Common Shares).
(i) NO PRICE STABILIZATION OR MANIPULATION. Such Selling Stockholder 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.
(j) CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES. Such Selling
Stockholder has no reason to believe that the representations and warranties of
the Company contained in Section 1(A) hereof are not true and correct, is
familiar with the Registration Statement and the Prospectus and has no knowledge
of any material fact, condition or information not disclosed in the Registration
Statement or the Prospectus which has had or may have a Material Adverse Effect
and is not prompted to sell shares of Common Stock by any information concerning
the Company which is not set forth in the Registration Statement and the
Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
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(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 Selling
Stockholders hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 405,000 Optional Common Shares
from the Selling Stockholders at the purchase price per share to be paid by the
Underwriters for the Firm Common 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 and the Selling Stockholders, 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, (a) 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 and (b) each Selling Stockholder
agrees, severally and not jointly, to sell 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 sold as the number of Optional Common
Shares set forth in SCHEDULE B opposite the name of such Selling Stockholder
bears to the total number of
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Optional 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 and the Selling Stockholders.
(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 to be
sold by the Company shall be made at the First Closing Date by wire transfer of
immediately available funds to the order of the Company. Payment for the Common
Shares to be sold by the Selling Stockholders shall be made at the First Closing
Date or the Second Closing Date, as the case may be, by wire transfer of
immediately available funds to the order of the Custodian.
It is understood that the Representatives have been authorized, for their
own account 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.
NationsBanc Montgomery Securities, Inc., individually and not as the
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.
Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Stockholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Stockholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Stockholder hereunder and to hold such amounts for the account of such
Selling Stockholder with the Custodian under the Custody 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 the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Selling Stockholders
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 from them at the First Closing
Date or the Second Closing Date, as the case may be, against the irrevocable
release of a wire 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 a location in
New York City as the Representatives may
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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.
A. COVENANTS OF THE COMPANY.
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 (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 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.
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(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 NationsBanc Montgomery Securities, Inc.
(which consent may be withheld at the sole discretion of NationsBanc Montgomery
Securities, Inc.), 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 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
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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
NationsBanc Montgomery Securities, Inc. (which consent may be withheld at the
sole discretion of NationsBanc Montgomery Securities, Inc.).
(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.
(l) AGREEMENT NOT TO RELEASE LOCK-UP RESTRICTIONS ON SECURITIES. During
the period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of NationsBanc Montgomery Securities,
Inc. (which consent may be withheld at the sole discretion of NationsBanc
Montgomery Securities, Inc.), directly or indirectly, release, waive or
otherwise fail to enforce any lock-up or other market stand-off agreement with
stockholders, option holders or others to which the Company is a party.
B. COVENANTS OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder further covenants and agrees with each Underwriter
as follows:
(a) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. Such Selling
Stockholder will not, without the prior written consent of NationsBanc
Montgomery Securities, Inc. (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 Exchange Act, 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.
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(b) DELIVERY OF FORMS W-8 AND W-9. To deliver to the Representative
prior to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States Person).
SECTION 4. PAYMENT OF EXPENSES.
The Company and the Selling Stockholders, jointly and severally, agree,
whether or not the transactions contemplated hereunder are consummated, to pay
all costs, fees and expenses incurred in connection with the performance of
their 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, 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 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.
The Selling Stockholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Stockholders, (ii) fees and expenses
of the Custodian and (iii) expenses and taxes incident to the sale and delivery
of the Common Shares to be sold by such Selling Stockholders to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Stockholders, on the other hand.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
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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 and
the Selling Stockholders set forth in Sections 1(A) and 1(B) 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 and the Selling Stockholders
of their respective 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 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,
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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 SELLING STOCKHOLDERS. On each of the First
Closing Date and the Second Closing Date, the Representatives shall have
received the favorable opinion of counsel for each Selling Stockholder, dated as
of such Closing date, in the form attached as EXHIBIT B (and the Representatives
shall have received an additional [___] conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(f) SELLING STOCKHOLDERS' CERTIFICATE. On each of the First Closing Date
and the Second Closing Date, the Representatives shall have received a written
certificate executed by or on behalf of each Selling Stockholder, dated as of
such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such
Selling Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such Selling
Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder 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.
(g) SELLING STOCKHOLDERS' DOCUMENTS. On the date hereof, the Company and
the Selling Stockholders shall have furnished for review by the Representatives
copies of the Power of Attorney and Custody Agreements executed by each of the
Selling Stockholders and such further information, certificates and documents as
the Representatives may reasonably request.
(h) 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 with respect to the matters
set forth in paragraphs (i), (vii) (with respect to subparagraph (i) only),
(ix), (x) and (xii) (with respect to the caption "Description of Capital Stock"
subparagraph (i) only), 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).
(i) 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).
(j) 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:
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(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.
(k) 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).
(l) 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.
(m) 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 and the Selling Stockholders 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
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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. Each of the Company and each
Selling Stockholder, severally and not jointly, 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 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 or such Selling Stockholder contained herein; or
(iv) in whole or in part upon any failure of the Company or such Selling
Stockholder to perform its respective 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; PROVIDED, HOWEVER, that (i) neither the
Company nor any Selling Stockholder will be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage, liability or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with the information furnished to the Company and the Selling
Stockholders by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), (ii) no Selling Stockholder shall be liable other than for
loss, claim, damage, liability or expense arising out of or based upon (A) an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with the information furnished to the
Company by such Selling Stockholder expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), (B) an inaccuracy in such Selling Stockholder's
representations and warranties contained herein or (C) a failure by such Selling
Stockholder to perform its obligations hereunder or under law; 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,
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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 and the Selling Stockholders 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, the Selling Stockholders and each person, if any, who
controls the Company or any Selling Stockholder within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability
or expense, as incurred, to which the Company, or any such director, officer,
Selling Stockholder 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 and the Selling Stockholders by the Representatives
expressly for use therein; and to reimburse the Company, or any such director,
officer, Selling Stockholder 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. Each of the Company and each of the Selling Stockholders, hereby
acknowledges that the only information that the Underwriters have furnished to
the Company and the Selling Stockholders 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
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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 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 (NationsBanc Montgomery Securities, Inc. 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) REIMBURSEMENT BY THE COMPANY. In addition to its other obligations
under Section 7(a) hereof, the Company and each Selling Stockholder,
severally and not jointly, agree that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon (i) any statement or omission or any alleged
statement or omission, (ii) any act or failure to act or any alleged act or
failure to act of the Company (in the case of the Company) or such Selling
Stockholder (in the case of such Selling Stockholder) or (iii) any breach or
inaccuracy in the representations and warranties of the Company (in the case
of the Company) or such Selling Stockholder (in the case of such Selling
Stockholder), they will reimburse each Underwriter on a quarterly basis for
all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the obligation of the Company or the
Selling Stockholders, as the case may be, to reimburse each Underwriter for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company or the Selling
Stockholders as applicable, together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time by
Bank of America, San Francisco, California (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter within
thirty (30) days of a request for reimbursement shall bear interest at the
Prime Rate from, in the case of the Company, the due date for such
reimbursement and, in the case of the Selling Stockholders, one hundred
twenty (120) days after the due date for such reimbursement.
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(e) REIMBURSEMENT BY THE UNDERWRITERS. In addition to its other
obligations under Section 7(b) hereof, each Underwriter severally agrees that,
as an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in Section 7(b) hereof
which relates to information furnished to the Company and the Selling
Stockholders pursuant to that section, it will reimburse the Company and the
Selling Stockholders (and, to the extent applicable, each officer, director or
controlling person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and the Selling Stockholders
(and, to the extent applicable, each officer, director or controlling person)
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, the Company
and the Selling Stockholders (and, to the extent applicable, each officer,
director or controlling person) shall promptly return it to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
and the Selling Stockholders within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(f) 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 and the Selling Stockholders,
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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 and the Selling Stockholders,
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 and the Selling Stockholders, 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 proceeds from the offering of the Common Shares
pursuant to this Agreement (before deducting expenses) received by the Company
and the Selling Stockholders, 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 and the Selling Stockholders, 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 and the Selling Stockholders, 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, the Selling Stockholders 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
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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 8A. LIMITATION OF SELLING STOCKHOLDER LIABILITY.
The liability of each Selling Stockholder pursuant to this Agreement,
including with respect to the Selling Stockholder's representations and
warranties contained in paragraph (B) of Section 1 hereunder and with respect to
the reimbursement, indemnity and contribution provisions contained in Sections
6, 7 and 8 hereof, shall be limited to the product obtained by multiplying the
per share price set forth in Section 2(a) hereof by the number of Optional
Common Shares sold by such Selling Stockholder pursuant to this Agreement.
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 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.
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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 and the Selling Stockholders 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 or the Selling Stockholders to any Underwriter,
except that the Company and the Selling Stockholders shall be obligated to
reimburse the expenses of the Representatives and the Underwriters pursuant to
Sections 4 and 6 hereof, (b) any Underwriter to the Company or the Selling
Stockholders, 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 of the Selling Stockholders 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, or the Selling Stockholders, 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:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
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Facsimile: 415-249-5558
Attention: Mr. Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities, Inc.
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
Facsimile: (650) 494-1417
Attention: Dennis R. Debroeck, Esq.
If to the Selling Stockholders:
Boston Equiserve
150 Royall Street
Canton, Massachusetts 02021
Facsimile:
Attention:
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
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"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 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. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND
DELIVER COMMON SHARES.
If one or more of the Selling Stockholders shall fail to sell and deliver
to the Underwriters the Common Shares to be sold and delivered by such Selling
Stockholders pursuant to this Agreement at the First Closing Date or the Second
Closing Date, as the case may be, then the
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Underwriters shall have the right, by written notice from the Representatives to
the Company and the Selling Stockholders, to postpone the Second Closing Date,
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.
SECTION 17. 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company and the Custodian 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
SELLING STOCKHOLDERS
By:
---------------------------------
[Attorney-in Fact]
Attorney-in-Fact
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California, as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
UBS SECURITIES LLC
Acting as Representatives of the
several Underwriters named in
the attached SCHEDULE A.
By: NATIONSBANC MONTGOMERY SECURITIES, INC.
By:
-----------------------------
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<PAGE>
SCHEDULE A
UNDERWRITERS NUMBER OF FIRM COMMON
SHARES TO BE PURCHASED
NationsBanc Montgomery Securities, Inc.
UBS Securities LLC
Total 2,700,000
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SCHEDULE B
SELLING STOCKHOLDERS MAXIMUM NUMBER OF OPTIONAL
COMMON SHARES TO BE SOLD
[Selling Stockholder #1] [_______________]
[Address]
Attention: [ ]
[Selling Stockholder #2] [_______________]
[Address]
Attention: [ ]
[Selling Stockholder #3] [_______________]
[Address]
Attention: [ ]
[Selling Stockholder #4] [_______________]
[Address]
Attention: [ ]
Total [_______________]
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<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section 5(d)
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.
(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,
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<PAGE>
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 (iii) to the
knowledge of such counsel, otherwise.
(ix) Based solely upon oral advice from the Commission's staff, the
Registration Statement 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.
(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
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<PAGE>
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 listed in such counsel's opinion; 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 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 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
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<PAGE>
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.
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<PAGE>
EXHIBIT B
Opinion of counsel for each Selling Stockholder to be delivered pursuant to
Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT B include any supplements
thereto at the Closing Date.
(i) The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of, and is a valid and binding agreement of, such
Selling Stockholder, 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.
(ii) The execution and delivery by or on behalf of such Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations under,
the Underwriting Agreement and its Custody Agreement and its Power of Attorney
will not contravene or conflict with, result in a breach of, or constitute a
default under, the charter or by-laws, partnership agreement, trust agreement or
other organizational documents, as the case may be, of such Selling Stockholder,
or, to such counsel's knowledge, violate or contravene any provision of
applicable law or regulation, or violate, result in a breach of or constitute a
default under the terms of any other agreement or instrument to which such
Selling Stockholder is a party or by which it is bound, or any judgment, order
or decree applicable to such Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction over
such Selling Stockholder.
(iii)Such Selling Stockholder has the legal right and power, and all
authorizations and approvals required under its charter and by-laws, partnership
agreement, trust agreement or other organizational documents, as the case may
be, to enter into the Underwriting Agreement and its Custody Agreement and its
Power of Attorney, to sell, transfer and deliver all of the Common Shares which
may sold by such Selling Stockholder pursuant to the Underwriting Agreement and
to comply with its other obligations pursuant to the Underwriting Agreement, its
Custody Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such Selling
Stockholder has been duly authorized, executed and delivered by or on behalf of
such Selling Stockholder and is a valid and binding agreement of such Selling
Stockholder, 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.
(v) Upon delivery of and payment for the Optional Common Shares to be
sold by each Selling Stockholder as provided in the Underwriting Agreement and
upon registration of the Optional Common Shares in the names of the Underwriters
(or their nominees) in the stock records of the
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Company, the Underwriters will be the owners of the Optional Common Shares, free
and clear of any adverse claim, security interests, liens, equities and other
encumbrances, provided that the Underwriters are purchasing the Optional Common
Shares in good faith and without notice of any adverse claim.
(vi) To such counsel's knowledge, no consent, approval, authorization or
other order of, or registration or filing with, any court or governmental
authority or agency, is required for the consummation by such Selling
Stockholder of the transactions contemplated in the Underwriting Agreement,
except as required under the Securities Act, applicable state securities or blue
sky laws, and from the NASD.
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 Representative) 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 the Selling Stockholders and public officials. In
addition, in rendering such opinion with respect to Selling Stockholders who are
individuals, such counsel may rely and state that it has relied, solely upon the
representations and warranties of such Selling Stockholders contained herein and
in the Powers of Attorney and Custody Agreements signed by such Selling
Stockholders.
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EXHIBIT C
Opinion of intellectual property counsel for the Company to be delivered
pursuant to Section 5(i) 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) Except for the patent infringement claim alleged by Mr. Keen Y.
Yee, as identified in Section 5.7(C) of the Schedule of Exceptions to Loan and
Security Agreement with Venture Banking Group, 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 patent
application 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 patent application 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;
and
(v) To such counsel's knowledge after review of the file history and
patent attorney's file for the patent application 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 patent or patent application.
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EXHIBIT D
LOCK-UP AGREEMENT
NATIONSBANC MONTGOMERY SECURITIES, INC.
UBS SECURITIES LLC
c/o NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Re: HYBRID NETWORKS, INC.
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock ("Common Stock") of Hybrid Networks, Inc. (the "Company") 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') pursuant to a Registration Statement to be filed under the
Securities Act of 1933, as amended (the "Registration Statement") for which you
will act as 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 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 (the Underwriting Agreement").
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities, Inc. (which consent may be withheld in its sold
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell or purchase, make any short sale (including without limitation any
"short vs. the box"), pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934, as amended, 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 to a date 180 days after the first
date any of the Common Stock to be sold in the Offering is released by you for
sale to the public.
Notwithstanding the foregoing, (i) if the undersigned is an individual, he
or she may transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for the Company's Common Stock either during his or
her lifetime or on death by will or intestacy to his or her immediate family or
to a trust the beneficiaries of which are exclusively the undersigned and/or a
member or members of his or her immediate family; provided, however, that prior
to any such transfer each transferee shall execute an agreement, satisfactory to
NationsBanc Montgomery Securities, Inc., pursuant to which each transferee shall
agree to receive and hold such shares of Common Stock, or securities convertible
into or exchangeable or exercisable for the Common Stock,
-8-
<PAGE>
subject to the provisions hereof, and there shall be no further transfer except
in accordance with the provisions hereof, (ii) if the undersigned is a
corporation, the undesigned corporation may transfer shares of Common Stock to
an affiliated corporation, partnership or other affiliated entity for which as
of the date above, it owns 80% or more of the capital stock, or to any
shareholder of such corporation (which may, in turn, make transfers as set forth
in (i) above), provided that any transferee or transferees thereof agree to be
bound by the restrictions set forth herein, (iii) if the undersigned is a
partnership, the undersigned partnership may transfer shares of Common Stock to
a partner of such partnership or a retired partner of such partnership who
retires after the date hereof, or to the estate of any such partner or retired
partner (which may, in turn, make transfers as set forth in (i) above), provided
that any transferee or transferees thereof agree to be bound by the restrictions
set forth herein, and (iv) the undersigned may sell or otherwise transfer shares
of Common Stock with the prior written consent of NationsBanc Montgomery
Securities, Inc. For the purposes of this paragraph, "immediate family" shall
mean spouse, lineal descendant, father, mother, brother or sister of the
transferor. 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 any of the Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
The undersigned understands that this agreement is irrevocable and shall be
binding on the undersigned and the respective successors, heirs, personal
representatives and assigns of the undersigned.
Very truly yours,
-------------------------------------------
Signature
-------------------------------------------
Please Type or Print Name
-------------------------------------------
Please Type or Print Title (if applicable)
-------------------------------------------
Additional Signature(s), if stock jointly held
-9-
<PAGE>
Number HYBRID Shares
HYBRID NETWORKS, INC.
THIS CERTIFICATE IS TRANSFERABLE CUSIP 44860K 10 2
IN BOSTON, MA OR NEW YORK, NY
THIS CERTIFIES THAT SEE REVERSE FOR CERTAIN
DEFINITIONS AND A STATEMENT
AS TO THE RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS
OF SHARES
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
HYBRID NETWORKS, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered
by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated: COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
/S/ DAN E. STEIMLE /S/ CARL S. LEDBETTER
SECRETARY CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
HYBRID NETWORKS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
JUNE 6, 1990
<PAGE>
A statement of 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, as established from time to time by the
Certificate of Incorporation of the Corporation or any certificate of
determination, the number of shares constituting each class and series, and
the designations thereof, may be obtained by the holder hereof upon request
and without charge at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ........................ Custodian .........................
(Cust) (Minor)
under Uniform Gifts to Minors
Act.........................................................
(State)
UNIF TRF MIN ACT - ............. Custodian (until age .........................)
(Cust)
..................................... under Uniform Transfers
(Minor)
to Minors Act ................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________
| |
|_________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_______________
_________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written
upon the face of the certificate in
every particular, without alteration or
enlargement or any change whatsoever.
SIGNATURES GUARANTEED
___________________________________________
The signature should be guaranteed by a
brokerage firm or a financial institution
that is a member of a securities approved
Medallion program, such as Securities
Transfer Agents Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP) or
New York Stock Exchange, Inc. Medallion
Signature Program (MSP).
2
<PAGE>
HYBRID NETWORKS, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SEPTEMBER 18, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
1. Registration Rights...................................................2
1.1 Definitions......................................................2
1.2 Company Registration.............................................3
1.3 Obligations of the Company.......................................4
1.4 Furnish Information..............................................5
1.5 Expenses of Company Registration.................................5
1.6 Underwriting Requirements........................................5
1.7 Delay of Registration............................................6
1.8 Indemnification..................................................6
1.9 Reports Under Securities Exchange Act of 1934....................8
1.10 Form S-3 Registration............................................8
1.11 Assignment of Registration Rights...............................11
1.12 "Market Stand-Off" Agreement....................................12
1.13 Termination of Registration Rights..............................12
2. Covenants of the Company.............................................12
2.1 Delivery of Financial Statements................................12
2.2 Termination and Assignment of Information Covenants.............13
2.3 Right of First Offer............................................13
3. Miscellaneous........................................................16
3.1 Successors and Assigns..........................................16
3.2 Governing Law...................................................16
3.3 Counterparts....................................................16
3.4 Titles and Subtitles............................................16
3.5 Notices.........................................................16
3.6 Expenses........................................................16
3.7 Amendments and Waivers..........................................17
3.8 Severability....................................................17
3.9 Aggregation of Stock............................................17
3.10 Entire Agreement; Amendment; Waiver.............................17
<PAGE>
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is entered into as
of September 18, 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"), BG Services Limited ("BG") and
the investors listed in Schedule D hereto (each of which is herein referred
to as a "NOTE WARRANT INVESTOR").
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
<PAGE>
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;
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 Agreement was further amended in April 1997 whereby, among
other things, the Company granted rights to London Pacific Life & Annuity
Company ("London") in connection with the Company's issuance to London of the
Company's Senior Secured Convertible Debenture due 2002 (the "DEBENTURE");
London subsequently transferred to BG the Debenture and London's rights under
this Agreement;
WHEREAS, pursuant to a Subordinated Note Purchase Agreement (the
"SUBORDINATED NOTE AGREEMENT"), the Company is issuing to the Note Warrant
Investors the Company's Subordinated Promissory Notes (the "SUBORDINATED
NOTES") and warrants to purchase shares of the Company's Common Stock (the
"NOTE WARRANTS"); 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
the Note Warrant Investors as required under the terms of the Subordinated
Note 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 the Note Warrant Investors desire 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 exercise of the Note
Warrants or conversion of the Subordinated Notes, 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
2
<PAGE>
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), (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 Note Warrants,
Subordinated Notes, Debenture, 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 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 and (3)
shares of Common Stock issuable upon conversion or exchange of securities
convertible into, or exchangeable for, Common Stock upon conversion of the
Subordinated Notes;
(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,
3
<PAGE>
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:
(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
4
<PAGE>
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 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
5
<PAGE>
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.
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
6
<PAGE>
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.
(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
7
<PAGE>
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:
(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.
(a) 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
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or compliance with respect to all or a part of the Registrable Securities
owned by such Holder or Holders, the Company will:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other
Holders; and
(ii) 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 15 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(a): (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 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(a); provided, however, that the Company
shall not utilize this right more than once in any 12-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(a); (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.
(iii) 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(a), the Series
C Investor will have rights under this Section 1.10(a), 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(a) 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(a).
(b) In addition to the registration rights provided for in
Sections 1.1, 1.2 and 1.10(a), the Note Warrant Investors that own any Note
Warrants, Subordinated Notes or shares of Common Stock of the Company that
have been issued upon exercise of any Note Warrants or conversion of any
Subordinated Notes (such Note Warrant Investors are referred to herein as
"NOTE/WARRANT HOLDERS") shall be entitled, collectively, to one demand
shelf-registration as provided in this Section 1.10(b). For the purposes of
this Section 1.10(b), (1) the term "NOTE/WARRANT SHARES" refers to shares of
Common Stock of the Company that have been issued, or are issuable,
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upon exercise of any Note Warrants or conversion of any Subordinated Notes,
and (2) a Note/Warrant Holder shall be deemed to own the number of
Note/Warrant Shares that are issuable upon the exercise of Note Warrants
owned by such Note/Warrant Holder as well as the number of Note/Warrant
Shares that are currently issued and outstanding and owned by such
Note/Warrant Holder. In the event that, after the first anniversary of the
consummation of the initial sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the firm
underwritten offering of its securities to the general public, the Company
shall receive from Note/Warrant Holders that own, in the aggregate, a
majority of the Warrant Shares 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 Note/Warrant Shares owned by such
Note/Warrant Holder or Note/Warrant Holders, the Company will:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
Note/Warrant Holders; and
(ii) as soon as practicable effect such registration and
all 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
Note/Warrant Holder's or Note Warrant Holders' Note/Warrant Shares as are
specified in such request, together with all or such portion of the
Note/Warrant Shares of any Note/Warrant Holder or Note/Warrant Holders
joining in such request as are specified in a written request given within 15
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(b):
(1) if Form S-3 is not available for such offering by the Note/Warrant
Holders other than as a result of a failure of the Company to comply with the
reporting requirements of Sections 13 and 15 of the 1934 Act; (2) if the
Company shall furnish to the Note/Warrant Holders requesting such
registration a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
Form S-3 registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3 registration
statement until, in the good faith judgment of the Board of Directors of the
Company, it would no longer be seriously detrimental to the Company and its
stockholders for such Form S-3 registration to be effected (but in no event
for a period of more than 90 days after receipt of the request of the
Note/Warrant Holder or Note Warrant Holders under this Section 1.10(b)); (3)
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. If Form S-3 is
not available for such offering by the Note/Warrant Holders as a result of a
failure of the Company to comply with the reporting requirements of Sections
13 and 15 of the 1934 Act, the Company shall effect such registration on Form
S-1.
(iii) Subject to the foregoing, the Company shall file a
registration statement on Form S-3 covering the Note/Warrant Shares so
requested to be registered as soon as practicable after receipt of the
request or requests of the Note/Warrant Holder or Note/Warrant Holders and
shall use its best efforts to cause the registration statement to become
effective under the Act and to keep the registration statement continuously
effective under the Act and available for the offer and sale of the
Note/Warrant Shares covered thereby for 180 days (or such shorter period
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ending when all Note/Warrant Shares covered by the registration statement
have been sold or are no longer entitled to registration under this Section
1.10(b)). The Company will be deemed not to have used its best efforts to
keep the registration statement effective and available for such offer and
sale during the requisite period if the Company voluntarily takes any action
that would result in Note/Warrant/Holders of Note/Warrant Shares covered
thereby not being able to offer and sell such Note/Warrant Shares thereunder
during any portion of that period unless (1) such action is required by
applicable law or (2) such action is taken by the Company in good faith and
for valid business reasons (not including avoidance of the Company's
obligations hereunder), including the acquisition or divestiture of assets,
so long as the Company promptly thereafter causes the registration to become
effective under the Act and available for such offer and sale. In the event
that the effectiveness or availability of the registration statement is
suspended during the requisite period, the Company will be obligated to
extend the period of effectiveness and availability of the registration
statement for a period that is at least equal to the period during which such
effectiveness or availability was suspended.
(iv) Each Note/Warrant Holder that causes the Company to
register any of such Note/Warrant Shares and under this Section 1.10(b) shall
immediately notify the Company in writing of any sales of Note/Warrant Sales
under the registration statement and, if the effectiveness of the
registration statement is terminated in accordance with this Section 1.10(b),
shall return to the Company's transfer agent all stock certificates that
represent any unsold Note Warrant Shares so that the transfer agent may affix
any appropriate securities legends thereto.
(v) Notwithstanding anything to the contrary in Section
3.7, any term of this Section 1.10(b) may be amended, and the observance of
any term of this Section 1.10(b) 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 Note/Warrant Holders that then own a
majority of all Note/Warrant Shares then owned by Note/Warrant Holders. Any
amendment or waiver effected in accordance with this paragraph shall be
binding upon the Company, each Note Warrant Holder and each future holder of
any Note/Warrant Shares.
(vi) Any Form S-3 registration statement required
pursuant to this Section 1.10(b) shall not be required to include any
Registrable Securities that are freely tradable by the Holders thereof without
registration under the Act (including shares as to which paragraph (k) of Rule
144 under the Act applies but not shares that are subject to applicable holding
period, volume limitation or manner of sale and notice requirements of
paragraphs (d), (e), (f), (g), (h) and (i) of Rule 144).
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,
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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 intestate 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. For the
purposes of determining the number of shares of Registrable Securities held
by any Note Warrant Investor, the shares of Registrable Securities held by
such Note Warrant Investor shall be aggregated with the shares of Registrable
Securities held by affiliates of the Note Warrant Investor or any entities
for which the Note Warrant Investor or its affiliates serve as general
partner and/or investment adviser or in a similar capacity, all mutual funds
or other pooled investment vehicles or entities under the common control or
management of such Note Warrant Investor, or the general partner or
investment adviser thereof, or any affiliate of the foregoing.
1.12 "MARKET STAND-OFF" AGREEMENT. Each signatory to the
Agreement or hereto or any prior or subsequent 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 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-transfer 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,
except as provided otherwise in Section 1.10(b)(v), 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.
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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, Note Warrant Investor, Itochu and BG
(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; and
(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.
For the purposes of determining the number of shares of Registrable
Securities held by any Note Warrant Investor, the shares of Registrable
Securities held by such Note Warrant Investor shall be aggregated with the
shares of Registrable Securities held by affiliates of the Note Warrant
Investor or any entities for which the Note Warrant Investor or its
affiliates serve as general partner and/or investment adviser or in a similar
capacity, all mutual funds or other pooled investment vehicles or entities
under the common control or management of such Note Warrant Investor, or the
general partner or investment adviser thereof, or any affiliate of the
foregoing.
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
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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, (i) 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 intestate succession) shall be aggregated together and with the
partnership and (ii) the holdings of a Note Warrant Investor shall be
aggregated with the holdings of affiliates of the Note Warrant Investor or
any entities for which the Note Warrant Investor or its affiliates serve as
general partner and/or investment adviser or in a similar capacity, all
mutual funds or other pooled investment vehicles or entities under the common
control or management of such Note Warrant Investor, or the general partner
or investment adviser thereof, or any affiliate of the foregoing.
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, BG, Strachman and each Note Warrant Holder 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, BG, Strachman and each Note/Warrant
Holder, and any general or limited partners and affiliates of any Series A
Investor, any Series B Investor, Intel, any Series D Investor or any
Note/Warrant Holder. Each Series A Investor, each Series B Investor, Intel
and 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:
(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 exercise of the Note Warrants or 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
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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 shares of Common Stock issued and
held, or issuable upon exercise of the Note Warrants or 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 exercise of the Note Warrants
or 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. The rights
of first offer in this Section 2.3 shall not be applicable to the
Subordinated Notes or any securities that may be issued or issuable upon
conversion of any Subordinated Notes, although the issuance of any securities
upon conversion of the Subordinated Notes shall not reduce the number of
Shares that any Note Warrant Holder shall be entitled to purchase, as
compared to any other Investor, pursuant to such rights of first offer.
(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-1;
(iii) to the issuance of securities pursuant to the conversion
or exercise of convertible or exercisable securities;
(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
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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, Itochu, BG or any
Note/Warrant Investor 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 shares of Registrable Securities or Section 1.2 Shares held by a
transferee or assignee for the purposes of this Section 2.3(f), (i) 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 intestate succession) shall
be aggregated together and with the partnership and (ii) the holdings of a
Note Warrant Investor shall be aggregated with the holdings of affiliates of
the Note Warrant Investor or any entities for which the Note Warrant Investor
or its affiliates serve as general
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partner and/or investment adviser or in a similar capacity, all mutual funds
or other pooled investment vehicles or entities under the common control or
management of such Note Warrant Investor, or the general partner or
investment adviser thereof, or any affiliate of the foregoing.
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.
17
<PAGE>
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 the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held
or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
3.10 ENTIRE AGREEMENT. This Amended and Restated Investor Rights
Agreement (including the Schedules hereto) constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Investor Rights 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
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Investor Rights Agreement as of the date first above written.
COMPANY:
HYBRID NETWORKS, INC.
By:___________________________
Carl S. Ledbetter, Chief Executive
Officer
Address: 10161 Bubb Road
Cupertino, CA 95014-4167
Facsimile Number: (408) 725-2439
INTEL CORPORATION
By: /s/Company Officer
---------------------------
Its: VP and Treasurer
--------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Facsimile Number: (408) 765-6038
20
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
TUDOR BVI FUTURES, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By:/s/ Robert P. Forlenza
----------------------
Robert P. Forlenza,
Vice President
Address: c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110
TUDOR ARBITRAGE PARTNERS, L.P.
By: Tudor Global Trading, Inc.,
General Partner
By:/s/ Robert P Forlenza
---------------------
Robert P. Forlenza,
Vice President
Address same as immediately above
RAPTOR GLOBAL FUND, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza
-----------------------
Robert P. Forlenza,
Vice President
Address same as immediately above
RAPTOR GLOBAL FUND, L.P.
By: Tudor Investment Corporation,
General Partner
By: /s/ Robert P. Forlenza
-----------------------
Robert P. Forlenza,
Vice President
Address same as immediately above
21
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
INVESTORS:
__________________________
Catherine P. Goodrich
Address: 3787 Woodside Road
Woodside, CA 94062
Facsimile Number: (415) 851-0726
22
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
J.F. SHEA CO., INC.,
By: /s/ Edmund Shea, Jr.
---------------------------------
Edmund Shea, Jr.
Address: 655 Brea Canyon Road
P. O. Box 489
Walnut, CA 91789-0489
Facsimile Number: (909) 869-0840
23
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
OSCCO III, L.P.
By: /s/ Stephen E. Halprin
-----------------------------------
Stephen E. Halprin
Address: One First Street, #15
Los Altos, CA 94022
Facsimile Number: (415) 917-0801
24
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Gary M. Lauder
-------------------------------------
(Executing this Agreement as a Series B
Investor)
Address: 88 Mercedes Lane
Atherton, CA 94027
Facsimile Number: (415) 323-2171
25
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
AT&T VENTURE COMPANY, L.P.
By: AT&T Venture Partners,
Its: General Partner
By: /s/ Neal Douglas
------------------------------
Its: General Partner
-----------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, CA 94025
Facsimile Number: (415) 854-4923
26
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SEQUOIA CAPITAL VI
By: /s/ Michael Moritz
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA TECHNOLOGY PARTNERS VI
By: /s/ Michael Moritz
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA XXIV
By: /s/ Michael Moritz
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
27
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
ACCEL IV L.P. ACCEL KEIRETSU L.P.
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
----------------------- -----------------------
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
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
28
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Howard L. Strachman
-----------------------------------
Howard L. Strachman
Address: c/o Ultracom Communications
21580 Stevens Creek Blvd.
Suite 207
Cupertino, CA 95014
Facsimile Number: (408) 863-0363
29
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Eduardo J. Moura
------------------------------------
Eduardo J. Moura
Address: 10161 Bubb Road
Cupertino, CA 95014-4167
Facsimile Number: (408) 725-2439
30
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
ITOCHU Corporation
By:
---------------------------------
Its:
--------------------------------
Address: 5-1, Kita-Aoyama 2-chome
Minato-ku, Tokyo 107-77
Japan
Facsimile Number: 011-81-3-3497-3131
31
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
BG SERVICES LIMITED
By:
---------------------------------
Its:
--------------------------------
Address: c/o Minden House
6 Minden Place
St. Helier
Jersey, Channel Islands
Attention: Ron Green
Facsimile Number: (0) 1534-607799
32
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Daniel E. Steimle
-----------------------------
Daniel E. Steimle
33
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
888 GROUP
/s/ David Hayes
By: /s/ Company Officer
---------------------------
Its: /s/ Company Officer
---------------------------
34
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Bradford J. Shafer
------------------------------
Bradford J. Shafer
35
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ K. Philip Hwang
------------------------------
K. Philip Hwang
36
<PAGE>
SCHEDULE A
Hybrid Networks, Inc.
Series A Investors
------------------
------------------
# of Shares of
Name 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>
SCHEDULE D
Hybrid Networks, Inc.
Note Warrant Investors
----------------------
<PAGE>
# of Shares of Common Stock for which
Name Note Warrants May Become Exercisable
- ---- -------------------------------------
Tudor BVI Futures, Ltd. 182,440-456,106
Tudor Arbitrage Partners, L.P. 46,667-116,667
Raptor Global Fund, Ltd. 120,593-301,486
Raptor Global Fund, L.P. 46,336-115,841
Sequoia Capital VI 27,029-67,574
Sequoia Technology Partners VI 1,485-3,713
Sequoia XXIV 1,188-2,970
Accel IV L.P. 22,673-56,683
Accel Investors '95 L.P. 1,064-2,661
Accel Keiretsu L.P. 470-1,176
Ellmore C. Patterson Partners 545-1,361
AT&T Ventures 25,465-63,664
OSCCO III, L.P. 19,802-49,505
Gary M. Lauder 9,901-24,753
888 Group 12,376-30,941
Daniel E. Steimle 49,505-123,763
Bradford J. Shafer 4,950-12,376
J.F. Shea Co., Inc. 9,901-24,753
K. Philip Hwang 99,009-247,525
<PAGE>
HYBRID NETWORKS, INC.
AMENDMENT TO
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
The Amended and Restated Investor Rights Agreement dated as of September
18, 1997 among Hybrid Networks, Inc. (the "COMPANY") and certain holders of
securities of the Company (the "ORIGINAL AGREEMENT") is hereby amended by this
amendment (this "AMENDMENT") dated as of October 13, 1997 among the Company,
Venture Banking Group, a division of Cupertino National Bank (the "BANK"), and
the holders of a majority of the Registrable Securities outstanding immediately
prior to this Amendment. Except as provided otherwise herein, the terms used in
this Amendment that are defined in the Original Agreement have the same meanings
as those terms have in the Original Agreement.
1. The Original Agreement is hereby amended as follows:
(a) The Bank will have the same registration rights under the
Original Agreement as amended by this Amendment (the "AGREEMENT"), with respect
to the shares of Common Stock of the Company issued or issuable upon exercise of
the warrants issued by the Company to the Bank in October 1997 to purchase up to
7,178 shares of Common Stock of the Company (the "BANK WARRANTS"), as the Note
Warrant Investors have with respect to the shares of Common Stock that are
issued or issuable upon exercise of the Note Warrants.
(b) The definition of "Registrable Securities" in Section 1.1(b) of
the Original Agreement is amended to include (i) shares of Common Stock of the
Company issuable or issued upon exercise of any Bank Warrants and (ii) any
Common Stock of the Company issued as (or issuable upon 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, any Bank
Warrants.
(c) The Bank will have, with respect to the Bank Warrants or shares
of Common Stock of the Company that have been issued upon exercise of any Bank
Warrants, the same right as any Note/Warrant Holder has to participate in the
one demand shelf-registration provided for in Section 1.10(b) of the Original
Agreement.
(d) As signatory of this Amendment, the Bank will be bound by the
provisions of Section 1.12 of the Original Agreement (Market Stand-Off
Agreement).
(e) The Company shall deliver financial statements to the Bank as
provided in Sections 2.1 and 2.2 of the Original Agreement.
(f) Section 3.5 of the Original Agreement is amended to replace the
words "registered or certified" with "first class."
2. Except as amended as provided in Section 1 above, the Original
Agreement continues in full force and effect.
3. This Amendment may be executed in two or more counterparts, each of
which will be deemed an original but, all of which together will constitute one
and the same instrument.
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER 13, 1997 TO THE
Hybrid Networks, Inc. Amended and Restated Investor Rights Agreement
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, EACH OF THE UNDERSIGNED EXECUTES AND DELIVERS THIS
AMENDMENT AS OF THE DATE SET FORTH IMMEDIATELY ABOVE.
THE COMPANY:
HYBRID NETWORKS, INC.
By /S/ Carl S. Ledbetter
----------------------------------------
Its: President and CEO
--------------------------------------
THE BANK:
VENTURE BANKING GROUP,
A DIVISION OF CUPERTINO NATIONAL BANK
By /S/ Company Officer
----------------------------------------
Its:
--------------------------------------
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
TUDOR BVI FUTURES, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By:
---------------------------------
Robert P. Forlenza,
Vice President
Address: c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110
Facsimile No.: c/o Bingham, Dana & Gould LLP
(617) 951-8736
Attn: Victor J. Paci, Esq.
TUDOR ARBITRAGE PARTNERS, L.P.
By: Tudor Global Trading, Inc.,
General Partner
By:
---------------------------------
Robert P. Forlenza,
Vice President
Address and facsimile no. same as immediately
above
RAPTOR GLOBAL FUND, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By:
---------------------------------
Robert P. Forlenza,
Vice President
Address and facsimile no. same as immediately
above
RAPTOR GLOBAL FUND, L.P.
By: Tudor Investment Corporation,
General Partner
By:
---------------------------------
Robert P. Forlenza,
Vice President
Address and facsimile no. same as immediately
above
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
J.F. SHEA CO., INC.,
By:
---------------------------------
Edmund Shea, Jr.
Address: 655 Brea Canyon Road
P. O. Box 489
Walnut, CA 91789-0489
Facsimile Number: (909) 869-0840
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
OSCCO III, L.P.
By:
---------------------------------
Stephen E. Halprin
Address: One First Street, #15
Los Altos, CA 94022
Facsimile Number: (415) 917-0801
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
-----------------------------------
Gary M. Lauder
Address: 88 Mercedes Lane
Atherton, CA 94027
Facsimile Number: (415) 323-2171
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
AT&T VENTURE COMPANY, L.P.
By: AT&T Venture Partners,
Its: General Partner
By:
--------------------------------
Its:
-------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, CA 94025
Facsimile Number: (415) 854-4923
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
SEQUOIA CAPITAL VI
By:
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA TECHNOLOGY PARTNERS VI
By:
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA XXIV
By:
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
ACCEL IV L.P. ACCEL KEIRETSU L.P.
By: Accel IV Associates L.P. By: Accel Partners & Co., Inc.
Its: General Partner Its: General Partner
By: By:
---------------------- ----------------------
Its: Its:
--------------------- ---------------------
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
By: By:
---------------------------- ----------------------------
Its: Its:
--------------------------- ---------------------------
Address: One Palmer Square Address: One Palmer Square
Princeton, NJ 08542 Princeton, NJ 08542
Facsimile Number: (609) 683-0384 Facsimile Number: (609) 683-0384
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
INTEL CORPORATION
By:
-------------------------------
Its:
-------------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Facsimile Number: (408) 765-6038
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
ITOCHU Corporation
By:
-------------------------------
Its:
-------------------------------
Address: 5-1, Kita-Aoyama 2-chome
Minato-ku, Tokyo 107-77
Japan
Facsimile Number: 011-81-3-3497-3131
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
BG SERVICES LIMITED
By:
-------------------------------
Its:
-------------------------------
Address: c/o Minden House
6 Minden Place
St. Helier
Jersey, Channel Islands
Attention: Ron Green
Facsimile Number: (0) 1534-607799
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
-----------------------------------
Daniel E. Steimle
Address: P. O. Box 928
Occidental, CA 95465
Facsimile No.: (408) 725-0990
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
888 GROUP
By:
-------------------------------
Its:
------------------------------
Address: 555 California Street, Suite 2200
San Francisco, CA 94104
Attn: David Hayes
Facsimile No.: (415) 576-2361
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
-----------------------------------
Bradford J. Shafer
Address: Heartport, Inc.
200 Chesapeake Drive
Redwood City, CA 94063
Facsimile No.: (415) 306-7905
<PAGE>
SIGNATURE PAGE
DATED AS OF OCTOBER __, 1997 TO THE
HYBRID NETWORKS, INC. AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
-----------------------------------
K. Philip Hwang
Address: 2345 Harris Way
San Jose, CA 95131-1413
Facsimile: (408) 954-8131
<PAGE>
HYBRID NETWORKS, INC.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
THIS CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT (the
"AGREEMENT") is entered into as of September 18, 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 those
certain purchasers identified on SCHEDULE 1 hereto (each a "PURCHASER" and
collectively the "PURCHASERS").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto mutually agree as follows:
1. AUTHORIZATION AND SALE OF NOTES
1.1 AUTHORIZATION OF NOTES. The Company has authorized the issuance
and sale pursuant to the terms and conditions hereof of up to $8.0 million in
principal amount of the Company's Convertible Subordinated Promissory Notes
due 1998 (the "NOTES"), which Notes shall be in the form set forth in EXHIBIT
A hereto and shall be convertible into shares of the Company's Common Stock,
at a conversion price determined as set forth in the Notes.
1.2 ISSUANCE AND SALE OF NOTES. Subject to the terms and conditions
hereof, at the Closing (as defined in Section 2.1 hereof) the Company will
issue and sell the Notes to the Purchasers, and the Purchasers will purchase
the Notes from the Company.
1.3 ISSUANCE AND DELIVERY OF WARRANTS. At the Closing, the Company
will issue and deliver to the Purchasers warrants (the "WARRANTS") to
purchase up to an aggregate of 1,980,200 shares (subject to adjustment as
provided in the Warrants) of the Company's Common Stock, at an exercise price
of $4.04 per share (subject to adjustment as provided in the Warrants), as
set forth on SCHEDULE 1 hereto, which Warrants shall be substantially in the
form set forth in EXHIBIT B hereto.
1.4 ALLOCATION OF PURCHASE PRICE. The Company and the Purchaser
agree that the consideration paid for the Warrants and Notes shall be
allocated, in proportion to each $1,000,000 of such consideration, $999,900
to the Notes and $100 to the Warrants.
2. CLOSING; DELIVERY.
2.1 CLOSING. The closing (the "CLOSING") of the purchase and sale
of the Notes will occur on September __, 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 Notes to the Purchasers,
(ii) the Purchasers will deliver to the Company by wire transfer the
aggregate purchase price for the Notes shown as SCHEDULE 1, (iii) the Company
will pay the expenses of the Purchasers as provided in Section 7.9, (iv) the
Company will issue and deliver the Warrants to the Purchasers, (v) the
Company, the Purchasers and certain
<PAGE>
existing stockholders of the Company will enter into the Amended and Restated
Investor Rights Agreement in substantially the form set forth in EXHIBIT C
hereto (the "RIGHTS AGREEMENT"), (v) the Company, the Purchasers and certain
existing stockholders of the Company will enter into a Right of Co-Sale
Agreement in substantially the form set forth in EXHIBIT D hereto (the
"Co-Sale Agreement"), and (vi) the parties will deliver such other documents
as they are required to deliver pursuant to Section 5.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Purchasers, except as set forth on an
exceptions letter (the "EXCEPTIONS LETTER") furnished to the Purchasers, as
follows:
3.1 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 has made available to the Purchasers
true and complete copies of the certificate of incorporation and bylaws of
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 Rights Agreement and the
Co-Sale Agreement, to issue, sell, execute and deliver the Notes and Warrants
hereunder and to carry out and perform its obligations under the terms of
this Agreement, the Rights Agreement, the Co-Sale Agreement and the Notes and
Warrants.
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 as of August 31, 1997 consists 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) 497,327 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 Series H Preferred Stock are
as stated in the Amended and Restated Certificate of Incorporation, a copy of
which the Company has provided to the Purchasers (the "AMENDED CERTIFICATE").
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(b) COMMON STOCK. 29,000,000 shares of Common Stock, of which
7,011,555 shares are issued and outstanding.
(c) VALID ISSUANCE. All the issued and outstanding shares of
Common Stock and Preferred Stock have been duly authorized and are validly
issued, fully paid and nonassessable and were issued in compliance with all
federal and state securities laws.
(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 Debentures (as
defined below), (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)
3,202,292 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) 1,620,000 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) 969,612
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) 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, (vii) warrants granted to Alex.
Brown & Sons Incorporated to purchase at $3.83 per share up to 156,658 shares
of Series G Preferred Stock, (viii) 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 (ix) 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
Preferred Stock so as to affect them adversely without so affecting the
entire class of Preferred Stock. Except for 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 (viii) above) have
entered into "market stand-off" agreements substantially similar to that set
forth in Section 1.12 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.
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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 Notes pursuant hereto, (ii) the issuance of the shares of Common Stock
or other securities of the Company issuable upon conversion of the Notes (the
"COMMON SHARES"), (iii) the issuance of the Warrants pursuant hereto, (iv)
the issuance of the shares of Common Stock issuable upon exercise of the
Warrants pursuant thereto (the "WARRANT SHARES"), and (v) the execution,
delivery and performance by the Company of this Agreement, the Rights
Agreement, the Co-Sale Agreement and the Notes and Warrants have been taken
or will be taken prior to the Closing hereunder. This Agreement is, and upon
execution and delivery the Rights Agreement, the Co-Sale Agreement and the
Notes and Warrants will be, the valid and binding obligations of the Company
enforceable against it in accordance with their respective terms.
(b) The Notes and Warrants, when issued in compliance with the
provisions of this Agreement, and the Common Shares and Warrant Shares, when
issued in compliance with the Notes and Warrants, respectively, will be duly
authorized, validly issued, fully paid and nonassessable, and will be free of
any liens or encumbrances; provided, however, that the Common Shares and
Warrant 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 and the Warrant 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
Notes and Warrants or the Common Shares and Warrant 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
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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 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 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 Rights Agreement, the Co-Sale Agreement and the Notes and
Warrants (including the issuance of the Common Shares and Warrant Shares),
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 the Purchasers with
access to all Contracts, including, without limitation, those listed in the
Exceptions Letter.
3.10 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 be 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 40l-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 the Purchasers. To
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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 therefor, 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, the Rights Agreement, the
Co-Sale Agreement, or the Notes and Warrants (including the issuance of the
Common Shares and Warrant Shares) 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, 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.
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, the Rights Agreement, the Co-Sale
Agreement or the Notes and Warrants, or the offer, sale or issuance of the
Notes or Warrants or the consummation of any other transaction provided for
herein or therein (including the issuance of Common Shares and Warrant
Shares), 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 the Purchasers'
representations in Section 4 hereof, the offer, sale and issuance of the
Notes and Warrants in conformity with the terms of this Agreement and the
issuance of the Common Shares upon conversion of the Notes 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. No statement by the Company contained in this
Agreement, including all exhibits, the Exceptions Letter and the Rights
Agreement, Co-Sale Agreement, Notes and Warrants, 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
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misleading in light of the circumstances under which they were made. The
Company has provided the Purchasers with all material information the
Purchasers or their respective representatives have requested in connection
with the Purchasers' decision to purchase the Notes and Warrants.
3.17 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 the
Purchasers audited balance sheets of the Company (including any subsidiaries)
at March 31, 1997, 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, 1997, March 31, 1996 and March 31, 1995, an
unaudited balance sheet at June 30, 1997 and an unaudited statement of
operations for the three months ended June 30, 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 adopted
a December 31 fiscal year end.
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
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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 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
the Purchasers 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
August 29, 1997. The Company has, however, provided Purchaser with a draft
of the minutes for the meeting held September 12, 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, and is seeking manufacturing
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 salable 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
$450,000).
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 106
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 September 30, 1998), and
the Sublessee (with Digital Chef Inc. as Sublessor) at 10351 Bubb Road in
Cupertino (which sublease expires June 14, 1998).
3.29 TRIALS. The Company's trials in Minnesota of wireless internet
access systems is proceeding in a reasonably satisfactory manner.
3.30 Each of the current executive officers, members of the Board
of Directors, and greater than five percent stockholders of the Company has
entered into a Market Stand-Off Agreement of equivalent duration and effect
to that described under Section 4.4 of this Agreement with respect to the
securities of the Company beneficially owned by such person.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS AND RESTRICTIONS ON
TRANSFER IMPOSED BY THE SECURITIES ACT AND STATE SECURITIES LAWS.
4.1 REPRESENTATIONS AND WARRANTIES BY PURCHASER. Each of the Purchasers
severally and not jointly represents and warrants to the Company as follows
(the Company is entering into this Agreement with each Purchaser in reliance
upon such Purchaser's representations to the Company set forth below, which
by such Purchaser's execution of this Agreement such Purchaser hereby
confirms with respect to such Purchaser only and not with respect to any
other Purchaser):
(a) The Notes and Common Shares issuable upon conversion thereof,
and the Warrants and the Warrant Shares issuable upon exercise thereof, to be
acquired by
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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 Notes or Common Shares,
or the Warrants or Warrant 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 Notes or Common Shares, or the Warrants or
Warrant Shares. Purchaser has not offered to sell the Notes or Warrants or
Common Shares or Warrant Shares to any other person.
(b) Purchaser understands that the Notes and Warrants, and the
Common Shares and Warrant Shares, have not been registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT") is 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
Notes or Warrants or the Common Shares or Warrant Shares. The Notes and
Warrants, and Common Shares and Warrant 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 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 (including purchase of the Notes and Warrants
and Common Shares and Warrant Shares).
(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 neither Purchaser nor any agent or employee 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 Notes and Warrants (and Common Shares
and Warrant Shares) pursuant to the terms of this Agreement and of protecting
Purchaser's interests in connection therewith. Purchaser acknowledges that
the Exceptions Letter is provided to Purchaser strictly for
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Purchaser's use in connection with its purchase of the Notes hereunder, and
Purchaser agrees to keep the Exceptions Letter confidential and not disclose
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 the ability to bear the economic risks inherent in
Purchaser's investment in the Notes and Warrants and Common Shares and
Warrant Shares; (iii) Purchaser is able, without materially impairing its
financial condition, to hold the Notes and Warrants and Common Shares and
Warrant Shares for an indefinite period of time and to suffer a complete loss
of its investment; and (iv) 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 Notes and Warrants and the Common Shares and Warrant Shares
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 Notes and Warrants and the
Common Shares and Warrant Shares, and, accordingly, it may not be possible
for Purchaser to liquidate its investment in the Notes and Warrants and the
Common Shares and Warrant Shares; and (4) there have been no representations
as to the present or possible future value, if any, of the Notes and Warrants
and the Common Shares and Warrant Shares.
(f) Purchaser has the full right, power and authority to enter into
and perform Purchaser's obligations under this Agreement, the Rights
Agreement, and the Co-Sale Agreement and each of this Agreement, 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 Rights Agreement or the
Co-Sale Agreement; neither the execution, the delivery nor the performance of
this Agreement, the Rights Agreement or the Co-Sale Agreement by Purchaser is
or will be in violation of any applicable statute, law or regulation.
4.2 LEGENDS. The Notes and Warrants, and each certificate representing
any Common Shares or Warrant 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
11
<PAGE>
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 Company 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 Notes 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 Notes or Warrants or Common Shares or Warrant
Shares shall be removed, and the Company shall issue a certificate without
such legend to the holder thereof, if the Notes or Warrants or Common Shares
or Warrant 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 Notes or Warrants or Common Shares
or Warrant Shares may be made without registration.
4.4 "MARKET STAND-OFF". Each Purchaser on behalf of such Purchaser only
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 such 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 PURCHASERS AT CLOSING. The
obligation of each Purchaser to purchase the Notes and Warrants 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 Purchaser pursuant to the
terms of Section 7.1:
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(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 Notes shall be true and complete in
all material respects (i) on the date hereof (except where 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.
(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 Rights
Agreement, the Co-Sale Agreement or the Notes or Warrants), permits and
waivers necessary or appropriate for consummation of the transactions
provided for in this Agreement, Rights Agreement, the Co-Sale Agreement and
the Notes and Warrants.
(c) RIGHTS AGREEMENT AND CO-SALE AGREEMENT. The Company and the
existing stockholders of the Company whose signatures are required shall have
executed and delivered the Rights Agreement and the Co-Sale Agreement.
(d) COMPLIANCE CERTIFICATE. The Company shall have delivered to
the Purchasers 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) and (b) of this Section 5.1.
(e) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions hereby contemplated to occur at the
Closing, and all documents and instruments incident to such transactions,
shall be reasonably satisfactory in substance and form to the Purchasers and
their special counsel, and the Purchasers 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 Notes and Warrants 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 the Purchasers 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. The Purchasers 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 the Purchasers of
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<PAGE>
this Agreement), permits and waivers necessary or appropriate for the
consummation by the Purchasers of the transactions provided for in this
Agreement or in the Notes or Warrants.
6. AFFIRMATIVE AND NEGATIVE COVENANTS. The Company hereby covenants and
agrees with the Purchasers as follows (the following covenants and agreements
shall continue as long as the Notes remain outstanding, unless an earlier
expiration date is indicated below):
6.1 INSPECTION RIGHTS. Until the Company consummates the closing of the
Company's first offer and sale of securities pursuant to a registration
statement under the Securities Act of 1933, as amended (the "SECURITIES
ACT"), filed with and declared effective by the Securities and Exchange
Commission (an "INITIAL PUBLIC OFFERING"), the Company will permit
representatives of each 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. Each Purchaser agrees to keep such information confidential and not
to 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 the closing of
its Initial Public Offering, the Company will permit one representative of all
the Purchasers 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. Each Purchaser agrees to keep such information confidential.
6.3 DIVIDENDS AND DISTRIBUTIONS. The Company will not pay any dividends
to any stockholder or effect any distribution of the Company's assets to any
stockholder (other than payments in the ordinary course of the Company's
business or repurchases in accordance with the terms of the Company's equity
incentive plans of shares issued under such plans).
6.4 ENCUMBRANCES AND LIENS. Except as provided in the Notes, 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 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.
6.5 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.
6.6 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.
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<PAGE>
6.7 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 Purchasers holding a majority of the then-outstanding principal amount of
the Notes, which consent shall not be unreasonably withheld by the
Purchasers. The Company will not move its principal place of business
outside California without the prior written consent of Purchasers holding a
majority of the then-outstanding principal amount of the Notes, which consent
shall not be unreasonably withheld by the Purchasers.
6.8 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.
6.9 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.
6.10 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.
6.11 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
the twelve month period ending March 31, 1998, in excess of $2.5 million
during the twelve month period ending March 31, 1999, in excess of $5.5
million during the twelve month period ending March 31, 2000 and in excess of
$11.0 million during the twelve month period ending March 31, 2001; provided,
however, that such limits will be increased by a percentage equal to that
percentage by which the current fiscal year's net revenues exceed the current
fiscal year's projected net revenues.
6.12 KEY MAN LIFE. The Company will 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.
6.13 ADDITIONAL COVENANTS. The Company will not, without the consent of
Purchasers holding a majority of the then-outstanding principal amount of the
Notes:
(a) create or authorize the creation or issuance of any additional class
or shares of capital stock, or any shares of any existing class of capital
stock, or create or authorize any
15
<PAGE>
obligation or security convertible into shares of any class of capital stock,
or issue, grant or sell any options, warrants or other rights to acquire any
shares of capital stock of the Company (except pursuant to existing stock or
stock option plans of the Company);
(b) engage in any business other than the business presently conducted
by the Company and businesses reasonably ancillary thereto, or take any
action for the purpose of substantially changing the nature or character of
its business as it is presently conducted;
(c) assume or incur any indebtedness for borrowed money or guarantee any
such indebtedness, or issue or sell any debt securities or rights to acquire
any debt securities, or guarantee any debt securities of others, or create
any mortgages, liens, security interests or other encumbrances on the
property of the Company in connection with any indebtedness thereof, or enter
into any "keep well" or other agreement or arrangement to maintain the
financial condition of another person, other than (i) purchase money
indebtedness in an amount not in excess of $100,000 per single transaction or
$500,000 in the aggregate in any calendar year, (ii) guarantees of the
Company's trade accounts in the ordinary course of business consistent with
past practice, (iii) any renewal, extension or refinancing of any
indebtedness existing as of the date hereof, in an amount not in excess of
the amount of indebtedness being renewed, extended or refinanced, and on
terms not less favorable to the company than those of the indebtedness being
renewed, extended or refinanced, or (iv) an increase in the amount of Senior
Indebtedness not in excess of $5,000,000;
(d) enter into, become a party to, become subject to or authorize any
agreement or instrument which would restrict, prohibit or interfere with the
Company's performance of its obligations under the terms of the Company's
charter documents, bylaws, or this Agreement, the Notes or the Warrants;
(e) have outstanding, or acquire or commit itself to acquire or hold,
any investment except (i) investments in marketable direct obligations issued
or guaranteed by the United States of America that mature within one year
from the date of acquisition thereof or which are subject to a repurchase
agreement, exercisable within ninety (90) days from the date of acquisition
of such agreement, with any commercial bank or trust company incorporated
under the laws of the United States of America or any State thereof or the
District of Columbia, (ii) investments in commercial paper maturing within
one year from the date of acquisition thereof and having, at the date of
acquisition thereof, the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation, (iii) investments in bankers'
acceptances eligible for rediscount under Federal Reserve Board requirements
accepted by any commercial bank or trust company referred to in clause (i)
hereof, (iv) investments in deposits or certificates of deposit maturing
within one year from the date of acquisition thereof issued by any commercial
bank or trust company referred to in clause (i) hereof and having capital and
surplus of at least $100,000,000, (v) investments in certificates of deposit
issued by banks organized under the laws of any other jurisdiction, each
having combined capital and surplus of not less than $100,000,000, and (vi)
investments in securities issued by subsidiaries of the Company;
(f) make, declare or pay any dividends or make any distributions on any
of its capital stock or make any other distribution of assets in respect of
its capital stock, or purchase, redeem or otherwise acquire any shares of its
capital stock or any securities convertible into
16
<PAGE>
Common Stock, except that the Company may do so (i) in connection with the
termination of any director, officer, employee, agent or consultant of the
Company, or (ii) as permitted by an employee benefit plan, contract or
arrangement that has been approved by the Board of Directors of the Company;
(g) make any loans on advances other than (i) for travel, entertainment
and similar expenses in the ordinary course of business consistent with past
practice, (ii) pursuant to any employee stock option plan or stock purchase
agreement of the Company, or (iii) advances to employees in an aggregate
amount not in excess of $25,000;
(h) engage in any transaction involving payments by the Company in
excess of $25,000 in any single calendar year with any other person directly
or indirectly controlling, controlled by or under direct or indirect common
control with the Company, including without limitation any person who is a
director, officer, employee or direct or indirect beneficial holder of at
least 5% of the then outstanding capital stock of the Company, any member of
the family of any such person, or any corporation, trust, partnership or
other entity in which any such person, or member of the family of any such
person, is a director, officer, trustee, partner or holder of more than 5% of
the outstanding capital stock thereof (each an "Affiliate"), except in the
ordinary course of business and pursuant to the reasonable requirements of
the Company's business and upon terms no less favorable to the Company than
would have been obtainable from a person who is not an Affiliate on an
arms'-length basis in the ordinary course of business;
(i) modify, rescind, terminate, waive, release or otherwise amend in any
material respect any of the terms or provisions (i) relating to
non-competition or confidential or proprietary information and contained in
any agreement, document or instrument with or relating to any of its
employees, officers, directors or other related parties, or to fail to
enforce any such provision, or fail to avail itself of all the rights and
remedies thereunder, or (ii) of this Agreement; or
(j) merge or consolidate with any other corporation or sell all or
substantially all of its assets or effect a voluntary dissolution,
liquidation or winding up of 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. This Agreement shall
automatically terminate at such time after the Closing Date as the Notes are
no longer outstanding, or on October 31, 1997 if the Closing has not then
been completed.
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.
17
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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 Rights Agreement, the Co-Sale Agreement or the
Notes and Warrants, except by operation of law or with the prior written
consent of the Purchasers holding a majority of the then-outstanding
principal amount of the Notes. Each Purchaser may assign or transfer its
rights hereunder in addition to the Notes and Warrants, and the Common Shares
and Warrant Shares, in whole or in part, to any affiliate of Purchaser or any
entity for which Purchaser or any of its affiliates serves as general partner
and/or investment advisor or in a similar capacity, and to all mutual funds,
or other pooled investment vehicles or entities, under the control or
management of such Purchaser or the general partner or investment advisor
thereof, or any affiliate of any of the foregoing.
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 the Purchasers.
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 opposite such Purchaser's
name on SCHEDULE 1, or at such other address or number as such Purchaser
shall have furnished to the Company in writing, with a copy to Victor J.
Paci, Esq., Bingham, Dana & Gould LLP, 150 Federal Street, Boston, MA 02110
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, with a copy to Edwin N. Lowe, Esq.,
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, CA 94306.
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 other than a finders fee to Mr. Lee in the amount of four percent
with respect to $2,000,000 principal amount of Notes purchased pursuant to
this Agreement, payable in stock or cash at the Company's election, and (ii)
hereby agrees to indemnify and to hold Purchaser harmless of and from any
liability for any commission or compensation in the nature of a finder's fee
to any other broker or 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.
(b) Each 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
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<PAGE>
firm (and the costs and expenses of defending against such liability or
asserted liability) for which such Purchaser, or any of its employees or
representatives, are responsible.
7.9 EXPENSES AND FEES. The Company will bear the actual expenses,
including fees and disbursements of counsel, incurred by Tudor Global
Trading, Inc. with respect to this Agreement and the transactions provided
for herein up to a maximum aggregate amount of $40,000, which shall be
payable to Bingham, Dana & Gould LLP at closing. Except for the immediately
preceding sentence, the Company and each Purchaser shall each bear these
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.
7.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to the Purchasers, 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 the Purchasers' part of any breach or default
under this Agreement, or any waiver on the Purchasers' 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 the
Purchasers', 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 attached as
EXHIBIT E, 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 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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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Convertible Subordinated
Promissory Note Purchase Agreement as of the day and year first above written.
"COMPANY"
HYBRID NETWORKS, INC.
By: /S/ Carl S. Ledbetter
-------------------------------
Its: President and CEO
------------------------------
"PURCHASERS"
TUDOR BVI FUTURES, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By: /S/ Robert P. Forlenza
----------------------------
Robert P. Forlenza,
Vice President
TUDOR ARBITRAGE PARTNERS, L.P.
By: Tudor Global Trading, Inc.,
General Partner
By: /S/ Robert P. Forlenza
---------------------------
Robert P. Forlenza,
Vice President
RAPTOR GLOBAL FUND, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By: /S/ Robert P. Forlenza
----------------------------
Robert P. Forlenza,
Vice President
RAPTOR GLOBAL FUND, L.P.
By: Tudor Investment Corporation,
General Partner
By: /S/ Robert P. Forlenza
----------------------------
Robert P. Forlenza,
Vice President
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<PAGE>
SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
SEQUOIA CAPITAL VI
By: /S/ Michael Moritz
---------------------------------
Its:
--------------------------------
SEQUOIA TECHNOLOGY PARTNERS VI
By: /S/ Michael Moritz
---------------------------------
Its:
--------------------------------
SEQUOIA XXIV
By: /S/ Michael Moritz
---------------------------------
Its:
--------------------------------
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SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
ACCEL IV L.P.
By: /S/ G. Carter Sednaoui
---------------------------------
Its: General Partner
--------------------------------
ACCEL INVESTORS '95 L.P.
By: /S/ G. Carter Sednaoui
---------------------------------
Its: General Partner
--------------------------------
ACCEL KEIRETSU L.P.
By: /S/ G. Carter Sednaoui
---------------------------------
Its: Chief Financial Officer
--------------------------------
ELLMORE C. PATTERSON PARTNERS
By: /s/ Company Officer
---------------------------------
Its: General Partner
--------------------------------
22
<PAGE>
SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
AT & T VENTURES
By: /S/ Neal Douglas
---------------------------------
Its: General Partner
--------------------------------
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SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
OSCCO III, L.P.
By: /S/ Stephen Halprin
---------------------------------
Its: General Partner
--------------------------------
24
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SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
/S/ Daniel E. Steimle
------------------------------------
Daniel E. Steimle
25
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SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
888 GROUP
By: /S/ David Hayes
---------------------------------
Its: /S/ Company Officer
--------------------------------
Company Officer
26
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SIGNATURE PAGE TO CONVERTIBLE SUBORDINATED PROMISSORY NOTE PURCHASE AGREEMENT
/S/ Bradford J. Shafer
------------------------------------
Bradford J. Shafer
27
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Signature Page to Convertible Subordinated Promissory Note Purchase Agreement
K. PHILLIP HWANG
By: /s/ K. Phillip Hwang
------------------------
Its:
------------------------
28
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Signature Page to Convertible Subordinated Promissory Note Purchase Agreement
J. F. SHEA CO., INC.
By: /s/ Edmund Shea, Jr.
------------------------
Its: Vice President
------------------------
29
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Signature Page to Convertible Subordinated Promissory Note Purchase Agreement
/s/ Gary Lauder
------------------------
Gary M. Lauder
30
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Schedule:
- --------
1. List of Purchasers
Exhibits:
- --------
A. Form of Subordinated Convertible Promissory Note
B. Form of Common Stock Purchase Warrant
C. Form of Rights Agreement
D. Form of Right of Co-Sale Agreement
E. Proprietary Information and Inventions Agreement
31
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SCHEDULE 1
PURCHASERS AND AMOUNTS PURCHASED
PURCHASER NAME & ADDRESS NOTES PURCHASED WARRANTS PURCHASED
- ------------------------ --------------- ------------------
Tudor BVI Future, Ltd.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 $1,842,667 182,440-456,106
Tudor Arbitrage Partners, L.P.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 $ 471,333 46,667-116,667
Raptor Global Fund Ltd.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 $1,218,000 120,593-301,486
Raptor Global Fund L.P.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 $ 468,000 46,336-115-841
Sequoia Capital VI
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Tami Taylor $ 273,000 27,029-67,574
Sequoia Technology Partners VI
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Tami Taylor $ 15,000 1,485-3,713
Sequoia XXIV
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Tami Taylor $ 12,000 1,188-2,970
<PAGE>
PURCHASER NAME & ADDRESS NOTES PURCHASED WARRANTS PURCHASED
- ------------------------ --------------- ------------------
Accel IV L.P.
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui $ 229,000 22,673-56,683
Accel Investors '95 L.P.
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui $ 10,750 1,064-2,661
Accel Keiretsu L.P.
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui $ 4,750 470-1,176
Ellmore C. Patterson Partners
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui $ 5,500 545-1,361
AT&T Ventures
3000 Sand Hill Road
Building 1, Suite 285
Menlo Park, CA 94025
Attn: Neal Douglas $ 257,201 25,465-63,664
OSCCO III, L.P.
3000 Sand Hill Road
Building 1, Suite 290
Menlo Park, CA 94025
Attn: Stephen E. Halprin $ 200,000 19,802-49,505
Gary M. Lauder
88 Mercedes Lane
Atherton, CA 94027 $ 100,000 9,901-24,753
888 Group
555 California Street
Suite 2200
San Francisco, CA 94104
Attn: David Hayes $ 125,000 12,376-30,941
<PAGE>
PURCHASER NAME & ADDRESS NOTES PURCHASED WARRANTS PURCHASED
- ------------------------ --------------- ------------------
Daniel E. Steimle
P.O. Box 928
Occidental, CA 95465 $ 500,000 49,505-123,763
Bradford J. Shafer
Heartport, Inc.
200 Chesapeake Drive
Redwood City, CA 94063 $ 50,000 4,950-12,376
J.F. Shea Co., Inc.
655 Brea Canyon Road
Walnut, CA 91789-3010 $ 100,000 9,901-24,753
Mr. K. Philip Hwang
2345 Harris Way
San Jose, CA 95131-1413 $1,000,000 99,009-247,525
TOTAL: $6,882,201 681,399-1,703,517
---------- -----------------
---------- -----------------
<PAGE>
EXHIBIT A
NEITHER THIS NOTE NOR THE SHARES ISSUABLE UPON EXERCISE OF THE CONVERSION
RIGHTS SET FORTH IN THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND NEITHER THIS NOTE NOR THE SHARES ISSUABLE UPON
EXERCISE OF THE CONVERSION RIGHTS SET FORTH IN THIS NOTE CAN BE SOLD OR
TRANSFERRED UNLESS SUCH SALE OR TRANSFER HAWS BEEN REGISTERED UNDER SUCH ACT
AND UNDER THE APPLICABLE SATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO
THE FORM AND SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND LAWS.
HYBRID NETWORKS, INC.
CONVERTIBLE SUBORDINATED NOTE
$___________
Palo Alto, California
September __, 1997
FOR VALUE RECEIVED, upon the terms and subject to the conditions set
forth in this convertible subordinated note (this "NOTE"), HYBRID NETWORKS,
INC., a Delaware corporation, with its principal place of business at 10161
Bubb Road, Cupertino, California 95014-4167 (the "COMPANY"), absolutely and
unconditionally promises to pay to the order of _______________________, a
____________ company (the "HOLDER"), at the Holder's offices at c/o Tudor
Global Trading, Inc., 40 Rowes Wharf, Boston, Massachusetts 02110, the
principal amount of __________________________ dollars ($____________),
together with interest as specified in Section 2(a).
This Note is one of a limited number of Convertible Subordinated Notes
(the "Convertible Subordinated Notes") in the aggregate principal amount of
up to Eight Million Dollars ($8,000,000), issued pursuant to that certain
Subordinated Promissory Note Purchase Agreement (the "Agreement") dated as of
the date hereof by and among the Company and those certain purchasers
identified on Schedule 1 thereto, including the Holder. The Company agrees
to make all payments (including prepayments) on the Convertible Subordinated
Notes in proportion to the respective principal amounts of each such note
outstanding from time to time.
SECTION 1. MATURITY; WAIVERS. The entire principal amount hereof, and
all unpaid interest thereon, shall become due and payable on the Maturity
Date (as defined in Section 3 hereof). The Company and any endorser and
guarantor of this Note or the obligations represented hereby expressly waives
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement
of this Note, assents to any extension or postponement of the time payment or
any other indulgence, to any addition, substitution, exchange or release of
collateral and to the addition or release of any other party or person
primarily or secondarily liable.
SECTION 2. INTEREST. This Note shall bear interest on the principal
amount outstanding and unpaid from time to time (a) from the date hereof
through and including the earlier of (i) March 30, 1998 and (ii) the date on
which such principal amount, together with all
<PAGE>
accrued but unpaid interest thereon, is paid or discharged in full, if such
date is on or before March 30, 1998, at the rate of 10% per annum, and (b) if
all or any portion of said principal amount, together with all accrued but
unpaid interest thereon, shall remain outstanding after March 30, 1998, then
from and after March 30, 1998 through and including the date on which such
principal amount, together with all accrued but unpaid interest thereon, is
paid or discharged in full, at the rate of 18% per annum. Interest shall be
calculated on the basis of a 360-day year and paid for the actual number of
days elapsed and shall be payable quarterly in arrears on the last day of
each quarter, commencing on September 30, 1998, with a final payment of all
accrued and unpaid interest upon the Maturity Date.
SECTION 3. PRINCIPAL PAYMENT; PREPAYMENT. All unpaid principal and
interest outstanding hereunder, together with all fees and expenses (if any)
payable hereunder, shall become immediately due and payable upon the earliest
to occur of the following (the "MATURITY DATE"):
(a) the closing of the first public offering of the Company's Common
Stock, $.001 par value per share (the "Common Stock"), and/or shares of any
other class of the Company's capital stock, pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities
Act");
(b) any sale or transfer, in a single transaction or a series of related
transactions, of all or substantially all of the Company's assets, or any
merger, consolidation or reorganization as a result of which the Company is
not the surviving corporation or, if the Company is the surviving
corporation, as a result of which the holders of voting stock of the Company
immediately prior to such merger, consolidation or reorganization do not
represent a majority of the voting stock of the surviving corporation, or the
dissolution of the Company, or the sale, in a single transaction or series of
related transactions, of a majority of the Company's voting capital stock
(whether newly issued or from treasury, or previously issued and then
outstanding, or any combination thereof);
(c) any Bankruptcy Event (as defined in Section 5(g) hereof); and
(d) September 30, 1998.
The Company shall have the right to prepay, in whole or in part, the
unpaid principal amount of this Note on fifteen (15) business days' prior
written notice to the Holder. Any notice of prepayment given pursuant to
this Section 3 shall not act to restrict or limit any rights which the Holder
may have at the time of receipt of such notice to convert this Note pursuant
to, and in accordance with, Section 7 below. Any prepayment of the principal
amount of this Note shall be made without premium or prepayment penalty,
PROVIDED that the Company shall pay all accrued interest to the date of
prepayment on the principal amount prepaid. All payments to be made by the
Company hereunder shall be made in U.S. dollars in cash without setoff or
counterclaim and without any withholding or deduction whatsoever.
SECTION 4. REPRESENTATIONS, WARRANTIES OF THE COMPANY AND OF THE HOLDER.
The representations and warranties of the Company and of the Holder
contained in Sections 3 and 4
2
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of the Purchase Agreement, respectively, are hereby incorporated by reference
in their entirety and made a part of this Note as fully as if restated herein.
SECTION 5. ACCELERATION EVENTS. If any of the following events or
circumstances (each an "ACCELERATION EVENT") shall occur:
(a) the Company's failure to meet its payment obligations when due under
this Note, including without limitation, the due and punctual payment of any
principal or interest due and payable hereunder;
(b) The Company commits a material breach or default of any of the
covenants or in the punctual performance of its other obligations under this
Note, the Purchase Agreement or that certain Stock Purchase Warrant of even
date herewith issued by the Company in favor of the Holder (the "WARRANT");
(c) any representation or warranty made by the Company herein or in the
Purchase Agreement or the Warrant shall have been false in any material
respect when made;
(d) there shall remain undischarged for more than sixty (60) days any
final judgment in excess of $5,000 or execution against the Company that
together with other outstanding claims and execution actions against the
Company exceed $100,000 in the aggregate;
(e) the Company commits a breach or default in the due and punctual
performance of any covenant or agreement with respect to indebtedness for
borrowed money, including without limitation the Debentures (as defined
below), and such breach or default permits the holder to accelerate a
material amount of such indebtedness under the terms thereof, or the Company
commits a material breach under any real property lease agreement or capital
equipment lease agreement to which the Company is a party;
(f) a reorganization, consolidation or merger of the Company with or
into any other entity or entities in which the Company is the surviving
corporation and as a result of which the holders of voting stock of the
Company immediately prior to such reorganization, consolidation or merger
represent a majority of the voting stock of the surviving corporation, if the
surviving corporation or corporations in the merger or consolidation does not
assume all of the Company's obligations under this Note and the Warrant
(subject to the Holder's rights set forth in Section 3 hereof); or
(g) the filing of a petition in bankruptcy or under any similar
insolvency law by the Company, 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 the Company and such petition is not
dismissed within 60 days of the filing thereof (each a "Bankruptcy Event");
then, the Holder at its option at any time thereafter during the
continuance of an Acceleration Event may declare the entire unpaid principal
of this Note and all interest, fees and expenses (if any) payable on or in
respect of this Note and the obligations evidenced hereby due and payable,
and the same shall thereupon forthwith become and be due and payable to the
Holder (an "ACCELERATION") without presentment, demand, protest, notice of
protest or any other formalities of any kind, all of which are hereby
expressly and irrevocably waived by the Company, PROVIDED THAT in the event
of an Acceleration Event under Section 5(g) all such
3
<PAGE>
amounts shall become and be immediately due and payable, and an Acceleration
shall be deemed for all purposes hereof to have occurred, automatically and
without any requirement of notice from the Holder.
SECTION 6. COVENANTS OF THE COMPANY. The covenants of the Company
contained in Section 6 of the Purchase Agreement are hereby incorporated by
reference in their entirety and made a part of this Note as fully as if
restated herein.
SECTION 7. CONVERSION. This Note shall be convertible pursuant to the
terms and provisions of this Section 7.
SECTION 7.1. CONVERSION RIGHTS. At the time of any non-public sale of
(i) shares of Common Stock (or any other class or series of capital stock of
the Company), or (ii) any securities convertible into, or exchangeable for,
or providing any right to purchase Common Stock (or any other class or series
of capital stock of the Company) or securities convertible into or
exchangeable for, shares of Common Stock (or any other class or series of
capital stock of the Company), while this Note is outstanding (any such
financing being referred to herein as a "PRIVATE EQUITY FINANCING"), the
Holder may, but shall not be obligated to, convert all (but not less than
all) of the outstanding principal amount of this Note, and, at the Holder's
option, all (but not less than all) of the accrued and unpaid interest on
this Note, into such number of whole shares of Conversion Stock (as defined
in Section 7.2(d) below) as the principal amount (and accrued and unpaid
interest, if the Holder elects to convert the same) will purchase at the
Conversion Price (as defined below in Section 7.2(c) below), upon the terms
and subject to the conditions hereinafter specified. The Company agrees to
give the Holder written notice (a "FINANCING NOTICE") of the contemplation of
a Private Equity Financing, including all of the material terms and
conditions thereof, not later than fifteen (15) days prior to the
contemplated completion thereof. Upon receipt of such Financing Notice, the
Holder may, by delivery to the Company of a Conversion Notice (as defined in
Section 7.2(b) below) not later than the date specified in the Financing
Notice, which date shall not be earlier than the date seven (7) days after
such Financing Notice and shall not be later than three (3) days prior to the
contemplated completion of such Private Equity Financing, exercise its
conversion rights hereunder. The Holder's Conversion Notice in connection
with a contemplated Private Equity Financing may expressly provide that the
exercise of conversion rights as set forth therein is contingent upon the
completion of such Private Equity Financing on the terms and conditions
described in the Company's notice thereof.
SECTION 7.2. CERTAIN DEFINITIONS. For all purposes of this Section 7,
the following terms shall have the respective meanings set forth below:
(a) "COMMON STOCK" shall mean and include the Company's Common Stock
authorized as at the date of this Note (as described in Section 3.4(b) of the
Purchase Agreement) and shall include also any other capital stock of the
Company of any class or series which has the right to participate in the
distribution of earnings and assets of the company without Limitation as to
amount;
(b) "CONVERSION NOTICE" shall mean written notice by the Holder in
substantially the form annexed hereto of the Holder's desire to exercise its
conversion rights hereunder;
4
<PAGE>
(c) "CONVERSION PRICE" shall mean the price for a share of Conversion
Stock payable by the investors purchasing such shares in the Private Equity
Financing in connection with which such Conversion Notice shall have been
delivered; and
(d) "CONVERSION STOCK" shall mean (i) the shares of Common Stock or
other class or series of capital stock of the Company or (ii) the securities
convertible into, exchangeable for or providing a right to purchase Common
Stock or other class or series of capital stock of the Company or providing a
right to purchase securities convertible into or exchangeable for shares of
Common Stock or other class or series of capital stock of the Company, which
shall be issued by the Company in any Private Equity Financing.
7.3. CONVERSION MECHANISM.
(a) Conversion of this Note shall be made upon surrender of this Note to
the Company at its principal place of business (or at such other office as
the Company shall designate by notice in writing to the Holder from time to
time), accompanied by written notice of the Holder's election to convert in
substantially the form of the Conversion Notice annexed hereto.
(b) The Company agrees that, at the time of such surrender and exercise
of conversion rights in compliance with the provisions hereof, the shares of
Conversion Stock issuable pursuant to such exercise shall be and be deemed to
be issued to the Holder (or the Holder's permitted transferee) as the record
owner of such shares as of the close of business of the Company on the date
on which conversion rights under this Note shall have been exercised as
aforesaid. In addition, the Holder shall thereupon be permitted to become a
party to, and shall have the benefit of, all of the rights granted to (i) the
other purchasers of Conversion Stock pursuant to each of the documents,
instruments and agreements executed and delivered by and between and/or among
the Company and such other purchasers of Conversion Stock in connection with
the applicable Private Equity Financing and (ii) the Holders (as defined in
that certain Hybrid Network, Inc. Amended and Restated Investor Rights
Agreement dated as of the date hereof by and among the Company and the
parties listed on the schedules thereto, including the Holder (the "INVESTOR
RIGHTS AGREEMENT")) pursuant to the Investor Rights Agreement.
(c) The Company covenants that all shares of Conversion Stock which may
be issued upon the exercise of conversion rights under this Note will, upon
such exercise, be validly issued, fully paid and non-assessable and free from
all taxes, liens, charges and other encumbrances or restrictions on sale and
free and clear of all pre-emptive rights in respect of the issue thereof.
(d) The certificates for the shares of Conversion Stock so issued shall
be delivered to the Holder (or the Holder's permitted designee) within a
reasonable time, not exceeding ten (10) days, after the date on which the
conversion rights under this Note shall have been so exercised, and shall
bear the following legend or a substantially equivalent legend:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
TRANSFERRED UNLESS SUCH SALE OR TRANSFER HAS BEEN REGISTERED UNDER SUCH ACT
AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR, IN THE OPINION OF COUNSEL
SATISFACTORY TO THE
5
<PAGE>
COMPANY, BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND
SUBSTANCE OF THE OPINION, IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT AND LAWS.
Such certificates may also bear any legend required under any applicable state
securities laws. The Company may take such steps as it deems appropriate to
cause the assignment and transfer restriction provided for in this Note to be
complied with.
(e) This Note may be converted once and only once. Unless the Holder
shall have elected to convert accrued but unpaid interest hereon, all of such
interest shall be paid to the Holder in cash immediately upon the conversion
of the principal amount of this Note.
(f) No fractional shares or scrip representing fractional shares shall
be issued upon the exercise of conversion rights under this Note, and the
Conversion Price with respect to any such fractional shares shall be payable
to the Holder in cash by the Company within ten (10) days after the date of
any such conversion.
(g) Issuance of certificates for shares of Conversion Stock upon the
exercise of conversion rights under this Note shall be made without charge to
the Holder (or the Holder's permitted transferee) for any issue or transfer
taxes or any other incidental expenses in respect of the issuance of such
certificates, all of which taxes and expenses shall be paid by the Company,
and such certificates shall be issued in the name of the Holder (or the
Holder's permitted transferee); PROVIDED, HOWEVER, that any income taxes or
capital gains taxes or similar taxes shall be payable by the Holder.
SECTION 7.4. CERTAIN OBLIGATIONS OF THE COMPANY. The Company will, in
accordance with the laws of the State of Delaware, take such actions as may
be necessary to ensure that the authorized amount of any class of stock from
which Conversion Stock is to be issued shall, at the time of such conversion,
be sufficient to permit the exercise of conversion rights under this Note and
to ensure that, at the time of such conversion, the authorized amount of any
class of stock into which the Conversion Stock is convertible shall be
sufficient to permit the exercise of any such conversion rights applicable to
the Conversion Stock. The Company will not, by amendment of its Certificate
of Incorporation or through reorganization, consolidation, merger,
dissolution, issuance of capital stock or sale of treasury stock or sale of
assets, or by any other voluntary act or deed, avoid or seek to avoid the
material performance or observance of any of the covenants, stipulations or
conditions in this Note to be observed or performed by the company. The
Company will at all times in good faith assist, insofar as it is able, in the
carrying out of all of the provisions of this Note in a reasonable manner and
in the taking of all other action which may be necessary in order to protect
and preserve the rights of the Holder set forth herein.
SECTION 7.5. EFFECT OF REORGANIZATION, RECLASSIFICATION, CONSOLIDATION,
MERGER, ETC.
(a) If, at any time while this Note is outstanding (subject in all
events to the rights of Holder set forth in Section 3 hereof) there should be
any reorganization, consolidation or merger of the Company with another
entity as a result of which the Company is not the surviving corporation, or
any sale, conveyance, lease or other transfer by the Company of all or
substantially all of its property to any other entity, the Holder of this
Note shall thereafter, upon
6
<PAGE>
exercise of conversion rights hereunder, be entitled to receive the number of
shares of stock or other securities or property of the Company, or of the
successor corporation resulting from such reorganization, consolidation or
merger, as the case may be, to which the Conversion Stock (and any other
securities and property) of the Company, deliverable upon the exercise of
conversion rights hereunder, would have been entitled upon such
consolidation, merger, sale or other transfer if such conversion rights had
been exercised immediately prior to such consolidation, merger, sale or other
transfer; and, in any such case, appropriate adjustment (as determined in
good faith by the Board of Directors of the Company) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the Holder of this Note to the end that the
provisions set forth herein shall thereafter be applicable, as near as
reasonably may be, in relation to any shares or other property thereafter
deliverable upon the exercise of conversion rights hereunder as if such
conversions rights had been exercised immediately prior to such
consolidation, merger, sale or other transfer and the Holder hereof had
carried out the terms of the exchange as provided for by such consolidation
or merger.
(b) The Company shall not effect any such consolidation or merger
unless, upon or prior to the consummation thereof, the successor corporation
shall by written instrument have assumed the obligation to deliver to the
Holder hereof such shares of stock, securities, cash or property as such
Holder shall be entitled to purchase in accordance with Section 7.5(a) hereof
(subject in all events to the rights of Holder set forth in Section 3 hereof).
SECTION 7.6 NO RIGHTS OR RESPONSIBILITIES AS SHAREHOLDER. This Note
neither entitles the Holder to any rights, nor subjects the Holder to any
responsibilities, as a shareholder of the Company.
SECTION 8. SUBORDINATION.
SECTION 8.1 SUBORDINATION TO SENIOR INDEBTEDNESS. Notwithstanding any
other provision of this Note, the payment of principal and interest on this
Note is and shall be junior and subordinated in right of payment, to the
extent and in the manner set forth in this Section 8, to the prior payment in
full of all amounts due and owing upon all Senior Indebtedness, as defined in
Section 8.2(a) below, at any time outstanding. Holder agrees to negotiate in
good faith reasonable and customary terms of a subordination agreement with
the Company's lender or lenders or proposed lender or lenders under a bank
credit facility, pursuant to which subordination agreement payment of the
principal and interest of the Notes shall be junior and subordinated in right
of payment to payment of such bank credit facility; provided, that any
subordination agreement with such lender or lenders acceptable to the Holders
of a majority of the aggregate principal amount of the Notes then outstanding
shall be binding upon all holders of Notes.
SECTION 8.2 CERTAIN DEFINITION. For all purposes of this Note, the
following terms shall have the respective meanings set forth below:
(a) "SENIOR INDEBTEDNESS" shall mean all of the Company's indebtedness
pursuant to those certain Senior Secured Convertible Debentures due 2002,
dated as of April 30, 1997, in the original principal amount of $5,500,000
(the "Debentures"); PROVIDED, HOWEVER, that Senior Indebtedness shall include
principal and interest under such Debentures at any time of determination
only to the extent that the aggregate principal amount thereunder does not
exceed
7
<PAGE>
$5,500,000 MINUS the aggregate amount of all principal payments made by the
Company, in respect thereof, PLUS accrued and unpaid interest under the
Debentures;
(b) "Subordinated Indebtedness" shall mean the indebtedness of the
Company under the Convertible Subordinated Notes; and
(c) "Standstill Period" shall mean, with respect to any Subordinated
Indebtedness, the period commencing on the date on which the holder thereof
shall have received written notice from the holders of Senior Indebtedness of
the occurrence of a Default (as defined in the Debentures) under the
Debentures and ending on the earlier of (i) 90 days after the commencement of
such period, and (ii) the date on which such Default shall have been cured or
waived.
SECTION 8.3 PRIOR PAYMENT OF SENIOR INDEBTEDNESS IN BANKRUPTCY, ETC. In
the event of any insolvency, bankruptcy, receivership, liquidation,
reorganization or other similar proceedings relating to the Company or its
debts or assets, and, in the event of any proceedings for voluntary
liquidation, dissolution or other winding up of the Company or distribution
or marshalling of its assets or any composition with creditors of the
Company, whether or not involving insolvency or bankruptcy, if all Senior
Indebtedness has not been paid in full at such time, (a) the holders of
Subordinated Indebtedness shall demand, but only the holders of Senior
Indebtedness may collect, payment of all Subordinated Indebtedness due from
the Company, and (b) the holders of the Senior Indebtedness are hereby
irrevocably authorized at any such meeting or in any such proceeding to
collect any assets of the Company distributed, divided or applied by way of
dividend or payment or any such securities issued on account of Subordinated
Indebtedness and apply the same, or the proceeds of any realization upon the
same that the holders of the Senior Indebtedness in their discretion elect to
effect, to Senior Indebtedness until all Senior Indebtedness shall have been
paid in full, rendering any surplus then remaining to the Holder of this
Note. The holders of the Subordinated Indebtedness shall retain the right to
vote and otherwise act in any such proceeding (including, without limitation,
the right to vote to accept or reject any plan of partial or complete
liquidation, reorganization, arrangement, composition or extension).
SECTION 8.4 NO PAYMENT ON NOTES UNDER CERTAIN CONDITIONS.
(a) During any Standstill Period, (i) no payment shall be made by the
Company on the Subordinated Indebtedness or accepted by any holder of such
Subordinated Indebtedness; and (ii) unless the holders of Senior Indebtedness
shall have accelerated such Senior Indebtedness or shall have commenced an
action or proceeding against the Company to enforce any of their rights in
respect of the Senior Indebtedness, no action or proceeding shall be
commenced by any holder of such Subordinated Indebtedness to collect payment
thereof. The acceleration of any Subordinated Indebtedness by the holder
thereof during any Standstill Period applicable thereto shall be deemed to be
automatically rescinded upon the expiration of such Standstill Period if upon
such expiration no Acceleration Event (other than failure by the Company to
pay the principal amount so accelerated) exists under this Agreement.
(b) Notwithstanding anything herein to the contrary, no Standstill
Period shall commence within 90 days after the end of another Standstill
Period nor may the provisions of this Section 8.4 or the Standstill Periods
established hereby restrict or prohibit for more than 180
<PAGE>
days in any 360-day period the Company from making or the holder thereof from
accepting any payment of Subordinated Indebtedness or such holder from
bringing any action or proceeding to collect any such payment.
SECTION 8.5 PAYMENTS HELD IN TRUST. If, in violation of the terms of
this Section 8, any holder of Subordinated Indebtedness receives payment
thereof or any distribution with respect thereto before all Senior
Indebtedness is paid in full, such payment or distribution shall be held in
trust for and paid ratably to the holders of Senior Indebtedness or their
representatives until all Senior Indebtedness shall have been paid in full.
No such payments or distributions paid to the holders of Senior Indebtedness
or their representatives by any holder of Subordinated Indebtedness shall be
deemed to discharge any of such Subordinated Indebtedness.
SECTION 8.6 SUBROGATION. Upon the payment of any Senior Indebtedness,
the holders of the unpaid Subordinated Indebtedness shall be subrogated to
the rights of the holders of Senior Indebtedness to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness.
For purposes of such subrogation, no payments or distributions made to the
holders of Senior Indebtedness of any cash, property or securities to which
the holders of Subordinated Indebtedness would be entitled except for the
subordination provisions of this Section 8 and no payment to the holders of
Senior Indebtedness by the holders of Subordinated Indebtedness, as between
the Company, its creditors (other than the holders of Senior Indebtedness)
and the holders of Subordinated Indebtedness, shall be deemed to discharge
any of the Senior Indebtedness with respect to which the holders of such
Subordinated Indebtedness shall be subrogated pursuant to this Section 8.6.
SECTION 8.7 SCOPE OF SUBORDINATION. The subordination provisions of
this Section 8 are intended solely to define the relative rights of the
holders of Subordinated Indebtedness and the holders of Senior Indebtedness.
Nothing in this Section 8 or this Note shall impair, as between the Company,
its creditors (other than the holders of Senior Indebtedness) and the holders
of Subordinated Indebtedness, the unconditional and absolute obligation of
the Company to timely pay the principal, interest, and other amounts and
obligations owing under the terms of this Note or affect the relative rights
of the holders of this Note and creditors of the Company (other than the
holders of Senior Indebtedness), nor shall anything prevent any holder of
Subordinated Indebtedness from accepting any payment with respect to such
Subordinated Indebtedness or exercising all remedies otherwise permitted by
application law upon default with respect to such Subordinated Indebtedness
or this Note, subject to any rights under this Section 8 of the holders of
Senior Indebtedness in respect of such payment.
SECTION 8.8 NOTICES. The holders of Senior Indebtedness will promptly
notify the holders of Subordinated Indebtedness in writing of the occurrence
of any Default, and the holders of Subordinated Indebtedness will promptly
notify the holders of Senior Indebtedness in writing of the occurrence of any
Accelerated Event. The failure to give such notice shall not, however,
deprive either the holders of Senior Indebtedness or the holders of
Subordinated Indebtedness of any rights or remedies to which they are
entitled hereunder.
SECTION 9. EXCHANGE. This Note is exchangeable, upon the surrender
hereof by the registered Holder at the principal office of the Company, for
new promissory notes of like tenor and date representing in the aggregate the
then outstanding principal balance hereof (together with interest theretofore
accrued and unpaid), each of such new notes to evidence the portion of
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<PAGE>
such then outstanding principal balance (and accrued and unpaid interest, in
such principal amount) as shall be designated by said registered Holder at
the time of such surrender, but in no event in denominations of principal of
less than $100,000.
SECTION 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF NOTE. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Note, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of this Note, if mutilated, the Company
will make and deliver a new promissory note of like tenor and date, and in
the principal balance then outstanding, in lieu of this Note.
SECTION 11. TITLE TO NOTE. This Note and all rights hereunder are
assignable and transferable (subject to the legend set forth in the heading
on the first page hereof) in whole or in part to, and the Holder may
participate all or any portion of this Note to affiliates of the Holder or
any entities for which the Holder or its affiliates serve as general partner
and/or investment advisor or in a similar capacity, all mutual funds, or
other pooled investment vehicles or entities, under the control or management
of such Holder or the general partner or investment advisor thereof, or any
affiliate of any of the foregoing. Any transfer or assignment shall occur at
the office or agency of the Company by the registered Holder in person or by
a duly authorized attorney, upon surrender of this Note together with an
assignment hereof properly endorsed. Until transfer hereof on the
registration books of the Company, the Company may treat the registered
Holder as the owner hereof for all purposes.
SECTION 12. COMMUNICATIONS AND NOTICES. All notices, demands, requests,
certificates or other communications hereunder must be in writing, either
delivered in hand or sent by private expedited courier for overnight delivery
with signature required, or by facsimile transmission, by tested or otherwise
authenticated telex or cable, in each such case, such notice, demand,
request, certificate or other communications being deemed to have been given
upon delivery or receipt, as the case may be, or by certified mail, postage
prepaid, in which case, such notice, demand, request, certificate or other
communications shall be deemed to have been given three (3) days after the
date on which it is first deposited in the mails, and, if to the Company,
shall be addressed to it at its principal place of business referred to in
the first paragraph hereof, or at such other address as the Company may
hereafter designate in writing by notice to the registered Holder, and, if so
to such registered Holder, addressed to such Holder at the address of such
Holder as shown on the books of the Company.
SECTION 13. MISCELLANEOUS.
(a) If the last or appointed day for the taking of any action required
or the expiration of any right granted herein shall be a Sunday or a Saturday
or shall be a legal holiday or a day on which banking institutions in the
City of Boston, Massachusetts, are authorized or required by law to remain
closed, then such action may be taken or right may be exercised on the next
succeeding day which is not a Sunday, a Saturday or a legal holiday and not a
day on which banking institutions in the City of Boston, Massachusetts, are
authorized or required by law to remain closed.
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<PAGE>
(b) THIS NOTE MAY OT BE ASSIGNED BY THE COMPANY WITHOUT THE PRIOR
WRITTEN CONSENT OF THE HOLDER. SUBJECT TO THE FOREGOING, THE NOTE SHALL BE
BINDING UPON THE COMPANY'S SUCCESSORS IN TITLE AND ASSIGNS. THIS NOTE SHALL
CONSTITUTE A CONTRACT UNDER SEAL AND, FOR ALL PURPOSES, SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA (WITHOUT
REGARD TO THE LAWS OF RULES OF LAW APPLICABLE TO CONFLICT OR CHOICE OF LAW).
(c) The failure of the Holder to exercise any or all of its rights,
remedies, powers or privileges hereunder in any instance shall not constitute
a waiver thereof in that or any other instance.
(d) The Company agrees promptly to pay all reasonable fees, expenses and
disbursements incurred from time to time in connection with any amendment,
modification, consent or waiver to or under this Note or the Warrant.
(e) Should all or any part of the indebtedness represented by this Note
be collected by action at law, or in bankruptcy, insolvency, receivership or
other court proceedings, or should this Note be placed in the hands of
attorneys for collection after default, the Company hereby promises to pay to
the Holder, upon demand by the Holder at any time, in addition to the
outstanding principal balance of and, accrued interest on, and all (if any)
other amounts payable to or in respect of this Note, all court costs and
reasonable attorneys' fees and other collection charges and expenses incurred
or sustained by the Holder.
IN WITNESS WHEREOF, the Company has caused this Convertible Subordinated
Note to be signed in its corporate name and its corporate seal to be
impressed hereon by its duly authorized officers.
HYBRID NETWORKS, INC.
[Seal] By:
-------------------------------------
Name:
Title:
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<PAGE>
FORM OF CONVERSION NOTICE
(To be signed only on exercise of conversion rights)
TO: HYBRID NETWORKS, INC.
The undersigned, the registered Holder of the Convertible Subordinated
Note dated September __, 1997 (the "Note"), of Hybrid Networks, Inc. (the
"Company") hereby irrevocably elects to exercise its conversion rights under
the provisions of Section 7 of the Note by conversion of [(i)] all of the
$_______ of outstanding principal of the Note[, and [(ii)] all of the
$________ of accrued and unpaid interest thereon, for ______* shares of ____
Stock of the Company, and requests that the certificates for such shares be
issued in the name of, and delivered to, __________ _________, whose address
is ____________ _____________.
Dated:
--------------------------- -----------------------------------------
(Signature must conform in all
respects to name of registered
holder as specified on the face
of the Note)
-----------------------------------------
(Address)
Signed in the presence of:
- ----------------------------------
*Insert here the number of shares as to which all of the outstanding
principal of, and if it is to be converted, accrued and unpaid interest on,
the Note is being converted.
<PAGE>
FORM OF ASSIGNMENT
(To be signed only on transfer of Note)
For value received, the undersigned hereby sells, assigns, and transfers unto
______ all right, title and interest in and to the within Convertible
Subordinated Note, dated September ___, 1997, of Hybrid Networks, Inc., and
appoints ________ Attorney to transfer such right on the books of said
Company with full power of substitution in the premises.
Dated:
--------------------------- -----------------------------------------
(Signature must conform in all
respects to name of registered
holder as specified on the face
of the Note)
-----------------------------------------
(Address)
Signed in the presence of:
- ----------------------------------
<PAGE>
EXHIBIT B
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
CAN BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR OTHER TRANSFER HAS BEEN
REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR,
IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE
IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS.
No. ___________________ Dated: September __, 1997
HYBRID NETWORKS, INC.
COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY THAT, for value received, ________________________
(the "NAMED HOLDER") and its registered successors and permitted assigns are
entitled, subject to the terms and conditions set forth below, to purchase
from HYBRID NETWORKS, INC., a Delaware corporation (the "CORPORATION"), at
any time and from time to time after 9:00 A.M., Cupertino, California time,
on the Initial Exercise Date (as defined in Section 1 below) and prior to
5:00 P.M., Cupertino, California time, on the Expiration Date (as defined in
Section 1 below), any or all of the Warrant Shares (as defined in Section 1
below), at a purchase price per share equal to the Exercise Price (as defined
in Section 1 below). The number and character of the Warrant Shares and the
Exercise Price are subject to adjustment as provided herein.
This Common Stock Purchase Warrant (this "WARRANT") is being issued in
connection with (a) the Subordinated Note Purchase Agreement dated as of
September 18, 1997 (the "PURCHASE AGREEMENT") by and among the Corporation,
the Named Holder and the other persons (the "INVESTORS") that are purchasing
Convertible Subordinated Notes pursuant to the Purchase Agreement and (b) the
Convertible Subordinated Notes, dated as of the date hereof, made by the
Corporation pursuant to the Purchase Agreement in favor of the Named Holder
and the other Investors (the "CONVERTIBLE SUBORDINATED NOTES"). A copy of
the Convertible Subordinated Notes are on file at the principal office of the
Corporation.
SECTION 1. DEFINITIONS. As used in this Warrant, the following terms
shall have the respective meanings set forth below or elsewhere in this
Warrant as referred to below:
"ADDITIONAL STOCK" shall have the meaning set forth in Section 4.3(f).
"COMMON STOCK" shall mean shares of the Common Stock of the Corporation,
$.001 par value per share (as such par value may be amended from time to
time).
"CONVERSION FRACTION" shall have the meaning set forth in Section 2.3.
<PAGE>
"CONVERTIBLE SUBORDINATED NOTES" shall have the meaning set forth in the
second paragraph of this Warrant.
"CORPORATION" shall have the meaning set forth in the first paragraph of
this Warrant.
"DECREASED NUMBER" shall have the meaning set forth in Section 2.1
hereof.
"DERIVATIVE SECURITY" shall have the meaning set forth in Section 4.3(e).
"EFFECTIVE PRICE" shall have the meaning set forth in Section 4.3(a).
"EXERCISE DATE" shall have the meaning set forth in Section 2.4 hereof.
"EXERCISE PRICE" shall mean, as of the Initial Exercise Date and at any
time thereafter, the Initial Exercise Price, as adjusted from time to time
pursuant to the terms of this Warrant.
"EXPIRATION DATE" shall mean September __, 2002.
"FAIR MARKET VALUE" of a Warrant Share shall mean (i) in the case of the
exercise of this Warrant, in whole or in part, after the consummation of an
Initial Public Offering, the average of the last reported sale price per
share of Stock on the Nasdaq-NMS or any national securities exchange in which
such Stock is quoted or listed, as the case may be, for the three trading
days immediately preceding the Exercise Date, or (ii) in the case of the
exercise of this Warrant, in whole or in part, before the consummation of an
Initial Public Offering, the fair market value of a share of Stock, as
determined in good faith by the Board of Directors of the Corporation.
"HOLDER" shall mean, as applicable, (i) the Named Holder, (ii) any
successor of the Named Holder or (iii) any Person to whom this Warrant or any
portion thereof shall have been transferred in accordance with the provisions
of Section 9 hereof.
"INITIAL EXERCISE DATE" shall mean the earlier to occur of (i) 180 days
after the Issue Date, and (ii) the date of consummation of an Initial Public
Offering; PROVIDED, HOWEVER, that, in the event of any sale or transfer, in a
single transaction or a series of related transactions, of all or
substantially all of the Corporation's assets, or the merger, consolidation,
reorganization or dissolution of the Corporation, or the sale, in a single
transaction or a series of related transactions, of a majority of the
Corporation's voting capital stock (whether newly issued or from treasury, or
previously issued and then outstanding, or any combination thereof) (any of
such events, a "DISPOSAL EVENT") occurring at any time prior to the earlier
of (A) 180 days after the Issue Date or (B) the date of consummation of an
Initial Public Offering, then the Initial Exercise Date shall be deemed to be
the date that is five business days prior to the earliest to occur of any
such Disposal Event.
"INITIAL EXERCISE PRICE" shall mean $4.04 per share (subject to
appropriate adjustment as provided in this Warrant); PROVIDED, HOWEVER, that,
in the event that all of the following occur: (i) the Convertible
Subordinated Notes are not paid in full by March 30, 1998 and (ii) the
Corporation fails to pay interest at the rate of 18% per annum at any time
that such interest is due and payable, then the Exercise Price shall
automatically and without further action on the part of the Holder be reduced
to $.01 per share (subject to appropriate adjustment in this Warrant, but in
no event less than the par value of capital stock constituting the Warrant
Shares) but the number
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<PAGE>
of Warrant Shares shall not be increased; PROVIDED FURTHER that in the event
that the number of shares of Common Stock outstanding on a fully diluted
basis as of the date hereof, and as of the date of closing (the "ACTUAL FULLY
DILUTED SHARES"), is more than the number of shares of Common Stock on a
fully diluted basis set forth in Section 3.4 of the Purchase Agreement and
Section 3.4 of the Letter of Exceptions (the "REPRESENTED FULLY DILUTED
SHARES") by an amount in excess of 25,000 shares of Common Stock, then (i)
the Exercise price shall be reduced by a fraction, the numerator of which
shall be equal to the excess of the Actual Fully Diluted Shares over the
Represented Fully Diluted Shares and the denominator of which shall be the
Actual Fully Diluted Shares (the "CAPITALIZATION RATIO") and (ii) the number
of Warrant Shares shall be increased by the Capitalization Ratio.
"INITIAL PUBLIC OFFERING" shall mean the closing of an underwritten
public offering pursuant to an effective registration statement filed with
the Securities and Exchange Commission under the Securities Act covering the
offer and sale of shares of Common Stock or any other class of capital stock
of the Corporation.
"INVESTOR RIGHTS AGREEMENT" shall mean that certain Hybrid Networks,
Inc. Amended and Restated Investor Rights Agreement, dated as of the date of
the Purchase Agreement, by and among the Corporation and the parties listed
on the Schedules thereto, including the Named Holder.
"ISSUE DATE" shall mean September __, 1997.
"NAMED HOLDER" shall have the meaning set forth in the first paragraph
hereof.
"NOTES" shall mean the Convertible Subordinated Notes and any promissory
notes of like tenor issued by the Corporation in exchange or replacement
therefor, upon assignment or transfer thereof or otherwise pursuant to the
terms of the Convertible Subordinated Notes.
"MAXIMUM NUMBER" shall have the meaning set forth in Section 2.1 hereof.
"PERSON" shall mean an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of
whatever nature.
"PURCHASE AGREEMENT" shall have the meaning set forth in the second
paragraph of this Warrant.
"REGISTRABLE SECURITIES" shall have the meaning ascribed to it in the
Investor Rights Agreement.
"RIGHT OF CO-SALE AGREEMENT" shall mean the Right of Co-Sale Agreement,
dated as of the date of the Purchase Agreement, by and among the Corporation,
the Investors and others.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"STOCK" shall mean (i) Common Stock, and/or (ii) to the extent that the
Holder is entitled to receive, or receives, upon exercise of this Warrant any
other capital stock of the Corporation
3
<PAGE>
(other than Common Stock), or of any other Person or any other securities of
the Corporation or of any other Person, in lieu of or in addition to Common
Stock (whether as a result of any reclassification of Common Stock or any
other Stock or reorganization, reclassification, merger, consolidation or
sale of substantially all the assets of the Corporation or otherwise), such
other capital stock or securities.
"SUBJECT SHARES" shall have the meaning set forth in Section 2.3.
"WARRANT" shall have the meaning set forth in the second paragraph of
this Warrant.
"WARRANT SHARES" shall mean the shares of Common Stock, as adjusted as
provided in this Warrant, that are issuable upon the exercise of this Warrant.
SECTION 2. EXERCISE OF WARRANT.
SECTION 2.1 NUMBER OF WARRANT SHARES ISSUABLE UPON EXERCISE. Subject
to adjustment as provided herein, the maximum number of Warrant Shares
issuable upon exercise of this Warrant shall be ________________
[247,525 WARRANT SHARES WITH RESPECT TO EACH $1,000,000 IN PRINCIPAL AMOUNT OF
CONVERTIBLE SUBORDINATED NOTE PURCHASED BY THE NAMED HOLDER PURSUANT TO THE
PURCHASE AGREEMENT] (the "MAXIMUM NUMBER"); PROVIDED, HOWEVER, that in the
event that the Notes are paid in full prior to September 1, 1998, the maximum
number of Warrant Shares issuable upon exercise of this Warrant shall be
decreased by 10% of the Maximum Number (rounding to the nearest whole Warrant
Share any fractional share that would otherwise result from the decrease) in
respect of each month prior to September 1998 during which the Notes no
longer remain outstanding (the number of Warrant Shares resulting from any
such decrease is referred to as the "DECREASED NUMBER") (so that, if the
Notes are paid in full during August 1998, the Decreased Number would be
equal to 90% of the Maximum Number; if the Notes are paid in full during
March 1998, the Decreased Number would be equal to 40% of the Maximum
Number); PROVIDED FURTHER, that in no event will the adjustment set forth
above cause the Decreased Number to be less than _____________________
[99,009 WARRANT SHARES WITH RESPECT TO EACH $1,000,000 IN PRINCIPAL AMOUNT OF
CONVERTIBLE SUBORDINATED NOTE PURCHASED BY THE NAMED HOLDER PURSUANT TO THE
PURCHASE AGREEMENT]. The maximum number of Warrant Shares issuable upon
exercise of this Warrant during any month prior to September 1, 1998 shall be
equal to the Decreased Number that would result if the Notes were paid in
full during that month; PROVIDED, HOWEVER, that, upon exercise of this
Warrant during any month prior to September 1998, the Corporation shall issue
to the Named Holder a new Warrant (the "REMAINDER WARRANT") of like tenor
exercisable for a number of Warrant Shares equal to the difference between
the Maximum Number and the number of Warrant Shares issued pursuant to the
foregoing sentence. The Remainder Warrant shall become exercisable with
respect to a number of Warrant Shares equal to 10% of the Maximum Number upon
the first day of each successive calendar month after the date of exercise of
this Warrant and prior to September 1, 1998 during which the Notes, or any
portion of the Notes, remain outstanding.
SECTION 2.2 METHOD OF EXERCISE. Subject to and upon all of the terms
and conditions set forth in this Warrant, the Holder may exercise this
Warrant, in whole or in part with respect to any Warrant Shares as to which
this Warrant is then currently exercisable, at any time and from time to time
during the period commencing on the Initial Exercise Date and ending on the
Expiration Date, by presentation and surrender of this Warrant to the
Corporation at its principal
4
<PAGE>
office (or such other office or agency as the Corporation may designate by
notice in writing to the Holder in accordance with Section 10.4), together
with (a) a properly completed and duly executed subscription form, in the
form attached hereto, which subscription form shall specify the number of
Warrant Shares for which this Warrant is then being exercised, and (b)
payment of the aggregate Exercise Price payable hereunder in respect of the
number of Warrant Shares for which this Warrant is then being exercised.
Payment of such aggregate Exercise Price shall be made either (i) in cash or
by money order, certified or bank cashier's check or wire transfer (in each
case in lawful currency of the United States of America), (ii) in the event
the Holder is also the holder of a Note and such outstanding principal amount
of, and/or accrued but unpaid interest on, such Note is equal to or greater
than the Exercise Price, by decreasing the outstanding principal amount of,
and/or accrued but unpaid interest on, such Note by the amount of the
Exercise Price, or (iii) by conversion of this Warrant as provided in
Section 2.3.
SECTION 2.3 CONVERSION OF WARRANT.
(a) The Holder shall have the right to convert this Warrant, in whole
or in part with respect to any Warrant Shares as to which this Warrant is
currently exercisable, at any time and from time to time during the period
commencing on the Initial Exercise Date and ending on the Expiration Date, by
the presentation and surrender of this Warrant to the Corporation at its
principal office (or such other office or agency as the Corporation may
designate by notice in writing to the Holder in accordance with Section 10.4,
together with a properly completed and duly executed conversion form, in the
form attached hereto, which conversion form shall specify the number of
Warrant Shares as to which this Warrant is being converted (the "SUBJECT
SHARES"). Upon exercise of this conversion right, the holder hereof shall be
entitled to receive that number of Warrant Shares equal to the quotient
obtained by dividing [ (A - B) (X) ] by (A), where:
A = the Fair Market Value of one Warrant Share on the date of
conversion of this Warrant.
B = the Exercise Price for one Warrant Share under this Warrant.
X = the number of Subject Shares as to which this Warrant is being
converted.
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon conversion of this Warrant.
(b) Upon conversion of this Warrant in accordance with this Section 2.3,
the Holder shall be entitled to receive a certificate for the number of
Warrant Shares acquired by the Holder as determined in accordance with the
foregoing, and a new Warrant in substantially identical form and dated as of
such conversion for the purchase of that number of Warrant Shares equal to
the difference, if any, between (i) the number of Warrant Shares subject to
issuance upon exercise of this Warrant immediately before such conversion and
(ii) the number of Subject Shares as to which the Holder exercised its
conversion right pursuant to this Section 2.3. No fractional shares may be
issued upon any conversion of this Warrant. If any conversion would result
in a fractional share (the "CONVERSION FRACTION"), then, at Holder's election
either (A) the number of shares issued upon the conversion will be rounded
down to the last whole share; or (B) the Holder will pay in cash an amount
equal to the Exercise Price times a fraction equal to 1 less the Conversion
Fraction, in which event the number of shares issued upon the conversion
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<PAGE>
(plus the cash payment) will be rounded up to the nearest whole share. For
example, if the Fair Market Value is $10.00 and the Exercise Price is $4.04,
then, upon exercise of the conversion right under this Section 2.3 with
respect to 100 Subject Shares, the Holder would receive, at the Holder's
election, either (1) 59 Warrant Shares without making any cash payment or (2)
60 Warrant Shares if the Holder elected to pay $2.42 in cash (60% of the
Exercise Price for the extra share) and would receive a new Warrant for the
number of Warrant Shares subject to issuance upon exercise of this Warrant
immediately before such conversion less 100.
SECTION 2.4 EFFECTIVENESS OF EXERCISE; OWNERSHIP. Each exercise of
this Warrant by the Holder shall be deemed to have been effected immediately
prior to the close of business on the date upon which all of the requirements
of Sections 2.1 and 2.2 hereof with respect to such exercise shall have been
complied within in full (each such date, an "EXERCISE DATE"). On the
applicable Exercise Date with respect to any exercise of this Warrant by the
Holder, the Corporation shall be deemed to have issued to the Holder, and the
Holder shall be deemed to have become the holder of record and legal owner
of, the number of Warrant Shares being purchased upon such exercise of this
Warrant, notwithstanding that the stock transfer books of the Corporation
shall then be closed or that certificates representing such number of Warrant
Shares being purchased shall not then be actually delivered to the Holder.
SECTION 2.5 DELIVERY OF STOCK CERTIFICATES ON EXERCISE. As soon as
practicable after the exercise of this Warrant, and in any event within ten
days thereafter, the Corporation, at its expense, will cause to be issued in
the name of and delivered to the Holder, or as the Holder may direct (subject
in all cases, to the provisions of Section 9 hereof), a certificate of
certificates for the number of Warrant Shares purchased by the Holder on such
exercise.
SECTION 2.6 SHARES TO BE FULLY PAID AND NONASSESSABLE. All Warrant
Shares issued upon the exercise of this Warrant shall be validly issued,
fully paid and nonassessable, free of all liens, taxes, charges and other
encumbrances or restrictions on sale (other than those set forth herein), and
free and clear of all preemptive rights.
SECTION 2.7 FRACTIONAL SHARES. This Warrant may be exercised only for
whole Warrant Shares. No fractional Warrant Shares or scrip representing
fractional Warrant Shares shall be issued upon the exercise of this Warrant.
SECTION 2.8 ISSUANCE OF NEW WARRANTS; CORPORATION ACKNOWLEDGMENT. Upon
any partial exercise of this Warrant, the Corporation, at its expense, will
forthwith issue and deliver to the Holder a new warrant or warrants of like
tenor, registered in the name of the Holder, exercisable, in the aggregate
and subject to the limitations provided for in this Warrant, for the then
balance of the Warrant Shares with respect to which this Warrant has not been
exercised. Moreover, the Corporation shall, at the time of any exercise of
this Warrant, upon the request of the Holder, acknowledge in writing its
continuing obligation to afford to the Holder any rights to which the Holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant; PROVIDED, HOWEVER, that if the Holder shall fail
to make any such request, such failure shall not affect the continuing
obligation of the Corporation to afford to the Holder any such rights.
SECTION 2.9 PAYMENT OF TAXES. The Corporation shall pay any transfer
tax which may be payable in respect of any issuance of certificates (if
applicable) representing any Warrant
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Shares purchased upon exercise or conversion of this Warrant. The
Corporation shall not be required to pay any tax or other charge imposed in
connection with any transfer involved in the issue of any certificate for
Warrant Shares, or any new or replacement shares in any name other than that
of the Holder of this Warrant, and in such case the Company shall not be
required to issue or deliver any stock certificate security or Warrant until
such tax or other charge has been paid, or it has been established to the
Company's satisfaction that no tax or other charge is due.
SECTION 2.10 EXPIRATION. This Warrant and the Holder's rights
hereunder, to the extent not previously exercised or converted, shall expire
as of 5:00 P.M., California time, on the Expiration Date.
SECTION 3. REGISTRATION AND OTHER RIGHTS. The Holder of this Warrant
shall have the benefit of all rights available to the parties to the Investor
Rights Agreement, including, without limitation, the right to cause the
Corporation to register any and all Warrant Shares under the Securities Act
and under any blue sky or securities laws of any jurisdiction within the
United States, at the time and in the manner specified in the Investor Rights
Agreement, and any and all Warrant Shares shall be deemed to be Registrable
Securities for all purposes of and as provided in the Investor Rights
Agreement and shall further have the benefit of all rights available under
the Co-Sale Agreement.
SECTION 4. ADJUSTMENTS. The number and character of Warrant Shares
issuable upon exercise or conversion of this Warrant (or any shares of Stock
or other assets at the time receivable or issuable upon exercise or
conversion of this Warrant) and the Exercise Price therefor, are subject to
adjustment upon occurrence of the following events:
SECTION 4.1 ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS,
RECAPITALIZATIONS, ETC. The Exercise Price of this Warrant and the number of
Warrant Shares issuable upon exercise or conversion of this Warrant (or any
shares of Stock or other assets at the time issuable upon exercise of this
Warrant) shall each be proportionally adjusted to reflect any stock dividends
stock splits, reverse stock splits, combinations of shares,
reclassifications, recapitalizations or other similar events altering the
number of outstanding shares of Warrant Stock (or such other Stock or other
assets).
SECTION 4.2 ADJUSTMENT FOR CAPITAL REORGANIZATION, CONSOLIDATION,
MERGER, SALE OR CONVERSION. If any reorganization of the capital stock of
the Corporation, or any consolidation or merger of the Corporation with or
into another entity, or the sale of all or substantially all of the
Corporation's assets to another entity shall be effected in such a way that
holders of Common Stock will be entitled to receive stock, securities or
assets with respect to or in exchange for their Common Stock, then, in each
such case, the Holder, upon the exercise or conversion of this Warrant, at
any time after the consummation of such capital reorganization,
consolidation, merger or sale, shall receive, in lieu of the stock or other
securities and property receivable upon the exercise or conversion, as
applicable, of this Warrant prior to such consummation, the Stock or other
assets to which the Holder would have been entitled upon such consummation if
the Holder had exercised or converted, as applicable, this Warrant
immediately prior thereto, all subject to further adjustment as provided in
this Section 4; and in each such case, the terms of this Warrant shall be
applicable to the shares of Stock or other assets receivable upon the
exercise or conversion, as applicable, of this Warrant after such
consummation.
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<PAGE>
SECTION 4.3 ADJUSTMENT FOR ISSUANCE FOR ADDITIONAL STOCK. The Exercise
Price of this Warrant and the number of Warrant Shares issuable upon exercise
or conversion of this Warrant shall be further subject to adjustment from
time to time as follows:
(a) Upon each issuance by the Corporation of any Additional
Stock (as defined below), after the Issue Date and before the consummation by
the Company of an Initial Public Offering, for a consideration per share less
than the Exercise Price in effect immediately prior to the issuance of such
Additional Stock (except as provided in Section 4.1 above), (i) the Exercise
Price in effect immediately prior to each such issuance shall forthwith
(except as otherwise provided in this Section 4.3) be adjusted to the
Effective Price (as defined below) at which the Additional Stock is issued,
and (ii) the number of Warrant Shares issuable upon exercise or conversion of
this Warrant shall forthwith be adjusted by dividing the number of Warrant
Shares into which this Warrant is exercisable immediately before the
adjustment provided for herein by a fraction the numerator of which shall be
the Effective Price and the denominator of which shall be the Exercise Price
immediately before the adjustment provided for herein. The "EFFECTIVE PRICE"
for any issuance of Additional Stock shall mean the lesser of $4.04 or the
quotient determined by dividing the total number of shares of Additional
Stock issued (or deemed issued pursuant to Section 4.3(e)) by the Corporation
in such issuance into the aggregate amount of consideration received by the
Corporation therefor, as provided in this Section 4.3.
(b) No adjustment of the Exercise 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 4.3(e)(3) and 4.3(e)(4)
below, no adjustment of the Exercise Price pursuant to this Section 4.3(a)
shall have the effect of increasing the Exercise Price above the Exercise
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
Issue 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 4.3.
(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
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<PAGE>
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 4.3(c) and 4.3(d), except as provided in
subsection 4.3(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 converted thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities (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)
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Corporation (without
taking into account potential antidilution adjustments) upon the conversion
or exchange of such securities or the exercise of any related options or
rights (the consideration in each case to be determined in the manner
provided in Section 4.3(c) and 4.3(d), except as provided in
subsection 4.3(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 Exercise
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.
(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 Exercise 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
Exercise 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.
(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 Section 4.3, the value of any options to
purchase or rights to subscribe for Common Stock, securities that are by
their terms convertible onto or exchangeable for Common Stock or
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<PAGE>
options to purchase or rights to subscribe for such convertible or
exchangeable securities (each a "DERIVATIVE SECURITY") issued by the
Corporation 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 Section 4.3,
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 4.3(e)(1) and 4.3(e)(2)).
(f) "ADDITIONAL STOCK" shall mean any shares of Common Stock
issued (or deemed to have been pursuant to Section 4.3(e)) by the Corporation
after the Issue Date other than
(1) Common Stock issued pursuant to a transaction described
in Section 4.1 or 4.2 hereof:
(2) An aggregate of up to 250,000 shares of, and/or options
or rights to acquire shares of, Common Stock, issuable or issued to employees
of the Corporation pursuant to an existing stock option plan or restricted
stock plan of the Corporation; as provided in Section 4.3(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 pursuant to this Section (2);
(3) shares of Common Stock issued or issuable (i) upon
exercise or conversion of this Warrant, any securities issued pursuant to the
Purchase Agreement or any options, warrants, convertible securities or other
securities of the Corporation outstanding as of the Issue Date or (ii) upon
conversion of shares of any series of Preferred Stock authorized as of the
Issue Date.
(g) No fractional shares shall be issued upon conversion of this
Warrant or any portion thereof, and the number of Warrant Shares issuable as
a result of any adjustment provided for in this Section 4.3 shall be rounded
to the nearest whole share.
SECTION 5. OFFICER'S CERTIFICATE AS TO ADJUSTMENTS. In each case of
any adjustment or readjustment in the number and kind of Warrant Shares (or
other Stock or assets), issuable hereunder from time to time, or in the
Exercise Price, the Corporation, at its expense, will promptly cause an
officer of the Corporation to compute such adjustment or readjustment in
accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment or readjustment and showing the facts upon which such
adjustment or readjustment is based. The Corporation will forthwith send a
copy of each such certificate to the Holder in accordance with Section 10.4
below.
SECTION 6. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Corporation of a record of the holders of
Stock for the purpose of determining the holders thereof who are entitled to
receive any shares of Stock as a dividend or other distribution or pursuant
to a stock split, or
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(b) any reorganization or the Corporation, or any sale or
transfer, in a single transaction or a series of related transactions, of all
or substantially all the assets of the Corporation to, or the consolidation
or merger of the Corporation with or into, any other Person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation, or
(d) any sale, in a single transaction or a series of related
transactions, of a majority of the Corporation's voting stock (whether newly
issued, or from treasury, previously issued and then outstanding, or any
combination thereof),
then and in each such event the Corporation will mail or cause to be mailed
to the Holder a notice specifying (i) the date on which any such record is to
be taken for the purpose of such dividend, distribution or stock split, and
stating the amount and character of such dividend, distribution or stock
split, or (ii) the date on which any such reorganization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take
place, and the time, if any is to be fixed, as of which the holders of record
of any one or more classes of Stock shall be entitled to exchange their
shares of Stock for securities or other property deliverable on such
reorganization, transfer, consolidation, merger, dissolution, liquidation or
winding-up or (iii) the date on which any such sale of a majority of the
Corporation's voting stock is to take place and the material terms thereof,
as the case may be. Such notice shall be mailed at least 15 days prior to
the date specified in such notice on which any such action is to be taken.
SECTION 7. EXCHANGE OF WARRANT. Subject to the provisions of Section 9
hereof (if and to the extent applicable), this Warrant shall be exchangeable,
upon the surrender hereof by the Holder at the principal office of the
Corporation, for new warrants of like tenor, each registered in the name of
the Holder or in the name of such other Persons as they may direct, subject
to Sections 9 and 10.5 (upon payment by the Holder of any applicable transfer
taxes). Each of such new warrants shall be exercisable for such number of
Warrant Shares as the Holder shall direct, PROVIDED that all of such new
warrants shall represent, in the aggregate, the right to purchase the same
number of Warrant Shares and cash, securities or other property, if any,
which may be purchased by the Holder upon exercise of this Warrant at the
time of its surrender.
SECTION 8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Corporation of the loss, theft, destruction or mutilation
of this Warrant and, in the case of any such loss, theft or destruction of
this Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Corporation or, in the case of any
such mutilation, on surrender and cancellation of this Warrant, the
Corporation at its expense will execute and deliver, in lieu thereof, a new
warrant of like tenor.
SECTION 9. TRANSFER PROVISIONS, ETC. By accepting this Warrant, Holder
makes the representations set forth in 9.1, 9.2, 9.3 and 9.4 below and agrees
to the restrictions set forth in 9.5, 9.6, 9.7 and 9.8 below, and, by
exercising or converting this Warrant in whole or in part, the Holder agrees
that Holder will then represent and will be deemed to represent that such
representations are true and complete as of the date of such exercise or
conversion.
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SECTION 9.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Warrant is, and
any Warrant Shares received by the Holder upon exercise or conversion of this
Warrant will be, acquired for investment for Holder's own account, not as a
nominee or agent, and not with a view to the resale or distribution of any
part thereof, and the Holder has no present intention of selling, granting
any participation in, or otherwise distributing any such securities. The
Holder does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of such securities.
SECTION 9.2 INVESTMENT EXPERIENCE. The Holder is an investor in
securities of companies in the development stage and acknowledges that the
Holder is able to fend for itself, can bear the economic risk of the Holder's
investment and has such knowledge and experience in financial or business
matters that the Holder is capable of evaluating the merits and risks of the
investment in this Warrant and the Warrant Shares.
SECTION 9.3 ACCREDITED INVESTOR. The Holder is an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act, as presently in effect.
SECTION 9.4 RESTRICTED SECURITIES. The Holder understands that this
Warrant and the Warrant Shares are characterized as restricted securities
under the federal securities laws and applicable state securities laws
inasmuch as such securities are being (or will be) acquired from the
Corporation in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Securities Act, only in certain limited circumstances.
SECTION 9.5 TRANSFER RESTRICTIONS. Without in any way limiting the
representations set forth above, the Holder agrees not to make any transfer
of all or any portion of this Warrant or the Warrant Shares unless and until
(a) such transfer is registered under the Securities Act and all applicable
state securities laws, or (ii) Holder shall have notified the Corporation of
the proposed transfer and shall have furnished the Corporation with a
detailed statement of the circumstances surrounding the proposed transfer,
and, if the Corporation requests, Holder shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company, that such
transfer will not require registration of such shares under the Securities
Act and applicable state securities laws.
SECTION 9.6 LEGENDS.
(a) Each certificate representing any Warrant Shares issued upon
exercise of this Warrant shall bear the legend set forth below, or a legend
substantially equivalent thereto:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR DISPOSED OF UNLESS THEY ARE SO REGISTERED OR
UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION,
BOTH AS TO THE IDENTITY OF COUNSEL AND AS TO THE FORM AND SUBSTANCE
OF SUCH OPINION, AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
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<PAGE>
(b) Each certificate representing any shares of Stock issued from
time to time upon exercise of this Warrant shall also bear any legend
required under any applicable state securities or blue sky laws.
(c) The Corporation may issue appropriate "stop transfer"
instructions and may take such other steps as it may deem appropriate to
cause the restrictions referred to in this Section 9 to be complied with.
SECTION 9.7 SURVIVAL. The obligations of the Holder (and/or of any
transferee of this Warrant or any Warrant Shares issued from time to time
upon exercise of this Warrant) under this Section 9 shall, with respect to
any Warrant Shares issued from time to time upon exercise of this Warrant,
survive the exercise, expiration or other termination, or transfer, of this
Warrant indefinitely.
SECTION 9.8 MECHANICS OF TRANSFER. Subject to the terms and conditions
of this Warrant and subject to compliance with all applicable securities
laws, any transfer of all or any portion of this Warrant, or of any interest
therein, that is otherwise in compliance with applicable law shall be
effected by surrendering this Warrant to the Corporation at its principal
office, together with (i) a duly executed form of assignment, in the form
attached hereto, (ii) payment of all applicable transfer taxes, if any. In
the event of any such transfer of this Warrant, in whole, the Corporation
shall issue a new warrant of like tenor to the transferee, representing the
right to purchase the same number of Warrant Shares, and cash, securities or
other property, if any, which were purchasable by the Holder upon exercise of
this Warrant at the time of its transfer. In the event of any such transfer
of any portion of this Warrant, (i) the Corporation shall issue a new warrant
of like tenor to the transferee, representing the right to purchase the same
number of Warrant Shares, and cash, securities or other property, if any,
which were purchasable by the Holder upon exercise of the transferred portion
of this Warrant at the time of such transfer, and (ii) the Corporation shall
issue a new warrant of like tenor to the Holder, representing the right to
purchase the number of Warrant Shares, and cash, securities or other
property, if any, purchasable by the Holder upon exercise of the portion of
this Warrant not transferred to such transferee. Until this Warrant or any
portion thereof is transferred on the books of the Corporation, the
Corporation may treat the Holder as the absolute holder of this Warrant and
all right, title and interest therein for all purposes, notwithstanding any
notice to the contrary. Notwithstanding the foregoing, neither this Warrant
nor any rights hereunder may be transferred unless such transfer complies
with all applicable securities laws and the provisions of this Section 9.
SECTION 10. GENERAL.
SECTION 10.1 AUTHORIZED SHARES; RESERVATION OF SHARES FOR ISSUANCE. At
all times while this Warrant is outstanding, the Corporation shall maintain
its corporate authority to issue, and shall have authorized and reserved for
issuance upon exercise of this Warrant, such number of shares of Common Stock
as shall be sufficient to perform its obligations under this Warrant (after
giving effect to any and all adjustments to the number and kind of Warrant
Shares purchasable upon exercise of this Warrant).
SECTION 10.2 NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation,
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<PAGE>
merger, dissolution, issuance or sale of securities, sale or other transfer
of any of its assets or properties, or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder hereunder against
impairment. Without limiting the generality of the foregoing, the
Corporation (a) will not increase the par value of any shares of Stock
receivable upon the exercise of this Warrant above the amount payable
therefor on such exercise, and (b) will take all action that may be necessary
or appropriate in order that the Corporation may validly and legally issue
fully paid and nonassessable shares of Stock on the exercise of this Warrant.
SECTION 10.3 NO RIGHTS AS STOCKHOLDER. The Holder shall not be
entitled to vote or to receive dividends or to be deemed the holder of Stock
that may at any time be issuable upon exercise of this Warrant for any
purpose whatsoever, nor shall anything contained herein be construed to
confer upon the Holder any of the rights of a stockholder of the Corporation
or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance
or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings (except to the extent otherwise provided in this Warrant),
or to receive dividends or subscription rights, until the Holder shall have
exercised the Warrant and been issued Warrant Shares in accordance with the
provisions hereof.
SECTION 10.4 NOTICES. All notices, demands, requests, certificates or
other communications under this Warrant shall be in writing and shall be
either mailed by first class mail, postage prepaid, in which case such
notice, demand, request, certificate or other communication shall be deemed
to have been given three business days after the date on which it is first
deposited in the mails, or hand delivered or sent by facsimile transmission,
by tested or otherwise authenticated telex or cable or by private expedited
courier for overnight delivery with signature required, in each such case,
such notice, demand, request, certificate or other communication being deemed
to have been given upon delivery or receipt, as the case may be:
(i) if to the Corporation, at 10161 Bubb Road, Cupertino,
California 95014 Attention: Chief Financial Officer, or at such other address
as the Corporation may have furnished in writing to the Holder; and
(ii) if to the Holder, at the Holder's address appearing in the
books maintained by the Corporation.
SECTION 10.5 ASSIGNMENT. Notwithstanding anything contained herein to
the contrary, this Warrant and all rights hereunder are assignable or
transferable (subject to the legend set forth in the heading on the first
page hereof), in whole or in part, by the Named Holder to affiliates of the
Named Holder or any entities for which the Named Holder or its affiliates
serve as general partner and/or investment adviser or in a similar capacity,
all mutual funds, or other pooled investment vehicles or entities, under the
control or management of such Named Holder or the general partner or
investment advisor thereof, or any affiliates of any of the foregoing.
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<PAGE>
SECTION 10.6 AMENDMENT AND WAIVER. No failure or delay of the Holder
in exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Holder are cumulative and not
exclusive of any rights or remedies which it would otherwise have. The
provisions of this Warrant may be amended, modified or waived with (and only
with) the written consent of the Corporation and the Holder.
SECTION 10.7 GOVERNING LAW. This Warrant shall be governed by, and
construed and enforced in accordance with, the laws of California.
SECTION 10.8 COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants,
stipulations, promises and agreements in this Warrant contained by or on
behalf of the Corporation shall bind its successors and assigns, whether so
expressed or not.
SECTION 10.9 SEVERABILITY. In case any one or more of the provisions
contained in this Warrant shall be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby. The parties shall endeavor in good faith negotiations to replace
the invalid, illegal or unenforceable provisions with valid provisions the
economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
SECTION 10.10 CONSTRUCTION. The definitions of this Warrant shall
apply equally to both the singular and the plural forms of the terms defined.
Wherever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The section and paragraph headings
used herein are for convenience of reference only, are not part of this
Warrant and are not to affect the construction of or be taken into
consideration in interpreting this Warrant.
SECTION 10.11 REMEDIES. The Holder and the Corporation, in addition to
being entitled to exercise all rights granted by law, including recovery of
damages, will each be entitled to specific performance of its rights under
this Warrant. The Holder and the Corporation each agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of
a breach by it of the provisions of this Warrant and hereby agrees to waive
the defense in any action for specific performance that a remedy at law would
be adequate. In any action or proceeding brought to enforce any provision of
this Warrant or where any provision hereof is invalidly asserted as a
defense, the successful party to such action or proceeding shall be entitled
to recover reasonable attorneys' fees in addition to any other available
remedy.
[rest of page intentionally left blank]
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IN WITNESS WHEREOF, the Corporation has caused this Warrant to be
executed in its corporate name by one of its officers thereunto duly
authorized, all as of the day and year first above written.
HYBRID NETWORKS, INC.
By:
---------------------------
Carl S. Ledbetter
Chief Executive Officer
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FORM OF SUBSCRIPTION
(To be executed upon exercise of Warrant)
To: HYBRID NETWORKS, INC.
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the attached Warrant for, and to exercise thereunder,
________ shares of Common Stock, $.001 par value per share ("COMMON STOCK"),
of Hybrid Networks, Inc., a Delaware corporation, and tenders herewith
payment of $________, representing the aggregate purchase price for such
shares based on the price per share provided for in such Warrant. The
undersigned hereby confirms that the representations set forth in Section 9
of the Warrant are true and complete with respect to the undersigned as of
the date hereof.
Please issue a certificate or certificates for such shares of Common
Stock in the following name or names and denominations and deliver such
certificate or certificates to the person or persons listed below at their
respective addresses set forth below:
If said number of shares of Common Stock shall not be all the shares of
Common Stock issuable upon exercise of the attached Warrant, a new Warrant is
to be issued in the name of the undersigned for the balance remaining of such
shares of Common Stock less any fraction of a share of Common Stock paid in
cash.
Dated: , 19
------------ --
----------------------------------------
(Name of Holder)
By:
------------------------------------
Its:
-----------------------------------
Address:
-------------------------------
NOTE: The above signature should correspond
exactly with the name on the face of the
attached Warrant.
<PAGE>
NOTICE OF CONVERSION
To: Hybrid Networks, Inc.
(1) The undersigned hereby elects to convert that portion of the attached
Warrant representing the right to purchase __________ shares of Common Stock
of Hybrid Networks, Inc. into such number of shares of Common Stock of Hybrid
Networks, Inc. as is determined pursuant to Section 2.3 of such Warrant,
which conversion shall be effected pursuant to the terms of such Warrant.
(2) The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that
the undersigned has no present intention of distributing or reselling such
shares, except in compliance with applicable federal and state securities
laws. The undersigned hereby confirms that the representations set forth in
Section 9 of the Warrant are true and complete with respect to the
undersigned as of the date hereof.
(3) The undersigned accepts such shares subject to the terms relating to
registration rights under the Amended and Restated Investor Rights Agreement
dated as of September 1997.
- ---------------------------------
(Date)
----------------------------------------
(Name of Holder)
By:
------------------------------------
Its:
-----------------------------------
Address:
-------------------------------
----------------------------------------
NOTE: The above signature should correspond
exactly with the name on the face of the
attached Warrant.
<PAGE>
FORM OF ASSIGNMENT
For value received, ____________________________ hereby sells, assigns
and transfers unto _____________________________ (the "TRANSFEREE") the
attached Warrant [__% of the attached Warrant], together with all right,
title and interest therein, and does hereby irrevocably constitute and
appoint ____________________________ attorney to transfer said Warrant
[said percentage of said Warrant] on the books of Hybrid Networks, Inc., a
Delaware corporation, with full power of substitution in the premises.
The Transferee, by signing below, hereby confirms that the
representations set forth in Section 9 of the Warrant are true and complete
with respect to the Transferee as of the date hereof, and that the Transferee
agrees to be bound by the restrictions of Section 9 of the Warrant.
If not all of the attached Warrant is to be so transferred, a new
Warrant is to be issued in the name of the undersigned for the balance of
said Warrant.
Dated: , 19
--------------- --
----------------------------------------
(Name of Holder)
By:
------------------------------------
Its:
-----------------------------------
NOTE: The above signature should correspond
exactly with the name on the face of the
attached Warrant.
AGREED TO AND ACCEPTED
- -------------------------------------
Name of Transferee
By:
----------------------------------
Its:
---------------------------------
Address:
-----------------------------
- -------------------------------------
<PAGE>
EXHIBIT C
HYBRID NETWORKS, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SEPTEMBER 18, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
1. Registration Rights...................................................2
1.1 Definitions......................................................2
1.2 Company Registration.............................................3
1.3 Obligations of the Company.......................................4
1.4 Furnish Information..............................................5
1.5 Expenses of Company Registration.................................5
1.6 Underwriting Requirements........................................5
1.7 Delay of Registration............................................6
1.8 Indemnification..................................................6
1.9 Reports Under Securities Exchange Act of 1934....................8
1.10 Form S-3 Registration............................................8
1.11 Assignment of Registration Rights...............................11
1.12 "Market Stand-Off" Agreement....................................12
1.13 Termination of Registration Rights..............................12
2. Covenants of the Company.............................................12
2.1 Delivery of Financial Statements................................12
2.2 Termination and Assignment of Information Covenants.............13
2.3 Right of First Offer............................................13
3. Miscellaneous........................................................16
3.1 Successors and Assigns..........................................16
3.2 Governing Law...................................................16
3.3 Counterparts....................................................16
3.4 Titles and Subtitles............................................16
3.5 Notices.........................................................16
3.6 Expenses........................................................16
3.7 Amendments and Waivers..........................................17
3.8 Severability....................................................17
3.9 Aggregation of Stock............................................17
3.10 Entire Agreement; Amendment; Waiver.............................17
<PAGE>
EXHIBIT C
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is entered into as
of September18, 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"), BG Services Limited ("BG") and
the investors listed in Schedule D hereto (each of which is herein referred
to as a "NOTE WARRANT INVESTOR").
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
<PAGE>
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;
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 Agreement was further amended in April 1997 whereby, among
other things, the Company granted rights to London Pacific Life & Annuity
Company ("London") in connection with the Company's issuance to London of the
Company's Senior Secured Convertible Debenture due 2002 (the "DEBENTURE");
London subsequently transferred to BG the Debenture and London's rights under
this Agreement;
WHEREAS, pursuant to a Subordinated Note Purchase Agreement (the
"SUBORDINATED NOTE AGREEMENT"), the Company is issuing to the Note Warrant
Investors the Company's Subordinated Promissory Notes (the "SUBORDINATED
NOTES") and warrants to purchase shares of the Company's Common Stock (the
"NOTE WARRANTS"); 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
the Note Warrant Investors as required under the terms of the Subordinated
Note 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 the Note Warrant Investors desire 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 exercise of the Note
Warrants or conversion of the Subordinated Notes, 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
2
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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), (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 Note Warrants,
Subordinated Notes, Debenture, 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 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 and (3)
shares of Common Stock issuable upon conversion or exchange of securities
convertible into, or exchangeable for, Common Stock upon conversion of the
Subordinated Notes;
(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,
3
<PAGE>
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:
(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
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<PAGE>
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 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
5
<PAGE>
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.
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
6
<PAGE>
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.
(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
7
<PAGE>
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:
(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.
(a) 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
8
<PAGE>
or compliance with respect to all or a part of the Registrable Securities
owned by such Holder or Holders, the Company will:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other
Holders; and
(ii) 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 15 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(a): (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 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(a); provided, however, that the Company
shall not utilize this right more than once in any 12-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(a); (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.
(iii) 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(a), the
Series C Investor will have rights under this Section 1.10(a), 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(a) 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(a).
(b) In addition to the registration rights provided for in
Sections 1.1, 1.2 and 1.10(a), the Note Warrant Investors that own any Note
Warrants, Subordinated Notes or shares of Common Stock of the Company that
have been issued upon exercise of any Note Warrants or conversion of any
Subordinated Notes (such Note Warrant Investors are referred to herein as
"NOTE/WARRANT HOLDERS") shall be entitled, collectively, to one demand
shelf-registration as provided in this Section 1.10(b). For the purposes of
this Section 1.10(b), (1) the term "NOTE/WARRANT SHARES" refers to shares of
Common Stock of the Company that have been issued, or are issuable,
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<PAGE>
upon exercise of any Note Warrants or conversion of any Subordinated Notes,
and (2) a Note/Warrant Holder shall be deemed to own the number of
Note/Warrant Shares that are issuable upon the exercise of Note Warrants
owned by such Note/Warrant Holder as well as the number of Note/Warrant
Shares that are currently issued and outstanding and owned by such
Note/Warrant Holder. In the event that, after the first anniversary of the
consummation of the initial sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the firm
underwritten offering of its securities to the general public, the Company
shall receive from Note/Warrant Holders that own, in the aggregate, a
majority of the Warrant Shares 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 Note/Warrant Shares owned by such
Note/Warrant Holder or Note/Warrant Holders, the Company will:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
Note/Warrant Holders; and
(ii) as soon as practicable effect such registration and
all 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
Note/Warrant Holder's or Note Warrant Holders' Note/Warrant Shares as are
specified in such request, together with all or such portion of the
Note/Warrant Shares of any Note/Warrant Holder or Note/Warrant Holders
joining in such request as are specified in a written request given within 15
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(b):
(1) if Form S-3 is not available for such offering by the Note/Warrant
Holders other than as a result of a failure of the Company to comply with the
reporting requirements of Sections 13 and 15 of the 1934 Act; (2) if the
Company shall furnish to the Note/Warrant Holders requesting such
registration a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
Form S-3 registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3 registration
statement until, in the good faith judgment of the Board of Directors of the
Company, it would no longer be seriously detrimental to the Company and its
stockholders for such Form S-3 registration to be effected (but in no event
for a period of more than 90 days after receipt of the request of the
Note/Warrant Holder or Note Warrant Holders under this Section 1.10(b)); (3)
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. If Form S-3 is
not available for such offering by the Note/Warrant Holders as a result of a
failure of the Company to comply with the reporting requirements of Sections
13 and 15 of the 1934 Act, the Company shall effect such registration on Form
S-1.
(iii) Subject to the foregoing, the Company shall file a
registration statement on Form S-3 covering the Note/Warrant Shares so
requested to be registered as soon as practicable after receipt of the
request or requests of the Note/Warrant Holder or Note/Warrant Holders and
shall use its best efforts to cause the registration statement to become
effective under the Act and to keep the registration statement continuously
effective under the Act and available for the offer and sale of the
Note/Warrant Shares covered thereby for 180 days (or such shorter period
10
<PAGE>
ending when all Note/Warrant Shares covered by the registration statement
have been sold or are no longer entitled to registration under this Section
1.10(b)). The Company will be deemed not to have used its best efforts to
keep the registration statement effective and available for such offer and
sale during the requisite period if the Company voluntarily takes any action
that would result in Note/Warrant/Holders of Note/Warrant Shares covered
thereby not being able to offer and sell such Note/Warrant Shares thereunder
during any portion of that period unless (1) such action is required by
applicable law or (2) such action is taken by the Company in good faith and
for valid business reasons (not including avoidance of the Company's
obligations hereunder), including the acquisition or divestiture of assets,
so long as the Company promptly thereafter causes the registration to become
effective under the Act and available for such offer and sale. In the event
that the effectiveness or availability of the registration statement is
suspended during the requisite period, the Company will be obligated to
extend the period of effectiveness and availability of the registration
statement for a period that is at least equal to the period during which such
effectiveness or availability was suspended.
(iv) Each Note/Warrant Holder that causes the Company to
register any of such Note/Warrant Shares and under this Section 1.10(b) shall
immediately notify the Company in writing of any sales of Note/Warrant Sales
under the registration statement and, if the effectiveness of the
registration statement is terminated in accordance with this Section 1.10(b),
shall return to the Company's transfer agent all stock certificates that
represent any unsold Note Warrant Shares so that the transfer agent may affix
any appropriate securities legends thereto.
(v) Notwithstanding anything to the contrary in Section
3.7, any term of this Section 1.10(b) may be amended, and the observance of
any term of this Section 1.10(b) 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 Note/Warrant Holders that then own a
majority of all Note/Warrant Shares then owned by Note/Warrant Holders. Any
amendment or waiver effected in accordance with this paragraph shall be
binding upon the Company, each Note Warrant Holder and each future holder of
any Note/Warrant Shares.
(vi) Any Form S-3 registration statement required
pursuant to this Section 1.10(b) shall not be required to include any
Registrable Securities that are freely tradable by the Holders thereof without
registration under the Act (including shares as to which paragraph (k) of Rule
144 under the Act applies but not shares that are subject to applicable holding
period, volume limitation or manner of sale and notice requirements of
paragraphs (d), (e), (f), (g), (h) and (i) of Rule 144).
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,
11
<PAGE>
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 intestate 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. For the
purposes of determining the number of shares of Registrable Securities held
by any Note Warrant Investor, the shares of Registrable Securities held by
such Note Warrant Investor shall be aggregated with the shares of Registrable
Securities held by affiliates of the Note Warrant Investor or any entities
for which the Note Warrant Investor or its affiliates serve as general
partner and/or investment adviser or in a similar capacity, all mutual funds
or other pooled investment vehicles or entities under the common control or
management of such Note Warrant Investor, or the general partner or
investment adviser thereof, or any affiliate of the foregoing.
1.12 "MARKET STAND-OFF" AGREEMENT. Each signatory to the
Agreement or hereto or any prior or subsequent 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 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-transfer 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,
except as provided otherwise in Section 1.10(b)(v), 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.
12
<PAGE>
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, Note Warrant Investor, Itochu and BG
(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; and
(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.
For the purposes of determining the number of shares of Registrable
Securities held by any Note Warrant Investor, the shares of Registrable
Securities held by such Note Warrant Investor shall be aggregated with the
shares of Registrable Securities held by affiliates of the Note Warrant
Investor or any entities for which the Note Warrant Investor or its
affiliates serve as general partner and/or investment adviser or in a similar
capacity, all mutual funds or other pooled investment vehicles or entities
under the common control or management of such Note Warrant Investor, or the
general partner or investment adviser thereof, or any affiliate of the
foregoing.
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
13
<PAGE>
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, (i) 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 intestate succession) shall be aggregated together and with the
partnership and (ii) the holdings of a Note Warrant Investor shall be
aggregated with the holdings of affiliates of the Note Warrant Investor or
any entities for which the Note Warrant Investor or its affiliates serve as
general partner and/or investment adviser or in a similar capacity, all
mutual funds or other pooled investment vehicles or entities under the common
control or management of such Note Warrant Investor, or the general partner
or investment adviser thereof, or any affiliate of the foregoing.
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, BG, Strachman and each Note Warrant Holder 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, BG, Strachman and each Note/Warrant
Holder, and any general or limited partners and affiliates of any Series A
Investor, any Series B Investor, Intel, any Series D Investor or any
Note/Warrant Holder. Each Series A Investor, each Series B Investor, Intel
and 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:
(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 exercise of the Note Warrants or 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
14
<PAGE>
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 shares of Common Stock issued and
held, or issuable upon exercise of the Note Warrants or 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 exercise of the Note Warrants
or 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. The rights
of first offer in this Section 2.3 shall not be applicable to the
Subordinated Notes or any securities that may be issued or issuable upon
conversion of any Subordinated Notes, although the issuance of any securities
upon conversion of the Subordinated Notes shall not reduce the number of
Shares that any Note Warrant Holder shall be entitled to purchase, as
compared to any other Investor, pursuant to such rights of first offer.
(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-1;
(iii) to the issuance of securities pursuant to the conversion
or exercise of convertible or exercisable securities;
(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
15
<PAGE>
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, Itochu, BG or any
Note/Warrant Investor 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 shares of Registrable Securities or Section 1.2 Shares held by a
transferee or assignee for the purposes of this Section 2.3(f), (i) 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 intestate succession) shall
be aggregated together and with the partnership and (ii) the holdings of a
Note Warrant Investor shall be aggregated with the holdings of affiliates of
the Note Warrant Investor or any entities for which the Note Warrant Investor
or its affiliates serve as general
16
<PAGE>
partner and/or investment adviser or in a similar capacity, all mutual funds
or other pooled investment vehicles or entities under the common control or
management of such Note Warrant Investor, or the general partner or
investment adviser thereof, or any affiliate of the foregoing.
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.
17
<PAGE>
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 the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
3.9 AGGREGATION OF STOCK. All shares of Registrable Securities held
or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
3.10 ENTIRE AGREEMENT. This Amended and Restated Investor Rights
Agreement (including the Schedules hereto) constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Investor Rights 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
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Investor Rights Agreement as of the date first above written.
COMPANY:
HYBRID NETWORKS, INC.
By:___________________________
Carl S. Ledbetter, Chief Executive
Officer
Address: 10161 Bubb Road
Cupertino, CA 95014-4167
Facsimile Number: (408) 725-2439
INTEL CORPORATION
By: /s/Company Officer
---------------------------
Its: VP and Treasurer
--------------------------
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Facsimile Number: (408) 765-6038
20
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
TUDOR BVI FUTURES, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By:/s/ Robert P. Forlenza
----------------------
Robert P. Forlenza,
Vice President
Address: c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110
TUDOR ARBITRAGE PARTNERS, L.P.
By: Tudor Global Trading, Inc.,
General Partner
By:/s/ Robert P Forlenza
---------------------
Robert P. Forlenza,
Vice President
Address same as immediately above
RAPTOR GLOBAL FUND, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza
-----------------------
Robert P. Forlenza,
Vice President
Address same as immediately above
RAPTOR GLOBAL FUND, L.P.
By: Tudor Investment Corporation,
General Partner
By: /s/ Robert P. Forlenza
-----------------------
Robert P. Forlenza,
Vice President
Address same as immediately above
21
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
INVESTORS:
__________________________
Catherine P. Goodrich
Address: 3787 Woodside Road
Woodside, CA 94062
Facsimile Number: (415) 851-0726
22
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
J.F. SHEA CO., INC.,
By: /s/ Edmund Shea, Jr.
---------------------------------
Edmund Shea, Jr.
Address: 655 Brea Canyon Road
P. O. Box 489
Walnut, CA 91789-0489
Facsimile Number: (909) 869-0840
23
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
OSCCO III, L.P.
By: /s/ Stephen E. Halprin
-----------------------------------
Stephen E. Halprin
Address: One First Street, #15
Los Altos, CA 94022
Facsimile Number: (415) 917-0801
24
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Gary M. Lauder
-------------------------------------
(Executing this Agreement as a Series B
Investor)
Address: 88 Mercedes Lane
Atherton, CA 94027
Facsimile Number: (415) 323-2171
25
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
AT&T VENTURE COMPANY, L.P.
By: AT&T Venture Partners,
Its: General Partner
By: /s/ Neal Douglas
------------------------------
Its: General Partner
-----------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 235
Menlo Park, CA 94025
Facsimile Number: (415) 854-4923
26
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SEQUOIA CAPITAL VI
By: /s/ Michael Moritz
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA TECHNOLOGY PARTNERS VI
By: /s/ Michael Moritz
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
SEQUOIA XXIV
By: /s/ Michael Moritz
-----------------------------------
Its:
----------------------------------
Address: 3000 Sand Hill Road,
Building 4, Suite 280
Menlo Park, CA 94025
Facsimile Number: (415) 854-2977
27
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
ACCEL IV L.P. ACCEL KEIRETSU L.P.
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
----------------------- -------------------------
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
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
28
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Howard L. Strachman
-----------------------------------
Howard L. Strachman
Address: c/o Ultracom Communications
21580 Stevens Creek Blvd.
Suite 207
Cupertino, CA 95014
Facsimile Number: (408) 863-0363
29
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Eduardo J. Moura
------------------------------------
Eduardo J. Moura
Address: 10161 Bubb Road
Cupertino, CA 95014-4167
Facsimile Number: (408) 725-2439
30
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
ITOCHU Corporation
By:
---------------------------------
Its:
--------------------------------
Address: 5-1, Kita-Aoyama 2-chome
Minato-ku, Tokyo 107-77
Japan
Facsimile Number: 011-81-3-3497-3131
31
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
BG SERVICES LIMITED
By:
---------------------------------
Its:
--------------------------------
Address: c/o Minden House
6 Minden Place
St. Helier
Jersey, Channel Islands
Attention: Ron Green
Facsimile Number: (0) 1534-607799
32
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Daniel E. Steimle
-----------------------------
Daniel E. Steimle
33
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
888 GROUP
/s/ David Hayes
By: /s/ Company Officer
---------------------------
Its: /s/ Company Officer
---------------------------
34
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ Bradford J. Shafer
------------------------------
Bradford J. Shafer
35
<PAGE>
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
/s/ K. Philip Hwang
------------------------------
K. Philip Hwang
36
<PAGE>
SCHEDULE A
Hybrid Networks, Inc.
Series A Investors
------------------
------------------
# of Shares of
Name 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>
SCHEDULE D
Hybrid Networks, Inc.
Note Warrant Investors
----------------------
<PAGE>
# of Shares of Common Stock for which
Name Note Warrants May Become Exercisable
- ---- -------------------------------------
Tudor BVI Futures, Ltd. 182,440-456,106
Tudor Arbitrage Partners, L.P. 46,667-116,667
Raptor Global Fund, Ltd. 120,593-301,486
Raptor Global Fund, L.P. 46,336-115,841
Sequoia Capital VI 27,029-67,574
Sequoia Technology Partners VI 1,485-3,713
Sequoia XXIV 1,188-2,970
Accel IV L.P. 22,673-56,683
Accel Investors '95 L.P. 1,064-2,661
Accel Keiretsu L.P. 470-1,176
Ellmore C. Patterson Partners 545-1,361
AT&T Ventures 25,465-63,664
OSCCO III, L.P. 19,802-49,505
Gary M. Lauder 9,901-24,753
888 Group 12,376-30,941
Daniel E. Steimle 49,505-123,763
Bradford J. Shafer 4,950-12,376
J.F. Shea Co., Inc. 9,901-24,753
K. Philip Hwang 99,009-247,525
<PAGE>
EXHIBIT D
RIGHT OF CO-SALE AGREEMENT
This Right of Co-Sale Agreement (this "AGREEMENT") is made and entered
into as of September 18, 1997 by and among Hybrid Networks, Inc., a Delaware
corporation (the "COMPANY"); those parties listed on EXHIBIT A attached
hereto (the "INVESTORS") to whom the Company has agreed to issue, pursuant to
the Purchase Agreement (defined below), warrants to purchase shares of the
Company's Common Stock, par value $.001 per share (the "COMMON STOCK"); and
those stockholders, stock option holders and warrant holders of the Company
listed on EXHIBIT B attached hereto (the "STOCKHOLDERS").
R E C I T A L S
A. Each Stockholder currently owns shares of the Company's Common Stock
(the "COMMON STOCK") and/or options or warrants to purchase that number of
shares of the Company's Common Stock or securities convertible into that
number of shares of Common Stock.
B. Each Investor is acquiring from the Company, pursuant to the
Subordinated Notes Purchase Agreement by and among the Company and the
Investors dated as of September 18, 1997 (the "PURCHASE AGREEMENT"), certain
warrants (the "WARRANTS") to purchase subject to certain terms and conditions
up to that maximum number of shares of Common Stock set forth opposite such
Investor's name on EXHIBIT A and certain Convertible Subordinated Notes of
the Company (the "CONVERTIBLE SUBORDINATED NOTES").
C. To induce the Investors to purchase such securities from the Company
and to enter into the Purchase Agreement, each Stockholder has agreed to
grant the Investors certain rights of co-sale with respect to the shares of
Stock (defined below) currently owned by such Stockholder, all on the terms
and conditions set forth in this Agreement. The Stock currently owned by
each Stockholder is set forth opposite such Stockholder's name on EXHIBIT B.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises herein contained, and for other consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following
terms have the following meanings:
1.1 The "STOCK" owned at any time by a Stockholder or Investor
refers to all shares of Common Stock that the Stockholder or Investor, as
applicable, then owns or has the right to acquire on a fully diluted basis,
including all shares of Common Stock issued and outstanding at the relevant
time plus (a) all shares of Common Stock that may be issued upon exercise of
any options, warrants and other rights of any kind that are then exercisable
and (b) all shares of Common Stock that may be issued upon conversion of (i)
any convertible securities, including, without limitation, Preferred Stock
and convertible debt securities then outstanding, including, without
limitation, the Convertible Subordinated Notes, or (ii) any convertible
securities issuable upon exercise of outstanding options, warrants or other
rights that are then exercisable. For the purposes of this definition, the
Stock owned by an Investor with respect to the Investor's unexercised
Warrants at any time will be the number of shares of Common Stock that would
be issuable upon exercise of the Warrants if the Initial Exercise Date (as
defined in the Warrant) had occurred.
<PAGE>
1.2 "OFFERED STOCK" means all shares of Stock proposed to be
Transferred by a Stockholder.
1.3 "TRANSFER" and "TRANSFERRED" mean and include any sale,
assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift,
transfer by bequest, devise or descent, or other transfer or disposition of
any kind, including but not limited to transfers to receivers, levying
creditors, trustees or receivers in bankruptcy proceedings or general
assignees for the benefit of creditors, whether voluntary or by operation of
law, directly or indirectly, EXCEPT FOR:
(a) any bona fide pledge if the pledgee executes a
counterpart copy of this Agreement and becomes bound thereby as if such
pledgee were a Stockholder;
(b) any transfers of Stock by gift during a Stockholder's
lifetime or on a Stockholder's death by will or intestacy to such
Stockholder's "immediate family" (as defined below) or to a trust for the
benefit of Stockholder or Stockholder's immediate family, provided that each
transferee or other recipient executes a counterpart copy of this Agreement
and becomes bound thereby as a Stockholder. For purposes of this Agreement,
the term "IMMEDIATE FAMILY" means Stockholder's spouse, lineal descendant
(whether natural or adopted) or antecedent, brother or sister, or the spouse
of any of the foregoing.
(c) any transfer of Stock by a Stockholder made: (i)
pursuant to a statutory merger or statutory consolidation of the Company with
or into another corporation or corporations; (ii) pursuant to the winding up
and dissolution of the Company; or (iii) at, and pursuant to, an Initial
Public Offering.
(d) any transfers of (i) any Warrants, Convertible
Subordinated Notes, (ii) any Stock issued or issuable upon the exercise or
conversion of any Warrants or Convertible Subordinated Notes or (iii) any
Stock by an Investor pursuant to the exercise of such Investor's Right of
Co-Sale (as defined in Section 3.1 hereof).
1.4 "INITIAL PUBLIC OFFERING" means the closing of an underwritten
public offering pursuant to an effective registration statement filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, covering the offer and sale of shares of Common Stock or any other
class of capital stock of the Company.
2. NOTICE OF PROPOSED TRANSFER. Before any Stockholder may effect any
Transfer of any Offered Stock involving in one transaction or in the
aggregate as a result of a series of transactions 15% or more of the total
shares of capital stock of the Company that are then outstanding (including
all shares of Common Stock then outstanding, all shares of Common Stock that
are issuable upon the exercise of outstanding options, warrants and other
rights of any kind that are then exercisable and all shares of Common Stock
that may be issued upon conversion of (i) any outstanding convertible
securities, including, without limitation, Preferred Stock and convertible
debt securities that are then convertible, including, without limitation, the
Convertible Subordinated Notes, or (ii) any convertible securities issuable
upon exercise of outstanding options, warrants or other rights that are then
exercisable; for the purposes of the foregoing, the shares deemed outstanding
with respect to unexercised Warrants will be the number of shares of Common
Stock that would be issuable upon exercise of the Warrants if the Initial
Exercise Date (as defined in the Warrants) had occurred), such Stockholder
(the "SELLING STOCKHOLDER") must give at the same time to the Company and the
Investors a written notice signed by the Selling Stockholder (the "SELLING
STOCKHOLDER'S NOTICE") stating (a) the Selling Stockholder's bona fide
intention to transfer such Offered Stock; (b) the number of shares of Offered
-2-
<PAGE>
Stock proposed to be transferred to each proposed purchaser or other
transferee ("PROPOSED TRANSFEREE"); (c) the name, address and relationship,
if any, to the Selling Stockholder of each Proposed Transferee; (d) the bona
fide cash price or, in reasonable detail, other consideration, per share for
which the Selling Stockholder proposes to transfer such Offered Stock to each
Proposed Transferee (the "OFFERED PRICE"); and (e) any other material terms
and conditions relating to such Proposed Transfer. Upon the request of the
Company or any Investor, the Stockholder will promptly furnish to the Company
and to the Investors such other information as may be reasonably requested to
establish that the offer and Proposed Transferee(s) are bona fide. If one or
more Stockholders propose to Transfer Stock in a series of transactions that
involves in the aggregate 15% or more of the total shares of stock of the
Company that are then outstanding, then each Selling Stockholder proposing to
Transfer Stock in each transaction in the series will give the Selling
Stockholder Notice provided for in this Section 2 with respect to such
transaction and the Right of Co-Sale provided for in Section 3, the Put
Rights provided for in Section 5.2 and other rights provided for herein will
apply to each such transaction. If a Proposed Transaction is one of a series
of transactions to which this Section 2 applies but one or more transactions
in the series shall have already occurred before any Selling Stockholder
Notice was given with respect to such earlier transaction or transaction,
then each such earlier Transfer by each such Selling Stockholder will be
deemed a Prohibited Transaction to which the Put Rights provided for in
Section 5.2 shall apply. For purposes of complying with this Section 2 and
Section 5, the Company will maintain a record of all transactions to which
this Agreement applies.
3. RIGHT OF CO-SALE.
3.1 RIGHT OF CO-SALE. Each Investor will have the right to
participate in the sale of any Offered Stock in the manner set forth herein
(the "RIGHT OF CO-SALE"). Pursuant to this Section 3 as a condition to any
Transfer of any such Offered Stock by a Stockholder, each Investor may
transfer to the Proposed Transferee(s) identified in the Selling
Stockholder's Notice at the same price per share upon the same terms and
conditions as set forth in the Selling Stockholder's Notice. such Investor's
Pro Rata Share of the Offered Stock, by giving written notice to the Selling
Stockholder, within ten days after the date of the Selling Stockholder's
Notice, specifying the number of shares and type of Stock that such Investor
desires to transfer to the Proposed Transferee(s) by exercising the Right of
Co-Sale. For purposes of this Section 3, an Investor's "PRO RATA SHARE"
refers to a fraction, the numerator of which is the number of shares of Stock
then owned by such Investor, and the denominator of which is the sum of the
number of shares of Stock then owned by all Investors having a Right of
Co-Sale hereunder plus the number of shares of Stock held by the Selling
Stockholder who proposes the Transfer.
3.2 CONSUMMATION OF CO-SALE. Each Investor that exercises its
Right of Co-Sale as provided in Section 3.1 will deliver to the Selling
Stockholder at the closing of the Transfer of Offered Stock to the Proposed
Transferee(s) (the "CLOSING") one or more certificates, properly endorsed for
Transfer, representing the Stock to be Transferred by such Investor. At the
Closing, such certificates or other instruments will be transferred and
delivered to the Proposed Transferee(s) in consummation of the Transfer of
the Offered Stock pursuant to the terms and conditions specified in the
Selling Stockholder's Notice, and the Selling Stockholder will remit, or will
cause to be remitted, to Investor at Closing that portion of the proceeds of
the Transfer to which Investor is entitled by reason of such Investor's
participation in such Transfer pursuant to the Right of Co-Sale.
4. MULTIPLE SERIES, CLASSES OR TYPES OF STOCK. If the Offered Stock
consists of more than one series or class or type of Stock, each Investor
will have the right to transfer hereunder such Investor's Pro Rata Share of
each such series, class or type of Stock; provided, however, that (a) if such
Investor does not hold any of such series, class or type of Stock, and the
Proposed
-3-
<PAGE>
Transferee or Proposed Transferees are not willing, at the Closing, to
purchase some other series, class or type of Stock from such Investor as part
of such Investor's Pro Rata Share, or (b) if the Proposed Transferee or
Proposed Transferees are not willing to purchase any Stock from such Investor
at the Closing (each such circumstance being referred to herein as an
"INCOMPLETE CO-SALE"), then such Investor will have the put right (the "PUT
RIGHT") set forth in Section 5.2 hereof.
5. REFUSAL TO TRANSFER; PUT RIGHT.
5.1 REFUSAL TO TRANSFER. Any attempt by any Selling Stockholder
to transfer any Stock in violation of any provision of this Agreement will be
void. The Company will not (a) transfer on its books any Stock that has been
sold, gifted or otherwise transferred in violation of this Agreement, or (b)
treat as owner of such Stock, or accord the right to vote to or pay dividends
to any purchaser, donee or other transferee to whom such Stock may have been
so transferred.
5.2 PUT RIGHT. If a Selling Stockholder transfers any Stock in
contravention of an Investor's Right of Co-Sale under this Agreement (a
"PROHIBITED TRANSFER"), or if an Incomplete Co-Sale occurs with respect to an
Investor and the provisions of Section 5 hereof apply, such Investor may
require such Selling Stockholder to purchase from such Investor, for cash or
such other consideration as the Selling Stockholder received in the
Prohibited Transfer or Incomplete Co-Sale, that number of shares of Stock
(either (i) shares of the same class, series or type as transferred in the
Prohibited Transfer or Incomplete Co-Sale, if such Investor then owns Stock
of such class, series or type, or (ii) if such Investor does not then own
such Stock, then shares of Common Stock) having a purchase price equal to the
aggregate purchase price such Investor would have received in the Closing of
such Prohibited Transfer or Incomplete Co-Sale if such Investor had exercised
and been able to consummate such Investor's Right of Co-Sale with respect
thereto (the Investor's "PUT RIGHT"). An Investor may exercise such
Investor's Put Right by delivery of written notice to the Selling Stockholder
and the Company (a "PUT NOTICE") within ten days after such Investor becomes
aware of the Prohibited Transfer or Incomplete Co-Sale. The closing of such
sale to the Selling Stockholder under such Investor's Put Right will occur
within seven days after the date of such Investor's Put Notice.
Notwithstanding the foregoing provisions of this Section 5.2, if the
Prohibited Transfer is one of a series of transactions to which Section 2
applies but which occurred before any Selling Stockholder Notice was given
with respect thereto, then (a) the Company will promptly give to each Selling
Stockholder in such earlier transaction a notice that such Selling
Stockholder is required to give within ten days to the Company and the
Investors (and such Selling Stockholder will be required to give such notice
within such ten-day period) a written notice signed by the Selling
Stockholder (the "SELLING STOCKHOLDER PUT NOTICE") stating with respect to
such earlier transaction the information provided for in Sections 2(a), (b),
(c), (d) and (e); (b) each Investor may exercise such Investor's Put Right
with respect to such earlier transaction by delivering a Put Notice to the
Selling Stockholder and the Company within ten days after such Selling
Stockholder Put Notice is given; and (c) the closing of the sale by the
Selling Stockholder under such Investor's Put Right will occur within seven
days after the date of such Investor's Put Notice.
6. RESTRICTIVE LEGEND AND STOP-TRANSFER ORDERS.
6.1 LEGEND. Each Stockholder understands and agrees that, in
addition to such legends as may reflect any transfer restrictions under the
applicable securities laws, the Company will cause the legend set forth
below, or a legend substantially equivalent thereto, to be placed upon any
certificate(s) or other documents or instruments evidencing ownership of
Stock by the Stockholder (other than Stock referred to in Section 1.3(d)):
-4-
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RIGHTS
OF CO-SALE AS SET FORTH IN A CO-SALE AGREEMENT ENTERED INTO BY THE
HOLDER OF THESE SHARES, THE COMPANY AND CERTAIN SHAREHOLDERS OF THE
COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF
THE COMPANY. SUCH RIGHTS OF CO-SALE ARE BINDING ON TRANSFEREES OF THESE
SHARES.
6.2 STOP TRANSFER INSTRUCTIONS. Each Stockholder agrees, to
ensure compliance with the restrictions referred to herein, that the Company
may issue appropriate "stop transfer" certificates or instructions and that,
if the Company transfers its own securities, it may make appropriate
notations to the same effect in its records.
7. TERMINATION AND WAIVER.
7.1 TERMINATION. The Investor's Right of Co-Sale will terminate
upon the earliest to occur of: the following: (a) immediately prior to the
closing of an Initial Public Offering; (b) the date on which this Agreement
is terminated by a writing executed by the Company and Investors that then
own at least a majority of the shares of Stock then owned by all the
Investors; or (c) the dissolution of the Company.
7.2 WAIVER. The application of the Right of Co-Sale of an
Investor as to any proposed Transfer by a Selling Stockholder of any Stock
may be waived in advance of or after such transfer by the written agreement
of Investors that own at least a majority of the shares of Stock then owned
by all the Investors, in which case such waiver will be binding as to all
Investors. The Company and the Investors will have the absolute right to
exercise or refrain from exercising any right or rights that each such party
may have by reason of this Agreement, including without limitation the right
to purchase or participate in the sale of Offered Stock. Neither the Company
nor any Investor will incur any liability to any other party hereto with
respect to exercising or refraining from exercising any such right or rights.
Any waiver by a party of its rights hereunder will be effective only if
evidenced by a written instrument executed by such party or its authorized
representative.
8. MISCELLANEOUS PROVISIONS.
8.1 NOTICES. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement will be in writing and
will be effective and deemed given to such party under this Agreement on the
earliest of the following: (a) the date of personal delivery; (b) the next
business day after transmission by facsimile or telecopier, addressed to the
other party at its facsimile number or telecopier address, with confirmation
of transmission; (c) the next business day after deposit with a return
receipt express courier for United States deliveries, or three business days
after such deposit for deliveries outside of the United States; or (d) three
business days after deposit in the United States mail by first class mail for
United States deliveries. All notices not delivered personally or by
facsimile will be sent with postage and/or other charges prepaid and properly
addressed to the party to be notified at the address set forth below such
party's signature on this Agreement or on EXHIBIT A hereto, or at such other
address as such other party may designate by written notice to the other
parties hereto. All notices for delivery outside the United States will be
sent by facsimile or by express courier. Any notice given hereunder to more
than one person will be deemed to have been given, for purposes of counting
time periods hereunder, on the date effectively given to the last party
required to be given such notice. Notices to the Company will be marked
"Attention: Chief Financial Officer."
-5-
<PAGE>
8.2 BINDING ON SUCCESSORS AND ASSIGNS. This Agreement, and the
rights and obligations of the parties hereunder, will inure to the benefit
of, and be binding upon, (i) their respective successors, assigns, heirs,
executors, administrators and legal representatives or (ii) any Person to
whom a Stockholder transfers any stock in a transfer referred to in Section
1.3(a) or (b); but this Agreement and such rights will not inure to the
benefit of or be binding upon any other transferees. Notwithstanding the
immediately preceding sentence of this Section 8.2, the rights under this
Agreement may be assigned, in whole or in part, by an Investor to an
affiliate of such Investor or any entities for which the Note Warrant
Investor or its affiliates serve as general partner and/or investment adviser
or in a similar capacity, all material funds or other pooled investment
vehicles or entities under the common control or management of such Investor,
or the general partner or investment adviser thereof, or any affiliate of the
foregoing.
8.3 SEVERABILITY. If any provision of this Agreement is held to
be invalid, illegal or unenforceable in any respect, such provision will be
enforced to the maximum extent possible and such invalidity, illegality or
unenforceability will not affect any other provision of this Agreement, and
this Agreement will be construed as if such invalid, illegal or unenforceable
provision had (to the extent not enforceable) never been contained herein.
8.4 AMENDMENT. This Agreement may be amended only by means of a
written instrument executed by the Company, by Investors that own at least a
majority of the shares of Stock then owned by all the Investors and by each
of the Stockholders.
8.5 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the internal laws of The Commonwealth of
Massachusetts, excluding that body of law pertaining to conflict of laws.
8.6 OBLIGATION OF COMPANY; BINDING NATURE OF EXERCISE. The
Company agrees to use its best efforts to enforce the terms of this
Agreement, to inform each Investor of any breach hereof (to the extent the
Company has knowledge thereof) and to assist each Investor in the exercise of
such Investor's rights and performance of such Investor's obligations
hereunder.
8.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered will be deemed an
original, and all such counterparts together will constitute one and the same
instrument.
8.8 ENTIRE AGREEMENT. This Agreement, including all Exhibits
hereto, each of which is incorporated herein by reference, constitutes the
entire agreement of the parties with respect to the specific subject matter
hereof and supersedes in their entirety all other agreements or
understandings between or among the parties hereto with respect to such
specific subject matter.
8.9 CALCULATION; BINDING EFFECT OF COMPANY NOTICES. All
calculations of an Investor's Pro Rata Share will be made by the Company as
of the date of the Company's notice in which such Pro Rata Share appears.
The Pro Rata Share of an Investor as shown on any notice required hereunder
to be delivered by the Company will be binding upon the parties hereto absent
fraud or error.
8.10 HEADINGS. The captions and headings of this Agreement are
included for ease of reference only and will be disregarded in interpreting
or construing this Agreement. Unless otherwise stated, all references herein
to Sections and Exhibits will refer to Sections of and Exhibits to this
Agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Right of Co-Sale
Agreement as of the day and year first above written.
"COMPANY"
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
--------------------------------
Its: President and CEO
--------------------------------
"INVESTORS AND/OR STOCKHOLDERS"
TUDOR BVI FUTURES, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza
----------------------------
Robert P. Forlenza,
Vice President
TUDOR ARBITRAGE PARTNERS, L.P.
By: Tudor Global Trading, Inc.,
General Partner
By: /s/ Robert P. Forlenza
----------------------------
Robert P. Forlenza,
Vice President
RAPTOR GLOBAL FUND, LTD.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza
---------------------------
Robert P. Forlenza,
Vice President
RAPTOR GLOBAL FUND, L.P.
By: Tudor Investment Corporation,
General Partner
By: /s/ Robert P. Forlenza
---------------------------
Robert P. Forlenza,
Vice President
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Right of Co-Sale
Agreement as of the day and year first above written.
"COMPANY"
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
-------------------------------
Its: President and CEO
------------------------------
"STOCKHOLDER"
INTEL CORPORATION
By: /s/ Company Officer
-------------------------------
Its: VP and Treasurer
------------------------------
-8-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
SEQUOIA CAPITAL VI
By: /s/ Michael Moritz
-------------------------------
Its:
------------------------------
SEQUOIA TECHNOLOGY PARTNERS VI
By: /s/ Michael Moritz
-------------------------------
Its:
------------------------------
SEQUOIA XXIV
By: /s/ Michael Moritz
-------------------------------
Its:
------------------------------
-9-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
/s/ Daniel E. Steimle
-----------------------------------
Daniel E. Steimle
-10-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
ACCEL IV L.P.
By: /s/ G. Carter Sednaoui
-----------------------------------------
Its: General Partner
----------------------------------------
ACCEL INVESTORS '95 L.P.
By: /s/ G. Carter Sednaoui
-----------------------------------------
Its: General Partner
----------------------------------------
ACCEL KEIRETSU L.P.
By: /s/ G. Carter Sednaoui
-----------------------------------------
Its: Chief Financial Officer
----------------------------------------
ELLMORE C. PATTERSON PARTNERS
By: /s/ Company Officer
-----------------------------------------
Its: General Partner
----------------------------------------
-11-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
AT & T VENTURES
By: /s/ Neal Douglas
----------------------------------------
Its: General Partner
---------------------------------------
-12-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
OSCCO III, L.P.
By: /s/ Stephen Halprin
-----------------------------------------
Its: General Partner
----------------------------------------
-13-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
GARY LAUDER
By: /s/ Gary Lauder
-----------------------------------------
Its:
----------------------------------------
-14-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
888 GROUP
By: /s/ David Hayes
-----------------------------------------
Its: /s/ Company Officer
----------------------------------------
/s/ Company Officer
-15-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
/s/ Bradford J. Shafer
---------------------------------------
Bradford J. Shafer
-16-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
/s/ K. Philip Hwang
---------------------------------------
K. Philip Hwang
-17-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
J. F. SHEA CO., INC.
By: /s/ Edmund Shea, Jr.
-----------------------------------------
Its: Vice President
----------------------------------------
-18-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
/s/ Carl Ledbetter
---------------------------------------
Carl Ledbetter
-19-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
INTEL CORPORATION
By:
-----------------------------------------
Its:
----------------------------------------
-20-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
/s/ Howard Strachman
---------------------------------------
Howard Strachman
-21-
<PAGE>
SIGNATURE PAGE TO RIGHT OF CO-SALE AGREEMENT
/s/ Eduardo Moura
---------------------------------------
Eduardo Moura
-22-
<PAGE>
EXHIBIT A
LIST OF INVESTORS
MAXIMUM NUMBER OF SHARES OF COMMON
STOCK THAT MAY BE ISSUED AT ANY TIME
PURCHASER NAME & ADDRESS UPON EXERCISE OF WARRANTS
- ------------------------- ------------------------------------
Tudor BVI Future, Ltd.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 456,106
Tudor Arbitrage Partners, L.P.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 116,667
Raptor Global Fund Ltd.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 301,486
Raptor Global Fund L.P.
c/o Tudor Global Trading, Inc.
40 Rowes Wharf
Boston, MA 02110 115,841
Sequoia Capital VI
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Tami Taylor 67,574
Sequoia Technology Partners VI
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Tami Taylor 3,713
Sequoia XXIV
3000 Sand Hill Road Building 4, Suite 280
Menlo Park, CA 94025
Attn: Tami Taylor 2,970
<PAGE>
Accel IV L.P.
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui 56,683
Accel Investors '95 L.P.
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui 2,661
Accel Keiretsu L.P.
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui 1,163
Ellmore C. Patterson Partners
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui 1,361
AT&T Ventures
3000 Sand Hill Road
Building 1, Suite 285
Menlo Park, CA 94025
Attn: Neal Douglas 63,664
OSCCO III, L.P.
3000 Sand Hill Road
Building 1, Suite 290
Menlo Park, CA 94025
Attn: Stephen E. Halprin 49,505
Gary M. Lauder
88 Mercedes Lane
Atherton, CA 94027 24,753
888 Group
555 California Street
Suite 2200
San Francisco, CA 94104
Attn: David Hayes 30,941
Daniel E. Steimle
P.O. Box 928
Occidental, CA 95465 123,763
2
<PAGE>
Bradford J. Shafer
c/o Heartport, Inc.
200 Chesapeake Drive
Redwood City, CA 94063 12,376
J.F. Shea Co., Inc.
655 Brea Canyon Road
Walnut, CA 91789-3010 24,753
Mr. K. Philip Hwang
2345 Harris Way
San Jose, CA 95131-1413 247,525
TOTAL: 1,703,517
---------
3
<PAGE>
EXHIBIT B
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
Fully Diluted Without Bridge Warrants*
Name Bridge Warrants (Maximum)** Total
----- ---------------------- ----------------- -------
<S> <C> <C> <C>
Sequoia Capital VI
Sequoia Technology Partners VI
Sequoia XXIV 2,292,594 74,258 2,366,852
Dan Steimle 300,000 123,763 423,763
Accel IV L.P.
Accel Investors '95 L.P.
Accel Keiretsu L.P. 2,321,166 61,881 2,383,047
Ellmore C. Patterson Partners
OSCCO III, L.P. 1,306,325 49,505 1,355,830
Carl Ledbetter 1,776,381 -- 1,776,381
Intel Corporation 3,258,949 -- 3,258,949
Howard Strachman 2,475,117 -- 2,475,117
Eduardo Moura 1,856,338 -- 1,856,338
------------- ------------ ----------
Total 15,586,870 309,407 15,896,277
- -------------------
</TABLE>
* Number includes all shares subject to oustanding exercisable or convertible
securities. The number that is currently exercisable or convertible may be
less depending on when calculation is made.
**Reflects "Maximum Number" as defined in Warrant; the number deemed
exercisable (as provided in the Agreement) may be less.
<PAGE>
EXHIBIT E
EMPLOYEE
PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
------------------------
_____________, 199_
Hybrid Networks, Inc.
10201 Bubb Road
Cupertino, CA 95014
The following confirms an agreement between me and Hybrid Networks,
Inc., a Delaware corporation (the "Company"), which is a material part of the
consideration for my employment by the Company:
1. I understand that the Company possesses and will possess Proprietary
Information which is important to its business. For purposes of this
Agreement, "Proprietary Information" is information that was or will be
developed, created, or discovered by or on behalf of the Company, or which
became or will become known by, or was or is conveyed to the Company, which
has commercial value in the Company's business. "Proprietary Information"
includes, but is not limited to, information about high speed digital
interactive channels, algorithms, circuits, layouts, trade secrets, computer
programs, designs, technology, ideas, know-how, processes, formulas,
compositions, data, techniques, improvements, inventions (whether patentable
or not), works of authorship, business and product development plans, the
salaries and terms of compensation of other employees, customers and other
information concerning the Company's actual or anticipated business, research
or development, or which is received in confidence by or for the Company from
any other person. I understand that my employment creates a relationship of
confidence and trust between me and the Company with respect to Proprietary
Information.
2. I understand that the Company possesses or will possess "Company
Materials" which are important to its business. For purposes of this
Agreement, "Company Materials" are documents or other media or tangible items
that contain or embody Proprietary Information or any other information
concerning the business, operations or plans of the Company, whether such
documents have been prepared by me or by others. "Company Materials" include,
but are not limited to, blueprints, drawings, photographs, charts, graphs,
notebooks, customer lists, computer disks, tapes or printouts, sound
recordings and other printed, typewritten or handwritten documents, as well
as samples, prototypes, models, products and the like.
3. In consideration of my employment by the Company and the
compensation received by me from the Company from time to time, I hereby
agree as follows:
a. All Proprietary Information and all title, patents, patent
rights, copyrights, mask work rights, trade secret rights, and other
intellectual property and rights anywhere in the world (collectively "Rights")
in connection therewith shall be the sole property of the Company. I hereby
assign to the Company any Rights I may have or acquire in such Proprietary
Information. At all times, both during my employment by the Company and after
its termination, I will keep in confidence and trust and will not use or
disclose any Proprietary Information or anything relating to it without the
prior written consent of an
<PAGE>
officer of the Company. Nothing contained herein will prohibit an employee
from disclosing to anyone the amount of his or her wages.
b. All Company Materials shall be the sole property of the Company.
I agree that during my employment by the Company, I will not remove any
Company Materials from the business premises of the Company or deliver any
Company Materials to any person or entity outside the Company. I further
agree that, immediately upon the termination of my employment by me or by the
Company for any reason, or during my employment if so requested by the
Company, I will return all Company Materials, apparatus, equipment and other
physical property, or any reproduction of such property, excepting only (i)
my personal copies of records relating to my compensation; (ii) my personal
copies of any materials previously distributed generally to stockholders of
the Company; and (iii) my copy of this Agreement.
c. I will promptly disclose in writing to my immediate supervisor,
or to any persons designated by the Company, all "Inventions", (which term
includes improvements, inventions, works of authorship, trade secrets,
technology, circuits, layouts, algorithms, computer programs, formulas,
compositions, ideas, designs, processes, techniques, know-how and data,
whether or not patentable) made or conceived or reduced to practice or
developed by me, either alone or jointly with others, during the term of my
employment. I will also disclose to the President of the Company Inventions
conceived, reduced to practice or developed by me within six (6) months of
the termination of my employment with the Company; such disclosures shall be
received by the Company in confidence (to the extent they are not assigned
in (d) below) and do not extend the assignment made in Section (d) below.
I will not disclose Inventions covered by Section 3.c to any person outside
the Company unless I am requested to do so by management personnel of the
Company.
d. I agree that all Inventions which I make, conceive, reduce to
practice or develop (in whole or in part, either alone or jointly with
others) during my employment shall be the sole property of the Company to the
maximum extent permitted by Section 2870 of the California Labor Code, if
applicable, a copy of which is attached and hereby assign such Inventions and
all Rights therein to the Company. No assignment in this Agreement shall
extend to inventions, the assignment of which is prohibited by Labor Code
section 2870. The Company shall be the sole owner of all Rights in connection
therewith.
e. I agree to perform, during and after my employment, all acts
deemed necessary or desirable by the Company to permit and assist it, at the
Company's expense, in evidencing, perfecting, obtaining, maintaining,
defending and enforcing Rights and/or my assignment with respect to such
Inventions in any and all countries. Such acts may include, but are not
limited to, execution of documents and assistance or cooperation in legal
proceedings. I hereby irrevocably designate and appoint the Company and its
duly authorized officers and agents, as my agents and attorneys-in-fact to
act for and in my behalf and instead of me, to execute and file any documents
and to do all other lawfully permitted acts to further the above purposes
with the same legal force and effect as if executed by me.
f. Any assignment of copyright hereunder includes all rights of
paternity, integrity, disclosure and withdrawal and any other rights that
may be known as or referred to as "moral rights" (collectively "Moral
Rights"). To the extent such Moral Rights cannot be assigned under applicable
law and to the extent the following is allowed by the laws in the various
countries where Moral Rights exist, I hereby waive such Moral Rights and
consent to any action of the Company that would violate such Moral Rights in
the absence of such consent. I will confirm any such waivers and consents
from time to time as requested by the Company.
2.
<PAGE>
g. I have attached hereto a complete list of all existing
Inventions to which I claim ownership as of the date of this Agreement and
that I desire to specifically clarify are not subject to this Agreement, and
I acknowledge and agree that such list is complete. If no such list is
attached to this Agreement, I represent that I have no such Inventions at the
time of signing this Agreement.
h. During the term of my employment and for one (1) year
thereafter, I will not encourage or solicit any employee or consultant of the
Company to leave the Company for any reason. However, this obligation shall
not affect any responsibility I may have as an employee of the Company with
respect to the bona fide hiring and firing of Company personnel.
i. I agree that during my employment with the Company I will not
either directly or indirectly, whether as a director, officer, consultant,
employee or adviser or in any other capacity (i) render any services
respecting high speed digital networking technology and services ("Services")
to any business, agency, partnership or entity engaged in a similar business
in the United States other than the Company ("Restricted Business"), or (ii)
make or hold any investment in any Restricted Business in the United States,
whether such investment be by way of loan, purchase of stock or otherwise,
PROVIDED that there shall be excluded from the foregoing the ownership of not
more than 5% of the listed or traded stock of any publicly-held corporation.
The provisions of this paragraph shall apply both during normal working hours
and at all other times including, but not limited to, nights, weekends and
vacation time, while I am employed by the Company.
j. I represent that my performance of all the terms of this
Agreement will not breach any agreement to keep in confidence proprietary
information acquired by me in confidence or in trust prior to my employment
by the Company. I have not entered into, and I agree I will not enter into,
any agreement either written or oral in conflict herewith or in conflict with
my employment with the Company.
4. I agree that this Agreement is not an employment contract and that I
have the right to resign and the Company has the right to terminate my
employment at any time, for any reason, with or without cause.
5. I agree that this Agreement does not purport to set forth all of the
terms and conditions of my employment, and that as an employee of the Company
I have obligations to the Company which are not set forth in this Agreement.
6. I agree that my obligations under paragraphs 3(a) through 3(f) and
paragraph 3(h) of this Agreement shall continue in effect after termination
of my employment, regardless of the reason or reasons for termination, and
whether such termination is voluntary or involuntary on my part, and that the
Company is entitled to communicate my obligations under this Agreement to
any future employer or potential employer of mine.
7. I agree that any dispute in the meaning, effect or validity of this
Agreement shall be resolved in accordance with the laws of the State of
California without regard to the conflict of laws provisions thereof. I
further agree that if one or more provisions of this Agreement are held to be
illegal or unenforceable under applicable California law, such illegal or
unenforceable portion(s) shall be limited or excluded from this Agreement to
the minimum extent required so that this Agreement shall otherwise remain in
full force and effect and enforceable in accordance with its terms.
8. This Agreement shall be effective as of the date I execute this
Agreement and shall be binding upon me, my heirs, executors, assigns, and
administrators and shall inure to the benefit of the Company, its
subsidiaries, successors and assigns.
3.
<PAGE>
9. This Agreement can only be modified by a subsequent written
agreement executed by the President of the Company.
I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE
OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR
REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I
SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE
UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY THE COMPANY AND THE
OTHER COUNTERPART WILL BE RETAINED BY ME.
Dated: _________________, 19__ ________________________________________
Accepted and Agreed to:
HYBRID NETWORKS, INC.
By: ________________________________________
4.
<PAGE>
ATTACHMENT A
------------
Hybrid Networks, Inc.
10201 Bubb Road
Cupertino, CA 95014
Ladies and Gentlemen:
1. The following is a complete list of Inventions relevant to the
subject matter of my employment by Hybrid Networks, Inc. (the "Company") that
have been made or conceived or first reduced to practice by me alone or
jointly with others prior to my employment by the Company that I desire to
clarify are not subject to the Company's Proprietary Information and
Inventions Agreement.
_____ No Inventions
_____ See below:
_____ Additional sheets attached
2. I propose to bring to my employment the following materials and
documents of a former employer:
_____ No materials or documents
_____ See below:
_________________________
Employee
<PAGE>
ATTACHMENT B
------------
SECTION 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE SHALL
ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER.
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer;
(2) Result from any work performed by the employee for his
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
<PAGE>
ADDENDUM NO.1 TO THE COLLABORATION AGREEMENT
This addendum No.1 to the Collaboration Agreement dated 25th day of
November, 1996 among Hybrid Networks Inc., Sharp Corporation and Itochu
Corporation ("Agreement") is made and enter into as of the same day mentioned
above.
RECITALS:
WHEREAS, Sharp may elect to manufacturer third party cable modems in
addition to the New Cable Modems (N-series cable modems) which result from the
Agreement.
AGREEMENT:
If and when Sharp elects to manufacture such third party cable modems, then
Hybrid shall have the option to use a separate source of OEM supply other than
Sharp. Hybrid will be allowed to have the New Cable Modems produced by another
supplier, such as a local contract manufacturer. The Sharp's technology
incorporated therein may be used by Hybrid under the royalty bearing license
agreement as foreseen in the Section 6 of the Agreement.
IN WITNESS WHEREOF, the Parties shall cause this Addendum No.1 to be
executed by duly authorized officers.
Hybrid Networks, Inc.
By: /s/ Carl S. Ledbetter
----------------------------
Its: CEO
---------------------------
Sharp Corporation Itochu Corporation
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------------- --------------------------
Its: Division Deputy General Manager Its: Department Officer
-------------------------------- -------------------------
[ILLEGIBLE]
<PAGE>
- ------------------------------------------------------------------------------
HYBRID NETWORKS, INC.
LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION............................................ 1
1.1 Definitions........................................................ 1
1.2 Accounting and Other Terms......................................... 8
2. LOAN AND TERMS OF PAYMENT............................................... 8
2.1 Revolving Advances................................................. 8
2.2 Overadvances....................................................... 9
2.3 Interest Rates, Payments, and Calculations......................... 9
2.4 Crediting Payments................................................. 10
2.5 Fees............................................................... 10
2.6 Additional Costs................................................... 10
3. CONDITIONS OF CREDIT EXTENSIONS......................................... 10
3.1 Conditions Precedent to Initial Credit Extension................... 10
3.2 Conditions Precedent to all Credit Extensions...................... 11
4. CREATION OF SECURITY INTEREST........................................... 11
4.1 Grant of Security Interest......................................... 11
4.2 Delivery of Additional Documentation Required...................... 11
4.3 Right to Inspect................................................... 12
5. REPRESENTATIONS AND WARRANTIES.......................................... 12
5.1 Due Organization and Qualification................................. 12
5.2 Due Authorization; No Conflict..................................... 12
5.3 No Prior Encumbrances.............................................. 12
5.4 Bona Fide Eligible Accounts........................................ 12
5.5 Merchantable Inventory............................................. 12
5.6 Name; Location of Chief Executive Office........................... 12
5.7 Litigation......................................................... 13
5.8 No Material Adverse Change in Financial Statements................. 13
5.9 Solvency........................................................... 13
5.10 Regulatory Compliance.............................................. 13
5.11 Environmental Condition............................................ 13
5.12 Taxes.............................................................. 14
5.13 Subsidiaries....................................................... 14
5.14 Government Consents................................................ 14
5.15 Full Disclosure.................................................... 14
6. AFFIRMATIVE COVENANTS................................................... 14
6.1 Good Standing...................................................... 14
6.2 Government Compliance.............................................. 14
6.3 Financial Statements, Reports, Certificates........................ 15
6.4 Inventory; Returns................................................. 15
6.5 Taxes.............................................................. 15
6.6 Insurance.......................................................... 16
6.7 Principal Depository............................................... 16
6.8 Quick Ratio........................................................ 16
6.9 Tangible Net Worth................................................. 16
6.10 Debt Net Worth..................................................... 16
6.11 Profitability...................................................... 17
i
<PAGE>
6.12 Further Assurances................................................. 17
7. NEGATIVE COVENANTS...................................................... 17
7.1 Dispositions....................................................... 17
7.2 Changes in Business, Ownership, Management or Business Locations... 17
7.3 Mergers or Acquisitions............................................ 17
7.4 Indebtedness....................................................... 17
7.5 Encumbrances....................................................... 18
7.6 Distributions...................................................... 18
7.7 Investments........................................................ 18
7.8 Transactions with Affiliates....................................... 18
7.9 Subordinated Debt.................................................. 18
7.10 Compliance......................................................... 18
8. EVENTS OF DEFAULT....................................................... 18
8.1 Payment Default.................................................... 19
8.2 Covenant Default................................................... 19
8.3 Material Adverse Change............................................ 19
8.4 Attachment......................................................... 19
8.5 Insolvency......................................................... 19
8.6 Other Agreements................................................... 20
8.7 Subordinated Debt.................................................. 20
8.8 Judgments.......................................................... 20
8.9 Misrepresentations................................................. 20
9. BANK'S RIGHTS AND REMEDIES.............................................. 20
9.1 Rights and Remedies................................................ 20
9.2 Power of Attorney.................................................. 21
9.3 Accounts Collection................................................ 22
9.4 Bank Expenses...................................................... 22
9.5 Bank's Liability for Collateral.................................... 22
9.6 Remedies Cumulative................................................ 22
9.7 Demand; Protest.................................................... 22
10. NOTICES................................................................. 23
11. CHOICE OF LAW AND VENUE................................................. 23
12. GENERAL PROVISIONS...................................................... 23
12.1 Successors and Assigns............................................. 23
12.2 Indemnification.................................................... 24
12.3 Time of Essence.................................................... 24
12.4 Severability of Provisions......................................... 24
12.5 Amendments in Writing, Integration................................. 24
12.6 Counterparts....................................................... 24
12.7 Survival........................................................... 24
12.8 Confidentiality.................................................... 24
ii
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of October 16, 1997,
by and between VENTURE BANKING GROUP, a division of Cupertino National Bank
("Bank") and HYBRID NETWORKS, INC. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions.
As used in this Agreement, the following terms shall have the
following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by Borrower, whether or not earned by performance, and any and
all credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means a cash advance under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each of
such Person's senior executive officers, directors, partners and, for any
Person that is a limited liability company, such Persons, managers and
members, provided that for purposes of this Agreement, with respect to
Borrower, Affiliate shall mean only Borrower, Borrower's Subsidiaries and
each of Borrower's and its Subsidiaries senior executive officers, directors,
partners and for any subsidiary that is a limited liability company, such
Subsidiary's managers and members.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation and negotiation of the Loan Documents not to exceed
$6,000 without the prior consent of Borrower; and Bank's reasonable
attorneys' fees and expenses incurred in amending, enforcing or defending the
Loan Documents (including fees and expenses of appeal or review, or those
incurred in any Insolvency Proceeding), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including without limitation: ledgers; records concerning Borrower's assets
or liabilities, the Collateral, business operations or financial condition;
and all computer programs, or tape files, and the equipment (except Equipment
that Borrower does not own, which Equipment Borrower leases from third
parties), containing such information.
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"Borrowing Base" means an amount equal to seventy-five percent
(75%) of Eligible Accounts as determined by Bank with reference to the most
recent Borrowing Base Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means a credit extension of up to
Four Million Dollars ($4,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of the obligations under the guarantee
or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance or any other extension of
credit by Bank for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries on a separate
company basis as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its
Subsidiaries on a separate company basis, as at such date, plus, to the
extent not already included therein, all outstanding Credit Extensions made
under this Agreement, including all Indebtedness that is payable upon demand
or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Default Rate" has the meaning assigned in Section 2.3(b).
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"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided,
that standards of eligibility may be fixed and revised from time to time by
Bank in Bank's reasonable judgment and upon notification thereof to Borrower
in accordance with the provisions hereof. Unless otherwise agreed to by Bank
in writing, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety
(90) days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed thirty percent (30%)
of the total of all Accounts but only to the extent that such obligations
exceed 30% of all Accounts, except as approved in writing by Bank or except
as set forth on the Schedule;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States;
(e) Accounts with respect to which the account debtor is a
federal, state or local governmental entity or any department, agency, or
instrumentality thereof;
(f) Accounts with respect to which Borrower is liable to the
account debtor, but only to the extent of any amounts owing to the account
debtor (sometimes referred to as "contra" accounts, e.g. accounts payable,
customer deposits, credit accounts, etc.) or except as set forth on the
Schedule;
(g) Accounts generated by demonstration or promotional
equipment, or with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or progress
billings, or other terms by reason of which the payment by the account debtor
may be conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower or except as set forth on
the Schedule;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes,
in its sole discretion, that there may be a basis for dispute (but only to
the extent of the amount subject to such dispute or claim), or is subject to
any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts owing from distributors that have not been
pre-approved by Bank or except as set forth on the Schedule; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in the
United States and that Bank approves on a case-by-case basis. (Bank
acknowledges approving Accounts owing by entities listed in the Schedule,
that are otherwise Eligible Accounts.)
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"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest, except Equipment that
Borrower does not own, which Equipment Borrower leases from third parties.
"Equity Event" means the receipt by Borrower of not less than
Thirty Two Million Dollars ($32,000,000) from the sale or issuance of its
equity securities in its initial public offering.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d)
all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief for
creditors.
"Intellectual Property Collateral" means all of Borrower's
right, title and interest in and to the following:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, or Trademarks and all license fees and royalties arising from such
use to the extent permitted by such license or rights (subject to the
exclusions set forth in the last paragraph of Exhibit A attached hereto);
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
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"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any non-negotiable documents of title representing any
of the above.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, in favor of Bank, and any other present or
future agreement entered into between Borrower and/or for the benefit of Bank
in connection with this Agreement, all as amended, extended or restated from
time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to
repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, negotiable documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may
have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like
protections, including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of
the same, now or hereafter existing, created or acquired.
"Payment Date" means the fifteenth (15th) day of each month,
commencing on the first such date after the Closing Date and ending on the
Revolving Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
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(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
(f) Any renewal, extension or refinancing of any Indebtedness
described in clauses (a) through (e), above provided the terms of such
renewal, extension or refinancing are not more burdensome than the original
Indebtedness and the principal amount of such renewal, extension or
refinancing does not exceed the principal amount of the original Indebtedness.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) Investments in: (i) marketable direct obligations issued
or unconditionally guaranteed by the United States of America or any agency
or any State thereof maturing within one (1) year from the date of
acquisition thereof, (ii) commercial paper maturing no more than one (1) year
from the date of creation thereof and currently having the rating of A or
higher from either Standard & Poor's Corporation or Moody's Investors
Service, Inc., (iii) certificates of deposit maturing no more than one (1)
year from the date of investment therein issued by Bank, or, as to such
certificates of deposit held by Bank of America, for thirty (30) days after
the Closing Date, and (iv) investments in securities issued by wholly-owned
Subsidiaries of Borrower;
(c) Investments consisting of (i) travel advances, employee
relocation loans and other employee loans and advances in the ordinary course
of business, and (ii) loans to employees, officers or directors relating to
the purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plans or agreements approved by Borrower's Board of
Directors;
(d) Investments (including debt obligations) received in
settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business; and
(e) Investments consisting of notes receivable of, or prepaid
royalties and other credit extensions to, customers and suppliers who are not
Affiliates, in the ordinary course of business; provided that this paragraph
(e) shall not apply to Investments by Borrower in any Subsidiary.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule (including the Lien of London Pacific Life and Annuity Company
or its assigns) or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment;
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(d) Liens that are not prior to the Lien of Bank which
constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangement entered into with banks in the
ordinary course of business;
(e) Liens on insurance proceeds in favor of insurance
companies granted solely as security for financed premiums;
(f) Liens related to leases or subleases and licenses or
sublicenses granted to others in the ordinary course of Borrower's business
not interfering in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor,
licensor or under any lease or license, provided that such leases, subleases,
licenses and sublicenses do not prohibit the grant of the security interest
granted hereunder (subject to the exclusions set forth in the last paragraph
of Exhibit A attached hereto); and
(g) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) and (e) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the
existing Lien (or proceeds of such property) and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently published in the Western edition of The Wall Street Journal, as
the "prime rate," whether or not such announced rate is the lowest rate
available from Bank.
"Quick Assets" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable and investments with
maturities of fewer than ninety (90) days of Borrower determined in
accordance with GAAP.
"Responsible Officer" means each of the Chief Executive
Officer, the President, the Chief Financial Officer and the Controller of
Borrower.
"Revolving Maturity Date" means the date immediately preceding
the first anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity
of which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or
one or more Affiliates of such Person.
"Tangible Net Worth" means, as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense,
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patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (ii) Total Liabilities of
Borrower and its Subsidiaries.
"Total Liabilities" means, as of any applicable date, all
obligations that should, in accordance with GAAP, be classified as
liabilities on the consolidated balance sheet of Borrower on a separate
company basis, including in any event all Indebtedness.
"Trademarks" means any trademark and service mark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of
Borrower connected with and symbolized by such trademarks now or hereafter
existing, created or acquired.
1.2 Accounting and Other Terms.
All accounting terms not specifically defined herein shall be
construed in accordance with GAAP and all calculations and determinations
made hereunder shall be made in accordance with GAAP. When used herein, the
term "financial statements" shall refer to the financial statements of
Borrower prepared on a separate company basis and shall include the notes and
schedules thereto. The terms "including" / "includes" shall always be read
as meaning "including (or includes) without limitation," when used herein or
in any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 Revolving Advances
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate
outstanding amount not to exceed the lesser of the Committed Revolving Line
or the Borrowing Base, less in each case the face amount of any outstanding
Letters of Credit (as hereafter defined), including drawn but unreimbursed
Letters of Credit. Subject to the terms and conditions of this Agreement,
amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at
any time prior to the Revolving Maturity Date.
(b) Whenever Borrower desires an Advance, Borrower will
notify Bank by facsimile transmission or telephone no later than 3:00 p.m.
Pacific time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer. Bank shall be
entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer or a designee thereof, and
Borrower shall indemnify and hold Bank harmless for any damages or loss
suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
Borrower shall deliver to Bank a promissory note in substantially the form of
Exhibit C.
(c) The Committed Revolving Line shall terminate on the
Revolving Maturity Date, at which time all Advances under this Section 2.1
shall be immediately due and payable.
2.1.1 Letters of Credit.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit
("Letters of Credit") for the account of Borrower in an aggregate outstanding
face amount not to exceed the lesser of the Committed Revolving Line or the
Borrowing Base, minus in each case the outstanding Advances, and in any case
not to exceed Two Million Five Hundred Thousand Dollars ($2,500,000). Each
Letter of Credit shall have an expiry date
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no later than one hundred eighty (180) days after the Revolving Maturity
Date, provided that Borrower's Letter of Credit reimbursement obligation
shall be secured by cash on terms acceptable to Bank at any time after the
Revolving Maturity Date if the term of this Agreement is not extended by
Bank. All Letters of Credit shall be, in form and substance, acceptable to
Bank in its sole discretion and shall be subject to the terms and conditions
of Bank's form of standard Application and Letter of Credit Agreement,
including without limitation an issuance fee equal to two percent (2%) of the
face amount of each Letter of Credit.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement and such Letters of Credit, under all
circumstances whatsoever. Borrower shall indemnify, defend, protect and hold
Bank harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with
any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States Dollars. If a demand
for payment is made under any such Letter of Credit, Bank shall treat such
demand as an Advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
(d) Upon the issuance of any Letter of Credit payable in
a currency other than United States Dollars, Bank shall create a reserve
under the Revolving Committed Line for Letters of Credit against fluctuations
in currency exchange rates, in an amount equal to ten percent (10%) of the
face amount of such Letter of Credit. The amount of such reserve may be
amended by Bank from time to time to account for fluctuations in the exchange
rate. The availability of funds under the Committed Revolving Line shall be
reduced by the amount of such reserve for so long as such Letter of Credit
remains outstanding. If a hedge for a currency exchange rate is in place for
any Letter of Credit, no reserve shall be required for such Letter of Credit.
2.2 Overadvances.
If, at any time or for any reason, the amount of Obligations
owed by Borrower to Bank pursuant to Section 2.1 of this Agreement is greater
than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing
Base, Borrower shall immediately pay to Bank, in cash, the amount of such
excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b), any
Advances shall bear interest on the average daily balance thereof, at a per
annum rate equal to the Prime Rate.
(b) Default Rate. All Obligations shall bear interest, from
and after the occurrence and continuance of an Event of Default, at a rate
equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on
each Payment Date. Borrower hereby authorizes Bank to debit any accounts
with Bank, including, without limitation, Account Number
for payments of principal and interest due on the Obligations and any other
amounts owing by Borrower to Bank. Bank will notify Borrower of all debits
which Bank has made against Borrower's accounts. Any such debits against
Borrower's accounts in no way shall be deemed a set-off. Any interest not
paid when due shall be compounded
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by becoming a part of the Obligations, and such interest shall thereafter
accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate
is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments.
Prior to the occurrence and during the continuance of an Event
of Default, Bank shall credit a wire transfer of funds, check or other item
of payment to such deposit account or Obligation as Borrower specifies.
After the occurrence and continuance of an Event of Default, the receipt by
Bank of any wire transfer of funds, check, or other item of payment, whether
directed to Borrower's deposit account with Bank or to the Obligations or
otherwise, shall be immediately applied to conditionally reduce Obligations,
but shall not be considered a payment in respect of the Obligations unless
such payment is of immediately available federal funds or unless and until
such check or other item of payment is honored when presented for payment.
Notwithstanding anything to the contrary contained herein, any wire transfer
or payment received by Bank after 12:00 noon Pacific time shall be deemed to
have been received by Bank as of the opening of business on the immediately
following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall
accrue and be payable for the period of such extension.
2.5 Fees.
Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Twenty Thousand
Dollars ($20,000), which fee shall be due on the Closing Date and shall be
fully earned and non-refundable;
(b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, not to exceed Seven Hundred and Fifty Dollars ($750) per audit, and
for each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents, provided that
such audits will be conducted no more often than every six months unless an
Event of Default has occurred and is continuing and such appraisals of
collateral and financial analysis shall be conducted only upon the occurrence
and during the continuance of an Event of Default.
(c) Bank Expenses. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses without Borrower's
prior consent, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.6 Additional Costs.
In case any law, regulation, treaty or official directive or
the interpretation or application thereof by any court or any governmental
authority charged with the administration thereof or the compliance with any
guideline or request of any central bank or other governmental authority
(whether or not having the force of law):
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(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any State or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank,
reduce the income receivable by Bank or impose any expense upon Bank with
respect the Obligations, Bank shall notify Borrower thereof. Borrower agrees
to pay to Bank the amount of such increase in cost, reduction in income or
additional expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Bank of a statement of the amount and
setting forth Bank's calculation thereof, all in reasonable detail, which
statement shall be deemed true and correct absent manifest error.
2.7 Term.
Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate
its obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF CREDIT EXTENSIONS
3.1 Conditions Precedent to Initial Credit Extension.
The obligation of Bank to make the initial Credit Extension is
subject to the condition precedent that Bank shall have received, in form and
substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) agreement to provide insurance;
(d) payment of the fees and Bank Expenses then due specified
in Section 2.5 hereof;
(e) an audit of Borrower's Accounts, the results of which
shall be satisfactory to Bank;
(f) a financing statement (Form UCC-1);
(g) a warrant to purchase stock executed as of the Closing
Date;
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(h) subordination agreements with respect to the Debenture and
the Subordinated Notes (as each term is defined in the Schedule) executed as
of the Closing Date; and
(i) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions.
The obligation of Bank to make each Credit Extension, including
the initial Credit Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Credit Extension
as though made at and as of each such date, and no Event of Default shall
have occurred and be continuing, or would result from such Credit Extension.
The making of each Credit Extension shall be deemed to be a representation
and warranty by Borrower on the date of such Credit Extension as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Borrower grants and pledges to Bank a continuing security
interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt payment of any and all Obligations and
in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule and
except for Permitted Liens, such security interest constitutes a valid, first
priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof. From and after the occurrence and continuance of an
Event of Default, Borrower acknowledges that Bank may place a "hold" on any
Deposit Account pledged as Collateral to secure the Obligations.
Notwithstanding termination of this Agreement, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver to Bank,
at the request of Bank, all Negotiable Collateral, all financing statements
and other documents that Bank may reasonably request, in form satisfactory to
Bank, to perfect and continue perfected Bank's security interests in the
Collateral and in order to fully consummate all of the transactions
contemplated under the Loan Documents.
4.3 Right to Inspect.
Subject to Section 12.8, Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice,
from time to time during Borrower's usual business hours, to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral;
provided, however, Bank shall have the right to appraise the Collateral only
upon the occurrence and continuance of an Event of Default.
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5. REPRESENTATIONS AND WARRANTIES
Except as set forth in the Schedule, Borrower represents and
warrants as follows:
5.1 Due Organization and Qualification.
Borrower and each Subsidiary is a corporation duly existing and
in good standing under the laws of its state of incorporation and qualified
and licensed to do business in, and is in good standing in, any state in
which the conduct of its business or its ownership of property requires that
it be so qualified, except for states as to which any failure to so qualify
would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict.
The execution, delivery, and performance of the Loan Documents
are within Borrower's corporate powers, have been duly authorized, and are
not in conflict with nor constitute a breach of any provision contained in
Borrower's Certificate of Incorporation or Bylaws, nor will they constitute
an event of default under any material agreement to which Borrower is a party
or by which Borrower is bound. Borrower is not in default under any
agreement to which it is a party or by which it is bound, which default would
reasonably be expected to have a Material Adverse Effect.
5.3 No Prior Encumbrances.
Borrower has good and indefeasible title to the Collateral,
free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts.
The Eligible Accounts are bona fide existing obligations. The
service or property giving rise to such Eligible Accounts has been performed
or delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding
of any account debtor whose accounts are included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Merchantable Inventory.
All Inventory is in all material respects of good and
marketable quality, free from all material defects.
5.6 Name; Location of Chief Executive Office.
Except as disclosed in the Schedule, Borrower has not done
business and will not, without at least thirty (30) days prior written notice
to Bank, do business under any name other than that specified on the
signature page hereof. The chief executive office of Borrower is located at
the address indicated in Section 10 hereof.
5.7 Litigation.
Except as set forth in the Schedule, there are no actions or
proceedings pending or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which
an adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral.
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5.8 No Material Adverse Change in Financial Statements.
All consolidated financial statements related to Borrower and
any Subsidiary that have been delivered by Borrower to Bank fairly present in
all material respects Borrower's consolidated financial condition as of the
date thereof and Borrower's consolidated results of operations for the period
then ended. There has not been a material adverse change in the consolidated
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Bank on or about the Closing Date.
5.9 Solvency.
Borrower is solvent and Borrower is able to pay its debts
(including trade debts) as they mature.
5.10 Regulatory Compliance.
Borrower and each Subsidiary has met the minimum funding
requirements of ERISA with respect to any employee benefit plans subject to
ERISA. No event has occurred resulting from Borrower's failure to comply
with ERISA that is reasonably likely to result in Borrower's incurring any
liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of its important activities, in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulations G, T and U of the Board of Governors of
the Federal Reserve System). Borrower has complied with all the provisions
of the Federal Fair Labor Standards Act. Borrower has not violated any
statutes, laws, ordinances or rules applicable to it, violation of which
could reasonably be expected to have a Material Adverse Effect.
5.11 Environmental Condition.
None of Borrower's or any Subsidiary's properties or assets has
ever been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous owners or operators, in the disposal of, or to
produce, store, handle, treat, release, or transport, any hazardous waste or
hazardous substance other than in accordance with applicable law; to the best
of Borrower's knowledge, none of Borrower's properties or assets has ever
been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site,
or a candidate for closure pursuant to any environmental protection statute;
no lien arising under any environmental protection statute has attached to
any revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or
any other federal, state or other governmental agency concerning any action
or omission by Borrower or any Subsidiary resulting in the release or other
disposition of hazardous waste or hazardous substances into the environment.
5.12 Taxes.
Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries.
Borrower does not own any stock, partnership interest or other
equity securities of any Person, except for Permitted Investments.
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5.14 Government Consents.
Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all governmental authorities that are necessary for the
continued operation of Borrower's business as currently conducted except
where any failure to do so would not reasonably be expected to have a
Material Adverse Effect.
5.15 Full Disclosure.
No representation, warranty or other statement made by Borrower
in any certificate or written statement furnished to Bank contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained in such certificates or statements
not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower are not to be viewed as facts and that actual
results during the period or periods covered by any such projections and
forecasts may differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing.
Borrower shall maintain its and each of its Subsidiaries'
corporate existence and good standing in its jurisdiction of incorporation
and maintain qualification in each jurisdiction in which the failure to so
qualify would reasonably be expected to have a Material Adverse Effect.
Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
would reasonably be expected to have a Material Adverse Effect.
6.2 Government Compliance.
Borrower shall meet, and shall cause each Subsidiary to meet,
the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. Borrower shall comply, and shall cause each
Subsidiary to comply, with all statutes, laws, ordinances and government
rules and regulations to which it is subject, noncompliance with which could
have a Material Adverse Effect or a material adverse effect on the Collateral
or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates.
(a) Borrower shall deliver to Bank: (i) as soon as available,
but in any event within thirty (30) days after the end of each month (and
after the Equity Event, within thirty (30) days after the end of each fiscal
quarter), a Borrower prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during such period, in a form and
certified by a Responsible Officer; (ii) as soon as available, but in any
event within one hundred twenty (120) days after the end of Borrower's fiscal
year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified
opinion on such financial statements of an independent certified public
accounting firm reasonably acceptable to Bank; (iii) within five (5) days of
filing, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of
Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the
Securities and Exchange Commission; (iv) promptly upon
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receipt of notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that would reasonably be
expected to result in damages or costs to Borrower or any Subsidiary of One
Hundred Thousand Dollars ($100,000) or more; and (v) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
(b) Within thirty (30) days after the last day of each month,
if Advances or Letters of Credit are outstanding under this Agreement,
Borrower shall deliver to Bank a Borrowing Base Certificate signed by a
Responsible Officer in substantially the form of Exhibit D hereto, together
with aged listings of accounts receivable and accounts payable.
(c) Borrower shall deliver to Bank with the monthly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit E hereto. After an Equity Event, the
Compliance Certificate shall be submitted on a quarterly basis or within five
(5) days after filing Form 10-K with the SEC.
(d) Bank shall have a right from time to time hereafter to
audit Borrower's Accounts at Borrower's expense, provided that such audits
will be conducted no more often than every six (6) months unless an Event of
Default has occurred and is continuing.
6.4 Inventory; Returns.
Borrower shall keep all Inventory in good and marketable
condition, free from all material defects. Returns and allowances, if any,
as between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all inventory related returns, and disputes and
claims regarding inventory, where the inventory related return, dispute or
claim involves more than One Hundred Twenty-Five Thousand Dollars ($125,000).
6.5 Taxes.
Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute
and deliver to Bank, within two (2) business days after demand, appropriate
certificates attesting to the payment or deposit thereof; and Borrower will
make, and will cause each Subsidiary to make, timely payment or deposit of
all material tax payments and withholding taxes required of it by applicable
laws, including, but not limited to, those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Bank with proof satisfactory to Bank indicating
that Borrower or a Subsidiary has made such payments or deposits; provided
that Borrower or a Subsidiary need not make any payment or deposit if the
amount or validity of such payment is (i)contested in good faith by
appropriate proceedings, (ii) is reserved against (to the extent required by
GAAP) by Borrower and (iii) no lien other than a Permitted Lien results.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's business in amounts and of a type
that are customary to businesses similar to Borrower's.
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(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Bank.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof and all liability insurance policies shall show the Bank
as an additional insured, and shall specify that the insurer must give at
least twenty (20) days notice to Bank before canceling its policy for any
reason. At Bank's request, Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. So long as no Event of Default has occurred and is continuing,
Borrower shall have the option of applying the proceeds of any casualty
policy of the replacement or repair of destroyed or damaged property;
provided, that after the occurrence and during the continuance of an Event of
Default, all proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank for application to the Obligations. All proceeds
payable under any such policy shall, at the option of Bank, be payable to
Bank to be applied on account of the Obligations.
6.7 Principal Depository.
Borrower shall maintain its principal depository and operating
accounts with Bank.
6.8 Quick Ratio.
Borrower shall maintain, as of the last day of each calendar
month, beginning with the month ending October 31, 1997, a ratio of Quick
Assets to Current Liabilities, of at least 1.25 to 1.0. After the Equity
Event, Borrower shall maintain, as of the last day of each fiscal quarter, a
ratio of Quick Assets to Current Liabilities, of at least 1.25 to 1.0.
6.9 Tangible Net Worth.
Borrower shall maintain, as of the last day of each calendar
month, a Tangible Net Worth plus Subordinated Debt of not less than Three
Million Five Hundred Thousand Dollars ($3,500,000). After the Equity Event,
Borrower shall maintain, as of the last day of each fiscal quarter, a
Tangible Net Worth plus Subordinated Debt of not less than Three Million Five
Hundred Thousand Dollars ($3,500,000).
6.10 Debt Net Worth.
Borrower shall maintain as of the last day of each calendar
month, beginning with the month ending October 31, 1997, a ratio of (i) Total
Liabilities less Subordinated Debt to (ii) Tangible Net Worth plus
Subordinated Debt of not more than 1.75 to 1.0 After the Equity Event,
Borrower shall maintain as of the last day of each fiscal quarter, a ratio of
Debt to Tangible Net Worth of at least 1.75 to 1.0.
6.11 Profitability.
Borrower may incur losses not to exceed: (i) $3,800,000 for
the fiscal quarter ending September 30, 1997; (ii) $2,600,000 for the fiscal
quarter ending December 31, 1997; (iii) $1,500,000 for the fiscal quarter
ending March 31, 1998; and (iv) $300,000 for the fiscal quarter ending June
30, 1998.
6.12 Registration of Intellectual Property Rights.
(a) Borrower shall, consistent with Borrower's reasonable
business practices, register or cause to be registered (to the extent not
already registered) with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those intellectual
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property rights listed on Exhibits A, B and C to the Intellectual Property
Security Agreement delivered to Bank by Borrower in connection with this
Agreement within thirty (30) days of the date of this Agreement; provided,
however, Borrower shall register its pending patents as soon as is reasonably
practicable, consistent with Borrower's reasonable business practices.
Borrower shall, consistent with Borrower's reasonable business practices,
register or cause to be registered with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, those
additional intellectual property rights developed or acquired by Borrower
from time to time in connection with any product prior to the sale or
licensing of such product to any third party, including without limitation
revisions or additions to the intellectual property rights listed on such
Exhibits A, B and C.
(b) Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request
to perfect Bank's security interest in the United States in the Intellectual
Property Collateral.
(c) Borrower shall, to the extent such Trademarks, Patents and
Copyrights are material to Borrower's business as determined by Borrower's
reasonable business practices (i) use commercially reasonable efforts to
protect, defend and maintain the validity and enforceability of the
registrations and applications for registration of the Trademarks, Patents
and Copyrights, (ii) use commercially reasonable efforts to detect
infringements of the Trademarks, Patents and Copyrights and promptly advise
Bank in writing of material infringements detected and (iii) not allow any
Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to
the public without the written consent of Bank, which shall not be
unreasonably withheld, unless Borrower determines that reasonable business
practices suggest that abandonment, forfeit or dedication is appropriate.
(d) Bank shall have the right, but not the obligation, to
take, at Borrower's sole expense, any actions that Borrower is required under
this Section 6.12 to take but which Borrower fails to take, after fifteen
(15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank
for all reasonable costs and reasonable expenses incurred in the reasonable
exercise of its rights under this Section 6.12.
6.13 Further Assurances.
At any time and from time to time Borrower shall execute and
deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, without the prior written
consent of Bank, which may be granted or withheld in Bank's sole discretion,
so long as any Credit Extension hereunder shall be available and until
payment in full of the outstanding Obligations or for so long as Bank may
have any commitment to make any Advances, Borrower will not do any of the
following:
7.1 Dispositions.
Except as set forth in the Schedule, convey, sell, lease,
transfer or otherwise dispose of (collectively, a "Transfer"), or permit any
of its Subsidiaries to Transfer, all or any part of its business or property,
other than Transfers (i) of inventory in the ordinary course of business,
(ii) of licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries in the ordinary course of business, (iii) of
worn-out or obsolete Equipment, or (iv) constituting Permitted Liens.
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7.2 Changes in Business, Ownership, Management or Business
Locations.
Engage in any business, or permit any of its Subsidiaries to
engage in any business, other than the businesses currently engaged in by
Borrower and its Subsidiaries and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership or management other than a sale by Borrower of equity
Securities of Borrower or as set forth in the Schedule. Borrower will not,
without at least thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 Mergers or Acquisitions.
Merge or consolidate, or permit any of its Subsidiaries to
merge or consolidate, with or into any other business organization, or
acquire, or permit any of its Subsidiaries to acquire, all or substantially
all of the capital stock or property of another Person; provided that this
Section 7.3 shall not apply to transactions among Subsidiaries or among
Borrower and its Subsidiaries in which Borrower is the surviving entity.
7.4 Indebtedness.
Create, incur, assume or be or remain liable with respect to
any Indebtedness, or permit any Subsidiary so to do, other than Permitted
Indebtedness, without Bank's prior written consent.
7.5 Encumbrances.
Create, incur, assume or suffer to exist any Lien with respect
to any of its property, or assign or otherwise convey any right to receive
income, including the sale of any Accounts, or permit any of its Subsidiaries
so to do, except for Permitted Liens.
7.6 Distributions.
Pay any dividends or make any other distribution or payment on
account of or in redemption, retirement or purchase of any capital stock;
provided, that (i) Borrower may declare and make any dividend payment or
other distribution payable in its equity securities, (ii) Borrower may
convert any of its convertible securities into other securities pursuant to
the terms of such convertible securities or otherwise in exchange therefor
and (iii) Borrower may repurchase stock from former employees, officers,
directors or consultants of Borrower in accordance with the terms of
repurchase or similar agreements between Borrower and such employees,
officers, directors or consultants provided that an Event of Default has not
occurred and is continuing, or would exist after giving effect to such
repurchase or similar transaction.
7.7 Investments.
Directly or indirectly acquire or own, or make any Investment
in or to any Person, or permit any of its Subsidiaries so to do, other than
Permitted Investments.
7.8 Transactions with Affiliates.
Directly or indirectly enter into any material transaction with
any Affiliate of Borrower except for transactions that are in the ordinary
course of Borrower's business, upon fair and reasonable terms that are no
less favorable to Borrower than would be obtained in an arm's length
transaction with a non-affiliated Person and except as set forth in the
Schedule.
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7.9 Subordinated Debt.
Make any payment in respect of any Subordinated Debt, or permit
any of its Subsidiaries to make any such payment, except in compliance with
the terms of such Subordinated Debt, or amend any provision contained in any
documentation relating to the Subordinated Debt, to the extent such amendment
has a material adverse effect on Bank or changes any of the terms of payment.
7.10 Compliance.
Become an "investment company" or a company controlled by an
"investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose;
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to
comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default.
If Borrower fails to pay, when due, any of the Obligations;
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under Sections
6.3, 6.6, 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or if Borrower fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and
Bank and as to any such default under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure such default
within fifteen (15) days after Borrower's actual knowledge thereof; provided,
however, that if the default cannot by its nature be cured within the fifteen
(15) day period or cannot after diligent attempts by Borrower be cured within
such fifteen (15) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period
(which shall not in any case exceed thirty (30) days after Borrower's actual
knowledge) to attempt to cure such default, and within such reasonable time
period the failure to have cured such default shall not be deemed an Event of
Default (provided that no Credit Extensions will be required to be made
during such cure period);
8.3 Material Adverse Change.
If there (i) occurs a material adverse change in the business,
operations, or condition (financial or otherwise) of Borrower or (ii) is a
material impairment of the prospect of repayment of any portion of the
Obligations or (iii) is a material impairment of the value or priority of
Bank's security interests in the Collateral; provided that the foregoing is
not intended to waive any rights available to Borrower under law.
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8.4 Attachment.
If any material portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has
not been removed, discharged or rescinded within thirty (30) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if
a judgment or other claim becomes a lien or encumbrance upon any material
portion of Borrower's assets, or if a notice of lien, levy, or assessment is
filed of record with respect to any material portion of Borrower's assets by
the United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within thirty (30) days after Borrower receives notice
thereof, provided that none of the foregoing shall constitute an Event of
Default where such action or event is stayed or an adequate bond has been
posted pending a good faith contest by Borrower (provided that no Credit
Extensions will be required to be made during such cure period);
8.5 Insolvency.
If Borrower becomes insolvent, or if an Insolvency Proceeding
is commenced by Borrower, or if an Insolvency Proceeding is commenced against
Borrower and is not dismissed or stayed within sixty (60) days (provided that
no Credit Extensions will be made from the date of commencement of an
Insolvency Proceeding up to the date of the dismissal of such Insolvency
Proceeding);
8.6 Other Agreements.
If there is an uncured and unwaived default in any agreement to
which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount equal to or in excess of Five
Hundred Thousand Dollars ($500,000) or that would reasonably be expected to
have a Material Adverse Effect;
8.7 Subordinated Debt.
If Borrower makes any payment on account of Subordinated Debt,
except to the extent such payment is required pursuant to the terms of such
Subordinated Debt which Subordinated Debt has been approved by Bank or is
allowed under any subordination agreement entered into with Bank;
8.8 Judgments.
If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Credit Extensions will be made from the date of such judgment until to the
satisfaction or stay of such judgment); or
8.9 Misrepresentations.
If any material misrepresentation or material misstatement
exists now or hereafter in any warranty or representation set forth herein or
in any certificate or writing delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or
any other Loan Document.
21
<PAGE>
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies.
Upon the occurrence and during the continuance of an Event of
Default, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence and during the continuance of
an Event of Default described in Section 8.5 all Obligations shall become
immediately due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any outstanding Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings
under such Letters of Credit, and Borrower shall forthwith deposit and pay
such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to
be paid or payable over the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(e) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble
the Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's owned premises,
Borrower hereby grants Bank a license to enter such premises and to occupy
the same, without charge, in order to exercise any of Bank's rights or
remedies provided herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section
9.1, to use, without charge, Borrower's labels, patents, copyrights, rights
of use of any name, trade secrets, trade names, trademarks, service marks,
and advertising matter, or any property of a similar nature, as it pertains
to the Collateral, in completing production of, advertising for sale, and
selling any Collateral and, in connection with Bank's exercise of its rights
under this Section 9.1, Borrower's rights under all licenses and all
franchise agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order Bank deems appropriate;
22
<PAGE>
(i) Bank may credit bid and purchase at any public sale, or at
any sale as permitted by law; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney.
Effective only upon the occurrence and during the continuance
of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of
Bank's designated officers, or employees) as Borrower's true and lawful
attorney to: (a) send requests for verification of Accounts or notify account
debtors of Bank's security interest in the Accounts; (b) endorse Borrower's
name on any checks or other forms of payment or security that may come into
Bank's possession; (c) sign Borrower's name on any invoice or bill of lading
relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable and (f) dispose of the
Collateral; provided Bank may exercise such power of attorney to sign the
name of Borrower on any of the documents described in Section 4.2 regardless
of whether an Event of Default has occurred. The appointment of Bank as
Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide Advances hereunder is terminated.
9.3 Accounts Collection.
Upon the occurrence and during the continuance of an Event of
Default, Bank may notify any Person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account and
Borrower shall collect all amounts owing to Borrower for Bank, receive in
trust all payments as Bank's trustee, and, if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses.
If Borrower fails to pay any amounts or furnish any required
proof of payment due to third persons or entities, as required under the
terms of this Agreement, then Bank may do any or all of the following upon
the occurrence and during the continuance of an Event of Default: (a) make
payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. The foregoing
notwithstanding, if Borrower fails to pay any amounts or furnish any required
proof of payment due to third persons or entities, immediately following
payment of all outstanding Obligations hereunder, as required under the terms
of this Agreement, then Bank may make payment of the same or any part
thereof. Any amounts so paid or deposited by Bank, except for reserves under
the Committed Revolving Line, shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided, and shall be secured by the Collateral. Any
payments made by Bank shall not constitute an agreement by Bank to make
similar payments in the future or a waiver by Bank of any Event of Default
under this Agreement.
23
<PAGE>
9.5 Bank's Liability for Collateral.
So long as Bank complies with reasonable banking practices,
Bank shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman,
bailee, forwarding agency, or other person whomsoever. All risk of loss,
damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the Loan
Documents, and all other agreements shall be cumulative. Bank shall have all
other rights and remedies not expressly set forth herein as provided under
the Code, by law, or in equity. No exercise by Bank of one right or remedy
shall be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 Demand; Protest.
Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into
in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return
receipt requested, or by telefacsimile to Borrower or to Bank, as the case
may be, at its addresses set forth below:
If to Borrower: Hybrid Networks, Inc.
10161 Bubb Road
Cupertino, CA 95014-4167
Attn: Daniel Steimle
FAX: (408) 725-0990
If to Bank: Venture Banking Group
Three Palo Alto Square, Suite 150
Palo Alto, CA 94306
Attn: Jon Krogstad
FAX: (650) 843-6969
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
24
<PAGE>
11. CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns.
This Agreement shall bind and inure to the benefit of the
respective successors and permitted assigns of each of the parties; provided,
however, that neither this Agreement nor any rights hereunder may be assigned
by Borrower without Bank's prior written consent, which consent may be
granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification.
Borrower shall indemnify, defend, protect and hold harmless
Bank and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by the Loan Documents; and (b)
all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as
a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all obligations
set forth in this Agreement.
12.4 Severability of Provisions.
Each provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of determining the legal
enforceability of any specific provision.
12.5 Amendments in Writing, Integration.
This Agreement cannot be amended or terminated except by a
writing signed by Borrower and Bank. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
25
<PAGE>
12.6 Counterparts.
This Agreement may be executed in any number of counterparts
and by different parties on separate counterparts, each of which, when
executed and delivered, shall be deemed to be an original, and all of which,
when taken together, shall constitute but one and the same Agreement.
12.7 Survival.
All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality.
In handling any confidential information Bank shall exercise
the same degree of care that it exercises with respect to its own proprietary
information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this
Agreement except that disclosure of such information may be made (i) to the
subsidiaries or affiliates of Bank in connection with their present or
prospective business relations with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Advance, provided that they have entered
into a comparable confidentiality agreement in favor of Borrower and have
delivered a copy to Borrower, (iii) as required by law, regulations, rule or
order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank, and
(v) as Bank may deem appropriate in connection with the enforcement of its
remedies hereunder. Confidential information hereunder shall not include
information that either (a) is in the public domain or in the knowledge or
possession of Bank when disclosed to Bank, or becomes part of the public
domain after disclosure to Bank through no fault of Bank; or (b) is disclosed
to Bank by a third party, provided Bank does not have actual knowledge that
such third party is prohibited from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
---------------------
Title: President and CEO
------------------
VENTURE BANKING GROUP, a division of
Cupertino National Bank
By: /s/ Company Officer
---------------------
Title:
------------------
26
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now owned
or hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
The Collateral shall not include Equipment that Borrower does not own,
which Equipment Borrower leases from third parties. Notwithstanding the
foregoing, the term "Collateral" shall not include any general intangibles or
contracts of Borrower (whether owned or held as licensee or lessee, or
otherwise) to the extent that (i) such general intangibles or contracts are
not assignable or capable of being encumbered as a matter of law or under the
terms of the license, lease or other agreement applicable thereto (but solely
to the extent that such restriction shall be enforceable under applicable
law) without the consent of the licensor or lessor thereof or other
applicable party thereto and (ii) such consent has not been obtained:
provided, however, that the foregoing grant of security interest shall
<PAGE>
extend to, and the term "Collateral" shall include, (A) any general
intangible or contract which is an Account or a proceed of, or otherwise
related to the enforcement or collection of, any Account or goods which are
the subject of any Account, and (B) any and all proceeds of any general
intangibles or contracts which are otherwise excluded to the extent that the
assignment or encumbrance of such proceeds is not so restricted, and (C) upon
obtaining the consent of any such licensor, lessor or other applicable party
with respect to any such otherwise excluded general intangibles or contracts,
such general intangibles or contracts as well as any and all proceeds thereof
that might theretofore have been excluded from such grant of a security
interest and the term "Collateral".
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _______________________
FAX#: ______________ TIME: _______________________
FROM: ____________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: ____________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: ____________________________________________________
PHONE NUMBER: ____________________________________________________________
FROM ACCOUNT # ________________________ TO ACCOUNT # _____________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_______________________________
PRINCIPAL PAYMENT (ONLY) $_______________________________
INTEREST PAYMENT (ONLY) $_______________________________
PRINCIPAL AND INTEREST (PAYMENT) $_______________________________
OTHER INSTRUCTIONS: ______________________________________________________
__________________________________________________________________________
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects
as of the date of the telephone request for and Advance confirmed by this
Borrowing Certificate; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
------------------
The following person is authorized to request the loan payment transfer/
loan advance on the advance designated account and is known to me.
__________________________________ ____________________________
Authorized Requester Phone #
__________________________________ ____________________________
Received by (Bank) Phone #
_____________________________________
Authorized Signature (Bank)
<PAGE>
EXHIBIT C
REVOLVING PROMISSORY NOTE
$4,000,000 Palo Alto, California
Date: October 16, 1997
HYBRID NETWORKS, INC. ("Borrower"), for value received, hereby promises
to pay to the order of VENTURE BANKING GROUP, a division of Cupertino
National Bank ("Bank"), in lawful money of the United States of America,
pursuant to that certain Loan and Security Agreement dated as of October 16,
1997, by and between Borrower and Bank (the "Loan Agreement"), (i) the
principal amount of $4,000,000 or, if lesser, (ii) the principal amount of
all Advances outstanding as of the maturity date hereof.
This Note is one of the Notes referred to in the Loan Agreement. All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein.
Borrower further promises to pay interest on each Advance hereunder in
like funds on the principal amount hereof from time to time outstanding from
the date hereof until paid in full, at a rate or rates per annum and payable
on the dates determined pursuant to the Loan Agreement.
Payment on this Note shall be applied in the manner set forth in the Loan
Agreement. The Loan Agreement contains provisions for acceleration of the
maturity of Advances hereunder upon the occurrence of certain stated events
and also provides for optional and mandatory prepayments of principal hereof
prior to any stated maturity upon the terms and conditions therein specified.
All Advances made by Bank to Borrower pursuant to the Loan Agreement
shall be recorded by Bank on the books and records of Bank. The failure of
Bank to record any Advance or any prepayment or payment made on account of
the principal balance hereof shall not limit or otherwise affect the
obligation of Borrower under this Note and under the Loan Agreement to pay
the principal, interest and other amounts due and payable under the Advances.
Any principal or interest payments on this Note not paid when due,
whether at stated maturity, by acceleration or otherwise, shall bear interest
at the Default Rate.
Upon the occurrence and continuance of a default hereunder or an Event of
Default under the Loan Agreement, all unpaid principal, accrued interest and
other amounts owing hereunder shall, at the option of Bank, be immediately
collectible by or on behalf of Bank pursuant to the Loan Agreement and
applicable law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorneys' fees, costs and
expenses. The right to plead any and all statutes of limitations as a
defense to any demand hereunder is hereby waived to the full extent permitted
by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflicts of laws
principles that would cause the application of the laws of any other
jurisdiction.
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
HYBRID NETWORKS, INC.
By: ____________________________
Printed Name:___________________
Title: _________________________
<PAGE>
EXHIBIT D
BORROWING BASE CERTIFICATE
______________________________________________________________________________
Borrower: Hybrid Networks, Inc.
Commitment Amount: $4,000,000
_______________________________________________________________________________
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $____________
2. Additions (please explain on reverse) $____________
3. TOTAL ACCOUNTS RECEIVABLE $____________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $____________
5. Balance of 50% over 90 day accounts $____________
6. Concentration Limits (Accounts exceeding 30% total A/R) $____________
7. Foreign Accounts (unless pre-approved) $____________
8. Governmental Accounts $____________
9. Contra Accounts $____________
10. Promotion or Demo Accounts $____________
11. Intercompany/Employee Accounts $____________
12. Other (please explain on reverse) $____________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $____________
14. Eligible Accounts (#3 minus #13) $____________
15. LOAN VALUE OF ACCOUNTS (75% of #14) $____________
BALANCES
16. Maximum Loan Amount $____________
17. Total Funds Available [Lesser of #15 or #16] $____________
18. Present balance owing on Line of Credit $____________
19. RESERVE POSITION (#17 minus #18) $____________
The undersigned represents and warrants that the foregoing is true, complete
and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representations and warranties set forth in the
Loan and Security Agreement between the undersigned and Venture Banking
Group.
COMMENTS:
BANK USE ONLY
---- --- ----
Rec'd By: ____________
Auth. Signer
HYBRID NETWORKS, INC. Date: ________________
Verified: ____________
Auth. Signer
By: ____________________________ Date:_________________
Authorized Signer ______________________
-
<PAGE>
EXHIBIT E
COMPLIANCE CERTIFICATE
TO: VENTURE BANKING GROUP
FROM: HYBRID NETWORKS, INC.
The undersigned authorized officer of Hybrid Networks, Inc. (the "Officer")
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in compliance in all material respects for the period ending _______________
with all required covenants except as noted below and (ii) all representations
and warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes. The Officer
expressly acknowledges that no borrowings may be requested by Borrower at any
time or date of determination that Borrower is not in compliance with any of the
terms of the Agreement, and that such compliance is determined not just at the
date this certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies" column.
Reporting Covenant Required Complies
------------------ -------- --------
Financial statements Within 30 days* Yes No
Annual (CPA Audited) FYE within 120 days or within 5 days Yes No
after filing with SEC
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
A/R & A/P Agings Monthly within 30 days Yes No
A/R Audit Initial and Semi-Annual Yes No
* After the Equity Event, within 30 days of each quarter end or within 5 days
after filing with the SEC.
Financial Covenant Required Actual Complies
------------------ ---------- ---------- --------
Maintain on a Monthly Basis:**
Minimum Quick Ratio 1.25:1.0 _____:1.0 Yes No
Minimum Adjusted Net Worth1 $3,500,000 $________ Yes No
Minimum Debt/Tangible Net Worth1 1.75:1.0 ______:___ Yes No
Profitability: Quarterly ________ 2 $________ Yes No
** After the Equity Event, Financial Covenants to be maintained on a quarterly
basis.
1 Tangible Net Worth plus Subordinated Debt
2 Permitted losses not to exceed: $3,800,000 for quarter ending
September 30, 1997; $2,600,000 for quarter ending December 31, 1997;
$1,500,000 for quarter ending March 31, 1998; and $300,000 for quarter
ending June 30, 1998.
Comments Regarding Exceptions: See Attached. BANK USE ONLY
Sincerely, Received by:_____________________
AUTHORIZED SIGNER
___________________________________
Signature Date:____________________________
___________________________________ Verified:________________________
Title AUTHORIZED SIGNER
___________________________________ Date:____________________________
Date
Compliance Status: Yes No
<PAGE>
Hybrid Networks, Inc. (the "Company")
Schedule of Exceptions to Loan and Security Agreement (the "Agreement")
with Venture Banking Group
Unless otherwise defined herein, all capitalized terms in this Schedule
have the same meaning given to such terms in the Agreement. Unless otherwise
noted, references to sections herein refer to the corresponding sections of
the Agreement. Sections or headings are provided for convenience only.
Nothing in this Schedule constitutes an admission of any liability or
obligation of the Company to any third party, nor an admission to any third
party against the Company's interests. Unless otherwise stated, all
statements made herein are made as of the date of execution of the Agreement.
"Eligible Accounts"
(c) Bank acknowledges approving Accounts owing by:
AT&T
(f) Bank acknowledges approving Accounts owing by:
AT&T
(h) Bank acknowledges approving Accounts owing by:
AT&T
Itochu
Network Systems Tec
(j) Bank acknowledges approving Accounts owing by:
Alcatel
Itochu
"Eligible Foreign Accounts"
Bank acknowledges approving Accounts owing by:
Alcatel
<PAGE>
"Permitted Indebtedness" (Indebtedness Existing on the Closing Date)
A. Senior Secured Convertible Debenture Due 2002, issued April 30, 1997
in an aggregate principal amount of $5,500,000, held by BG Services Limited (the
"Debenture").
B. Subordinated Promissory Notes issued September 25, 1997, in an
aggregate principal amount of approximately $6.9 million ("Subordinated Notes").
C. Equipment Lease with Comdisco, Inc. dated August 1, 1995 with a
maximum face amount of $500,000 (the "1995 Comdisco Lease").
D. Equipment Lease with Comdisco, Inc. dated August 19, 1996 with a
maximum face amount of $1,000,000 (the "1996 Comdisco Lease").
E. The Company is soliciting additional equipment leases with an
aggregate maximum face amount of up to $2,000,000 from Pentech Financial
Services, Phoenix Capital, Leasing Technologies International, IMF Financial
Corp. and certain other parties (the "Additional Leases").
"Permitted Investment"
(a) The Company made an installment sale of $850,000 to Internet Ventures,
which sale is expected to be fully paid in March 1998.
"Permitted Liens"
A. Liens in substantially all assets of the Company granted to the holder
of the Debenture.
B. Liens in equipment financed under the 1995 Comdisco Lease.
C. Liens in equipment financed under the 1996 Comdisco Lease.
D. Liens in equipment to be financed under the Additional Leases.
Section 4.1 (Grant of Security Interest)
The security interest granted under the Agreement shall constitute a valid,
first priority security interest to the extent that such security interest can
be perfected by the filings contemplated by the Agreement, and such filings are
made with the appropriate filing offices.
Section 5.1 (Due Organization and Qualification)
The Company is not currently qualified to do business in Illinois and is in
the process of considering whether such qualification is necessary.
Section 5.7 (Litigation)
A. The Company has determined that third parties may be infringing its
patent rights and/or may have misappropriated its trade secrets, know-how and
other proprietary rights. The
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Company has sent letters to certain third parties notifying them that they
may be infringing such rights, although the Company has not yet determined if
it will assert any claims against these parties or others. The Company is
currently evaluating its intellectual property strategies. There can be no
assurance that such strategies will not involve potential litigation or that
such litigation, if brought, will not have a material adverse effect upon the
Company.
B. The Company has received two United States Patents: (i) 5,347,304
dated September 13, 1994 (the "304 Patent") and (ii) 5,586,121 dated December
17, 1996. On November 16, 1994 the Company filed an application for the
reissuance of the 304 Patent, which was subsequently allowed for reissuance by
the Patent and Trademark Office ("PTO") on August 19, 1997. Such reissue
application was formally protested by International Business Machines
Corporation ("IBM") and John Powers, Jr. ("Powers"). On December 12, 1996 the
Company filed a Complaint For Damages and Equitable Relief (the "Complaint") in
the Superior Court of the District of Columbia against both IBM and Powers.
(Civil Action No. 96CA009725). The suit arose out of IBM's filing an Invention
Disclosure with the PTO following the Company's filing for reissue of its '304
patent. In April 1997, the Company settled its claims against IBM. The claims
against the other defendant in the suit, John T. Powers were dismissed without
prejudice as to either party. In connection with the settlement, the Company
agreed to fully dismiss its complaint against IBM with prejudice and IBM agreed
to designate certain portions of the deposition of its witness, Steven B.
Phillips, Esq. as non-confidential and not to assert any claims against the
Company arising out of the suit. As of September 18, 1997, IBM and the Company
have settled the Complaint and the Complaint against Powers was voluntarily
dismissed without prejudice.
C. The Company has been notified by Keen Yee that he believes that
certain of the Company's products utilize technology invented by Mr. Yee and
included in certain patents issued to him. Aside from the letter from Mr. Keen
Y. Yee dated December 18, 1996 objecting to the Company's use of certain
technology developed by Mr. Yee and allegedly infringing upon certain patent
rights ('789, '499 and '476) of Mr. Yee's, the Company is not aware of any
further action taken by Mr. Yee against the Company, and the Company does not
believe, after reasonable inquiry that the Company has or is infringing upon the
intellectual property rights of Mr. Yee. There can be no assurance , however,
that Mr. Yee will not assert claims against the Company or that he will not
prevail with respect to such claims.
D. The Company's trademark of "Cyber Manager" was contested by Cyber
Interactive by letter of its counsel to the Company dated March 12, 1996. On
March 3, 1997, the Company sent an e-mail to Cyber Interactive stating the
Company's position that the parties have different rights in different markets
but offering to negotiate an agreement with Cyber Interactive. No further
action has been taken or threatened by Cyber Interactive since that date. The
Company has notified Hybrid Communications, Inc. ("HCI") that it is the
Company's position that HCI's web site use of the "Hybrid" name violates the
Company's intellectual property rights. HCI notified the Company on April 12,
1995 (via e-mail) that it had already changed its web page to "Hybrid
City/Downtown" and was not in violation. The Company has taken no further
action against HCI in this matter. The Company holds a trademark for HYBRIDWARE
(Reg. No. 2,065,404) and CYBERMASTER (Reg. No. 2,058,030).
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Section 6.1 Good Standing
See section 5.1.
Section 7.2 Changes in Business
Up to approximately 25% of the Company's equity securities is intended to
be sold to the public in an initial public offering, and any equity securities
sold in such offering will be tradable by the public.
Section 7.8 Transactions with Affiliates
A. The Company has entered into consulting agreements with certain
persons who may also be stockholders.
B. Certain Sequoia entities and Daniel Steimle were among the purchasers
of the Subordinated Notes.
C. Network Systems Technologies, of which Eduardo Moura is an officer,
has an outstanding receivable for $482,299.
D. Employment Agreement with Carl Ledbetter dated as of January 15, 1996.
Employment offer letters from the Company which contain severance arrangements,
including offer letters to Victor Godbole, Daniel Steimle and William Fry.
E. Certain of the Company's officers and employees are eligible for
commissions and/or bonuses (including stock grants) based upon the Company's
financial performance and personal objectives.
F. All of the Company's full-time employees and dependents are eligible
to participate in benefit plans covering medical insurance, dental insurance,
life insurance, long term disability insurance and worker's compensation
insurance. The Company has adopted (a) the 1997 Employee Stock Purchase Plan,
the 1997 Directors Stock Option Plan, and the 1997 Equity Incentive Plan, to
become effective upon the Company's initial public offering; and (b) the 1992
Stock Issuance Plan, the Executive Officer Incentive Plan, the 1993 Equity
Incentive Plan and the 1996 Equity Incentive Plan.
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NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
CAN BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR OTHER TRANSFER HAS BEEN
REGISTERED UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR,
IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS TO THE
IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE OPINION, IS
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS.
No.___________________ Dated: October 16, 1997
HYBRID NETWORKS, INC.
Common Stock Purchase Warrant
THIS IS TO CERTIFY THAT, for value received, Venture Banking Group, a
division of Cupertino National Bank (the "Bank"), and its registered
successors and permitted assigns are entitled, subject to the terms and
conditions set forth below, to purchase from HYBRID NETWORKS, INC., a
Delaware corporation (the "Corporation"), at any time and from time to time
after 9:00 A.M., Cupertino, California time, on the Initial Exercise Date (as
defined in Section 1 below) and prior to 5:00 P.M., Cupertino, California
time, on the Expiration Date (as defined in Section 1 below), any or all of
the Warrant Shares (as defined in Section 1 below), at a purchase price per
share equal to the Exercise Price (as defined in Section 1 below). The
number and character of the Warrant Shares and the Exercise Price are subject
to adjustment as provided herein.
This Common Stock Purchase Warrant (this "Warrant") is being issued in
connection with a Loan and Security Agreement between the Corporation and
the Bank.
Section 1. Definitions. As used in this Warrant, the following terms
shall have the respective meanings set forth below or elsewhere in this
Warrant as referred to below:
"Additional Stock" shall have the meaning set forth in Section 4.3(f).
"Bank" shall have the meaning set forth in the first paragraph hereof.
"Common Stock" shall mean shares of the Common Stock of the Corporation,
$.001 par value per share (as such par value may be amended from time to time).
"Conversion Fraction" shall have the meaning set forth in Section 2.3.
"Corporation" shall have the meaning set forth in the first paragraph of
this Warrant.
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"Derivative Security" shall have the meaning set forth in Section 4.3(e).
"Effective Price" shall have the meaning set forth in Section 4.3(a).
"Exercise Date" shall have the meaning set forth in Section 2.4 hereof.
"Exercise Price" shall mean, as of the Initial Exercise Date and at any
time thereafter, the Initial Exercise Price, as adjusted from time to time
pursuant to the terms of this Warrant.
"Expiration Date" shall mean October 16, 2002.
"Fair Market Value" of a Warrant Share shall mean (i) in the case of the
exercise of this Warrant, in whole or in part, after the consummation of an
Initial Public Offering, the average of the last reported sale price per
share of Stock on the Nasdaq-NMS or any national securities exchange in which
such Stock is quoted or listed, as the case may be, for the three trading
days immediately preceding the Exercise Date, or (ii) in the case of the
exercise of this Warrant, in whole or in part, before the consummation of an
Initial Public Offering, the fair market value of a share of Stock, as
determined in good faith by the Board of Directors of the Corporation.
"Holder" shall mean, as applicable, (i) the Bank, (ii) any successor of
the Named Holder or (iii) any Person to whom this Warrant or any portion
thereof shall have been transferred in accordance with the provisions of
Section 9 hereof.
"Initial Exercise Date" shall mean the earlier to occur of (i) 180 days
after the Issue Date, or (ii) the date of consummation of an Initial Public
Offering; provided, however, that, in the event of any sale or transfer, in a
single transaction or a series of related transactions, of all or
substantially all of the Corporation's assets, or the merger, consolidation,
reorganization or dissolution of the Corporation, or the sale, in a single
transaction or a series of related transactions, of a majority of the
Corporation's voting capital stock (whether newly issued or from treasury, or
previously issued and then outstanding, or any combination thereof) (any of
such events, a "Disposal Event") occurring at any time prior to the earlier
of (A) 180 days after the Issue Date or (B) the date of consummation of an
Initial Public Offering, then the Initial Exercise Date shall be deemed to be
the date that is five business days prior to the earliest to occur of any
such Disposal Event.
"Initial Exercise Price" shall mean $4.04 per share (subject to appropriate
adjustment as provided in this Warrant).
"Initial Public Offering" shall mean the closing of an underwritten
public offering pursuant to an effective registration statement filed with
the Securities and Exchange Commission under the Securities Act covering the
offer and sale of shares of Common Stock or any other class of capital stock
of the Corporation.
"Investor Rights Agreement" shall mean that certain Hybrid Networks, Inc.
Amended and Restated Investor Rights Agreement, dated as of September 18,
1997, by and among the Corporation and certain holders of the Corporation's
securities, as amended pursuant to an amendment entered into by the
Corporation, the Bank and holders of a majority of the Registrable Securities
outstanding (as defined in the Investor Rights Agreement), and as further
amended from time to time in accordance with the terms thereof.
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"Issue Date" shall mean October 16, 1997.
"Person" shall mean an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of
whatever nature.
"Registrable Securities" shall have the meaning ascribed to it in the
Investor Rights Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock" shall mean (i) Common Stock, and/or (ii) to the extent that the
Holder is entitled to receive, or receives, upon exercise of this Warrant any
other capital stock of the Corporation (other than Common Stock), or of any
other Person or any other securities of the Corporation or of any other
Person, in lieu of or in addition to Common Stock (whether as a result of any
reclassification of Common Stock or any other Stock or reorganization,
reclassification, merger, consolidation or sale of substantially all the
assets of the Corporation or otherwise), such other capital stock or
securities.
"Subject Shares" shall have the meaning set forth in Section 2.3.
"Warrant" shall have the meaning set forth in the second paragraph of
this Warrant.
"Warrant Shares" shall mean the shares of Common Stock, as adjusted as
provided in this Warrant, that are issuable upon the exercise of this
Warrant.
Section 2. Exercise of Warrant.
Section 2.1 Number of Warrant Shares Issuable Upon Exercise. Subject to
adjustment as provided herein, the maximum number of Warrant Shares issuable
upon exercise of this Warrant shall be 7,178.
Section 2.2 Method of Exercise. Subject to and upon all of the terms
and conditions set forth in this Warrant, the Holder may exercise this
Warrant, in whole or in part with respect to any Warrant Shares as to which
this Warrant is then currently exercisable, at any time and from time to time
during the period commencing on the Initial Exercise Date and ending on the
Expiration Date, by presentation and surrender of this Warrant to the
Corporation at its principal office (or such other office or agency as the
Corporation may designate by notice in writing to the Holder in accordance
with Section 10.4), together with (a) a properly completed and duly executed
subscription form, in the form attached hereto, which subscription form shall
specify the number of Warrant Shares for which this Warrant is then being
exercised, and (b) payment of the aggregate Exercise Price payable hereunder
in respect of the number of Warrant Shares for which this Warrant is then
being exercised. Payment of such aggregate Exercise Price shall be made
either (i) in cash or by money order, certified or bank cashier's check or
wire transfer (in each case in lawful currency of the United States of
America), (ii) in the event the Holder is also the holder of a Note and such
outstanding principal amount of, and/or accrued but unpaid interest on, such
Note is equal to or greater than the Exercise Price, by decreasing the
outstanding principal amount of, and/or accrued but unpaid interest on, such
Note by the amount of the Exercise Price, or (iii) by conversion of this
Warrant as provided in Section 2.3.
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Section 2.3 Conversion of Warrant.
(a) The Holder shall have the right to convert this Warrant,
in whole or in part with respect to any Warrant Shares as to which this
Warrant is currently exercisable, at any time and from time to time during
the period commencing on the Initial Exercise Date and ending on the
Expiration Date, by the presentation and surrender of this Warrant to the
Corporation at its principal office (or such other office or agency as the
Corporation may designate by notice in writing to the Holder in accordance
with Section 10.4, together with a properly completed and duly executed
conversion form, in the form attached hereto, which conversion form shall
specify the number of Warrant Shares as to which this Warrant is being
converted (the "Subject Shares"). Upon exercise of this conversion right,
the holder hereof shall be entitled to receive that number of Warrant Shares
equal to the quotient obtained by dividing [ (A - B) (X) ] by (A), where:
A = the Fair Market Value of one Warrant Share on the
date of conversion of this Warrant.
B = the Exercise Price for one Warrant Share under this
Warrant.
X = the number of Subject Shares as to which this Warrant
is being converted.
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon conversion of this Warrant.
(b) Upon conversion of this Warrant in accordance with this
Section 2.3, the Holder shall be entitled to receive a certificate for the
number of Warrant Shares acquired by the Holder as determined in accordance
with the foregoing, and a new Warrant in substantially identical form and
dated as of such conversion for the purchase of that number of Warrant Shares
equal to the difference, if any, between (i) the number of Warrant Shares
subject to issuance upon exercise of this Warrant immediately before such
conversion and (ii) the number of Subject Shares as to which the Holder
exercised its conversion right pursuant to this Section 2.3. No fractional
shares may be issued upon any conversion of this Warrant. If any conversion
would result in a fractional share (the "Conversion Fraction"), then, at
Holder's election either (A) the number of shares issued upon the conversion
will be rounded down to the last whole share; or (B) the Holder will pay in
cash an amount equal to the Exercise Price times a fraction equal to 1 less
the Conversion Fraction, in which event the number of shares issued upon the
conversion (plus the cash payment) will be rounded up to the nearest whole
share. For example, if the Fair Market Value is $10.00 and the Exercise
Price is $4.04, then, upon exercise of the conversion right under this
Section 2.3 with respect to 100 Subject Shares, the Holder would receive, at
the Holder's election, either (1) 59 Warrant Shares without making any cash
payment or (2) 60 Warrant Shares if the Holder elected to pay $2.42 in cash
(60% of the Exercise Price for the extra share) and would receive a new
Warrant for the number of Warrant Shares subject to issuance upon exercise of
this Warrant immediately before such conversion less 100.
Section 2.4 Effectiveness of Exercise; Ownership. Each exercise of
this Warrant by the Holder shall be deemed to have been effected immediately
prior to the close of business on the date upon which all of the requirements
of Sections 2.1 and 2.2 hereof with respect to such exercise shall have been
complied within in full (each such date, an "Exercise Date"). On the
applicable Exercise Date with respect to any exercise of this Warrant by the
Holder, the
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Corporation shall be deemed to have issued to the Holder, and the Holder
shall be deemed to have become the holder of record and legal owner of, the
number of Warrant Shares being purchased upon such exercise of this Warrant,
notwithstanding that the stock transfer books of the Corporation shall then
be closed or that certificates representing such number of Warrant Shares
being purchased shall not then be actually delivered to the Holder.
Section 2.5 Delivery of Stock Certificates on Exercise. As soon
as practicable after the exercise of this Warrant, and in any event within
ten days thereafter, the Corporation, at its expense, will cause to be issued
in the name of and delivered to the Holder, or as the Holder may direct
(subject in all cases, to the provisions of Section 9 hereof), a certificate
of certificates for the number of Warrant Shares purchased by the Holder on
such exercise.
Section 2.6 Shares to be Fully Paid and Nonassessable. All
Warrant Shares issued upon the exercise of this Warrant shall be validly
issued, fully paid and nonassessable, free of all liens, taxes, charges and
other encumbrances or restrictions on sale (other than those set forth
herein), and free and clear of all preemptive rights.
Section 2.7 Fractional Shares. This Warrant may be exercised
only for whole Warrant Shares. No fractional Warrant Shares or scrip
representing fractional Warrant Shares shall be issued upon the exercise of
this Warrant.
Section 2.8 Issuance of New Warrants; Corporation
Acknowledgment. Upon any partial exercise of this Warrant, the Corporation,
at its expense, will forthwith issue and deliver to the Holder a new warrant
or warrants of like tenor, registered in the name of the Holder, exercisable,
in the aggregate and subject to the limitations provided for in this Warrant,
for the then balance of the Warrant Shares with respect to which this Warrant
has not been exercised. Moreover, the Corporation shall, at the time of any
exercise of this Warrant, upon the request of the Holder, acknowledge in
writing its continuing obligation to afford to the Holder any rights to which
the Holder shall continue to be entitled after such exercise in accordance
with the provisions of this Warrant; provided, however, that if the Holder
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Corporation to afford to the Holder any such
rights.
Section 2.9 Payment of Taxes. The Corporation shall pay any
transfer tax which may be payable in respect of any issuance of certificates
(if applicable) representing any Warrant Shares purchased upon exercise or
conversion of this Warrant. The Corporation shall not be required to pay any
tax or other charge imposed in connection with any transfer involved in the
issue of any certificate for Warrant Shares, or any new or replacement shares
in any name other than that of the Holder of this Warrant, and in such case
the Company shall not be required to issue or deliver any stock certificate
security or Warrant until such tax or other charge has been paid, or it has
been established to the Company's satisfaction that no tax or other charge is
due.
Section 2.10 Expiration. This Warrant and the Holder's rights
hereunder, to the extent not previously exercised or converted, shall expire
as of 5:00 P.M., California time, on the Expiration Date.
Section 3. Registration Rights. The Holder of this Warrant
shall have the benefit of the rights available to the parties to the Investor
Rights Agreement to cause the Corporation to
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register any and all Warrant Shares under the Securities Act and under any
blue sky or securities laws of any jurisdiction within the United States, at
the time and in the manner specified in the Investor Rights Agreement, as
provided in the amendment to that agreement entered into by the Bank, the
Company and the holders of majority of the Registrable Securities outstanding
(as defined in the Investor Rights Agreement), and any and all Warrant Shares
shall be deemed to be Registrable Securities for all purposes of and as
provided in the Investor Rights Agreement.
Section 4. Adjustments. The number and character of Warrant
Shares issuable upon exercise or conversion of this Warrant (or any shares of
Stock or other assets at the time receivable or issuable upon exercise or
conversion of this Warrant) and the Exercise Price therefor, are subject to
adjustment upon occurrence of the following events:
Section 4.1 Adjustment for Stock Splits, Stock Dividends,
Recapitalizations, etc. The Exercise Price of this Warrant and the number of
Warrant Shares issuable upon exercise or conversion of this Warrant (or any
shares of Stock or other assets at the time issuable upon exercise of this
Warrant) shall each be proportionally adjusted to reflect any stock dividends
stock splits, reverse stock splits, combinations of shares,
reclassifications, recapitalizations or other similar events altering the
number of outstanding shares of Warrant Stock (or such other Stock or other
assets).
Section 4.2 Adjustment for Capital Reorganization, Consolidation,
Merger, Sale or Conversion. If any reorganization of the capital stock of
the Corporation, or any consolidation or merger of the Corporation with or
into another entity, or the sale of all or substantially all of the
Corporation's assets to another entity shall be effected in such a way that
holders of Common Stock will be entitled to receive stock, securities or
assets with respect to or in exchange for their Common Stock, then, in each
such case, the Holder, upon the exercise or conversion of this Warrant, at
any time after the consummation of such capital reorganization,
consolidation, merger or sale, shall receive, in lieu of the stock or other
securities and property receivable upon the exercise or conversion, as
applicable, of this Warrant prior to such consummation, the Stock or other
assets to which the Holder would have been entitled upon such consummation if
the Holder had exercised or converted, as applicable, this Warrant
immediately prior thereto, all subject to further adjustment as provided in
this Section 4; and in each such case, the terms of this Warrant shall be
applicable to the shares of Stock or other assets receivable upon the
exercise or conversion, as applicable, of this Warrant after such
consummation.
Section 4.3 Adjustment for Issuance for Additional Stock. The
Exercise Price of this Warrant and the number of Warrant Shares issuable upon
exercise or conversion of this Warrant shall be further subject to adjustment
from time to time as follows:
(a) Upon each issuance by the Corporation of any Additional
Stock (as defined below), after the Issue Date and before the consummation by
the Company of an Initial Public Offering, for a consideration per share less
than the Exercise Price in effect immediately prior to the issuance of such
Additional Stock (except as provided in Section 4.1 above), (i) the Exercise
Price in effect immediately prior to each such issuance shall forthwith
(except as otherwise provided in this Section 4.3) be adjusted to the
Effective Price (as defined below) at which the Additional Stock is issued,
and (ii) the number of Warrant Shares issuable upon exercise or conversion of
this Warrant shall forthwith be adjusted by dividing the number of Warrant
Shares into which this Warrant is exercisable immediately before the
adjustment
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provided for herein by a fraction the numerator of which shall be the
Effective Price and the denominator of which shall be the Exercise Price
immediately before the adjustment provided for herein. The "Effective Price"
for any issuance of Additional Stock shall mean the lesser of $4.04 or the
quotient determined by dividing the total number of shares of Additional
Stock issued (or deemed issued pursuant to Section 4.3(e)) by the Corporation
in such issuance into the aggregate amount of consideration received by the
Corporation therefor, as provided in this Section 4.3.
(b) No adjustment of the Exercise 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 4.3(e)(3) and 4.3(e)(4)
below, no adjustment of the Exercise Price pursuant to this Section 4.3(a)
shall have the effect of increasing the Exercise Price above the Exercise
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 Issue 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 4.3.
(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 Sections 4.3(c) and 4.3(d), except as provided in subsection 4.3(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 converted thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities (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)
or upon the exercise of options to purchase or rights to subscribe for
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such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the
minimum additional consideration, if any, to be received by the Corporation
(without taking into account potential antidilution adjustments) upon the
conversion or exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be determined in the
manner provided in Section 4.3(c) and 4.3(d), except as provided in
subsection 4.3(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 Exercise
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.
(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 Exercise 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
Exercise 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.
(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 Section 4.3, the value of any options to
purchase or rights to subscribe for Common Stock, securities that are by
their terms convertible onto 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 Corporation 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 Section 4.3, 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 4.3(e)(1) and 4.3(e)(2)).
(f) "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been pursuant to Section 4.3(e)) by the Corporation after
the Issue Date other than
(1) Common Stock issued pursuant to a transaction described in
Section 4.1 or 4.2 hereof:
8
<PAGE>
(2) An aggregate of up to 250,000 shares of, and/or options or
rights to acquire shares of, Common Stock, issuable or issued to employees of
the Corporation pursuant to an existing stock option plan or restricted stock
plan of the Corporation; as provided in Section 4.3(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 pursuant to this Section (2);
(3) shares of Common Stock issued or issuable (i) upon
exercise or conversion of this Warrant, any securities issued pursuant to the
Purchase Agreement or any options, warrants, convertible securities or other
securities of the Corporation outstanding as of the Issue Date or (ii) upon
conversion of shares of any series of Preferred Stock authorized as of the
Issue Date.
(g) No fractional shares shall be issued upon conversion of this
Warrant or any portion thereof, and the number of Warrant Shares issuable as
a result of any adjustment provided for in this Section 4.3 shall be rounded
to the nearest whole share.
Section 5. Officer's Certificate as to Adjustments. In each
case of any adjustment or readjustment in the number and kind of Warrant
Shares (or other Stock or assets), issuable hereunder from time to time, or
in the Exercise Price, the Corporation, at its expense, will promptly cause
an officer of the Corporation to compute such adjustment or readjustment in
accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment or readjustment and showing the facts upon which such
adjustment or readjustment is based. The Corporation will forthwith send a
copy of each such certificate to the Holder in accordance with Section 10.4
below.
Section 6. Notices of Record Date, etc. In the event of
(a) any taking by the Corporation of a record of the
holders of Stock for the purpose of determining the holders thereof who are
entitled to receive any shares of Stock as a dividend or other distribution
or pursuant to a stock split, or
(b) any reorganization or the Corporation, or any sale or
transfer, in a single transaction or a series of related transactions, of all
or substantially all the assets of the Corporation to, or the consolidation
or merger of the Corporation with or into, any other Person, or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Corporation, or
(d) any sale, in a single transaction or a series of
related transactions, of a majority of the Corporation's voting stock
(whether newly issued, or from treasury, previously issued and then
outstanding, or any combination thereof),
then and in each such event the Corporation will mail or cause to be mailed
to the Holder a notice specifying (i) the date on which any such record is to
be taken for the purpose of such dividend, distribution or stock split, and
stating the amount and character of such dividend, distribution or stock
split, or (ii) the date on which any such reorganization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take
place, and the time, if any
9
<PAGE>
is to be fixed, as of which the holders of record of any one or more classes
of Stock shall be entitled to exchange their shares of Stock for securities
or other property deliverable on such reorganization, transfer,
consolidation, merger, dissolution, liquidation or winding-up or (iii) the
date on which any such sale of a majority of the Corporation's voting stock
is to take place and the material terms thereof, as the case may be. Such
notice shall be mailed at least 15 days prior to the date specified in such
notice on which any such action is to be taken.
Section 7. Exchange of Warrant. Subject to the provisions of
Section 9 hereof (if and to the extent applicable), this Warrant shall be
exchangeable, upon the surrender hereof by the Holder at the principal office
of the Corporation, for new warrants of like tenor, each registered in the
name of the Holder or in the name of such other Persons as they may direct,
subject to Sections 9 and 10.5 (upon payment by the Holder of any applicable
transfer taxes). Each of such new warrants shall be exercisable for such
number of Warrant Shares as the Holder shall direct, provided that all of
such new warrants shall represent, in the aggregate, the right to purchase
the same number of Warrant Shares and cash, securities or other property, if
any, which may be purchased by the Holder upon exercise of this Warrant at
the time of its surrender.
Section 8. Replacement of Warrant. On receipt of evidence
reasonably satisfactory to the Corporation of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement or
security reasonably satisfactory in form and amount to the Corporation or, in
the case of any such mutilation, on surrender and cancellation of this
Warrant, the Corporation at its expense will execute and deliver, in lieu
thereof, a new warrant of like tenor.
Section 9. Transfer Provisions, etc. By accepting this
Warrant, Holder makes the representations set forth in 9.1, 9.2, 9.3 and 9.4
below and agrees to the restrictions set forth in 9.5, 9.6, 9.7 and 9.8
below, and, by exercising or converting this Warrant in whole or in part, the
Holder agrees that Holder will then represent and will be deemed to represent
that such representations are true and complete as of the date of such
exercise or conversion.
Section 9.1 Purchase Entirely for Own Account. This Warrant
is, and any Warrant Shares received by the Holder upon exercise or conversion
of this Warrant will be, acquired for investment for Holder's own account,
not as a nominee or agent, and not with a view to the resale or distribution
of any part thereof, and the Holder has no present intention of selling,
granting any participation in, or otherwise distributing any such securities.
The Holder does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or
to any third person, with respect to any of such securities.
Section 9.2 Investment Experience. The Holder is an investor
in securities of companies in the development stage and acknowledges that the
Holder is able to fend for itself, can bear the economic risk of the Holder's
investment and has such knowledge and experience in financial or business
matters that the Holder is capable of evaluating the merits and risks of the
investment in this Warrant and the Warrant Shares.
Section 9.3 Accredited Investor. The Holder is an
"accredited investor" within the meaning of Rule 501 of Regulation D under
the Securities Act, as presently in effect.
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<PAGE>
Section 9.4 Restricted Securities. The Holder understands
that this Warrant and the Warrant Shares are characterized as restricted
securities under the federal securities laws and applicable state securities
laws inasmuch as such securities are being (or will be) acquired from the
Corporation in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Securities Act, only in certain limited circumstances.
Section 9.5 Transfer Restrictions. Without in any way
limiting the representations set forth above, the Holder agrees not to make
any transfer of all or any portion of this Warrant or the Warrant Shares
unless and until (a) such transfer is registered under the Securities Act and
all applicable state securities laws, or (ii) Holder shall have notified the
Corporation of the proposed transfer and shall have furnished the Corporation
with a detailed statement of the circumstances surrounding the proposed
transfer, and, if the Corporation requests, Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company,
that such transfer will not require registration of such shares under the
Securities Act and applicable state securities laws.
Section 9.6 Legends.
(a) Each certificate representing any Warrant Shares
issued upon exercise of this Warrant shall bear the legend set forth below,
or a legend substantially equivalent thereto:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR
DISPOSED OF UNLESS THEY ARE SO REGISTERED OR UNLESS, IN THE
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, BOTH AS
TO THE IDENTITY OF COUNSEL AND AS TO THE FORM AND SUBSTANCE
OF SUCH OPINION, AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE."
(b) Each certificate representing any shares of Stock
issued from time to time upon exercise of this Warrant shall also bear any
legend required under any applicable state securities or blue sky laws.
(c) The Corporation may issue appropriate "stop
transfer" instructions and may take such other steps as it may deem
appropriate to cause the restrictions referred to in this Section 9 to be
complied with.
Section 9.7 Survival. The obligations of the Holder (and/or
of any transferee of this Warrant or any Warrant Shares issued from time to
time upon exercise of this Warrant) under this Section 9 shall, with respect
to any Warrant Shares issued from time to time upon exercise of this Warrant,
survive the exercise, expiration or other termination, or transfer, of this
Warrant indefinitely.
Section 9.8 Mechanics of Transfer. Subject to the terms and
conditions of this Warrant and subject to compliance with all applicable
securities laws, any transfer of all or any portion of
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<PAGE>
this Warrant, or of any interest therein, that is otherwise in compliance
with applicable law shall be effected by surrendering this Warrant to the
Corporation at its principal office, together with (i) a duly executed form
of assignment, in the form attached hereto, (ii) payment of all applicable
transfer taxes, if any. In the event of any such transfer of this Warrant,
in whole, the Corporation shall issue a new warrant of like tenor to the
transferee, representing the right to purchase the same number of Warrant
Shares, and cash, securities or other property, if any, which were
purchasable by the Holder upon exercise of this Warrant at the time of its
transfer. In the event of any such transfer of any portion of this Warrant,
(i) the Corporation shall issue a new warrant of like tenor to the
transferee, representing the right to purchase the same number of Warrant
Shares, and cash, securities or other property, if any, which were
purchasable by the Holder upon exercise of the transferred portion of this
Warrant at the time of such transfer, and (ii) the Corporation shall issue a
new warrant of like tenor to the Holder, representing the right to purchase
the number of Warrant Shares, and cash, securities or other property, if any,
purchasable by the Holder upon exercise of the portion of this Warrant not
transferred to such transferee. Until this Warrant or any portion thereof is
transferred on the books of the Corporation, the Corporation may treat the
Holder as the absolute holder of this Warrant and all right, title and
interest therein for all purposes, notwithstanding any notice to the
contrary. Notwithstanding the foregoing, neither this Warrant nor any rights
hereunder may be transferred unless such transfer complies with all
applicable securities laws and the provisions of this Section 9.
Section 10. General.
Section 10.1 Authorized Shares; Reservation of Shares for
Issuance. At all times while this Warrant is outstanding, the Corporation
shall maintain its corporate authority to issue, and shall have authorized
and reserved for issuance upon exercise of this Warrant, such number of
shares of Common Stock as shall be sufficient to perform its obligations
under this Warrant (after giving effect to any and all adjustments to the
number and kind of Warrant Shares purchasable upon exercise of this Warrant).
Section 10.2 No Impairment. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities, sale or other transfer of any of its assets or properties, or any
other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of
the Holder hereunder against impairment. Without limiting the generality of
the foregoing, the Corporation (a) will not increase the par value of any
shares of Stock receivable upon the exercise of this Warrant above the amount
payable therefor on such exercise,
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<PAGE>
and (b) will take all action that may be necessary or appropriate in order
that the Corporation may validly and legally issue fully paid and
nonassessable shares of Stock on the exercise of this Warrant.
Section 10.3 No Rights as Stockholder. The Holder shall not
be entitled to vote or to receive dividends or to be deemed the holder of
Stock that may at any time be issuable upon exercise of this Warrant for any
purpose whatsoever, nor shall anything contained herein be construed to
confer upon the Holder any of the rights of a stockholder of the Corporation
or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance
or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings (except to the extent otherwise provided in this Warrant),
or to receive dividends or subscription rights, until the Holder shall have
exercised the Warrant and been issued Warrant Shares in accordance with the
provisions hereof.
Section 10.4 Notices. All notices, demands, requests,
certificates or other communications under this Warrant shall be in writing
and shall be either mailed by first class mail, postage prepaid, in which
case such notice, demand, request, certificate or other communication shall
be deemed to have been given three business days after the date on which it
is first deposited in the mails, or hand delivered or sent by facsimile
transmission, by tested or otherwise authenticated telex or cable or by
expedited courier for overnight delivery with signature required, in each
such case, such notice, demand, request, certificate or other communication
being deemed to have been given upon delivery or receipt, as the case may be:
(i) if to the Corporation, at 10161 Bubb Road,
Cupertino, California 95014 Attention: Chief Financial Officer, or at such
other address as the Corporation may have furnished in writing to the Holder;
and
(ii) if to the Holder, at the Holder's address appearing
in the books maintained by the Corporation.
Section 10.5 Assignment. Notwithstanding anything contained
herein to the contrary, this Warrant and all rights hereunder are assignable
or transferable (subject to the legend set forth in the heading on the first
page hereof), in whole or in part, by the Bank to affiliates of the Bank.
Section 10.6 Amendment and Waiver. No failure or delay of
the Holder in exercising any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right
or power, preclude any other or further exercise thereof or the exercise of
any other right or power. The rights and remedies of the Holder are
cumulative and not exclusive of any rights or remedies which it would
otherwise have. The provisions of this Warrant may be amended, modified or
waived with (and only with) the written consent of the Corporation and the
Holder.
Section 10.7 Governing Law. This Warrant shall be governed
by, and construed and enforced in accordance with, the laws of California.
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<PAGE>
Section 10.8 Covenants to Bind Successor and Assigns. All
covenants, stipulations, promises and agreements in this Warrant contained by
or on behalf of the Corporation shall bind its successors and assigns,
whether so expressed or not.
Section 10.9 Severability. In case any one or more of the
provisions contained in this Warrant shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.
Section 10.10 Construction. The definitions of this Warrant
shall apply equally to both the singular and the plural forms of the terms
defined. Wherever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The section and
paragraph headings used herein are for convenience of reference only, are not
part of this Warrant and are not to affect the construction of or be taken
into consideration in interpreting this Warrant.
Section 10.11 Remedies. The Holder and the Corporation, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will each be entitled to specific performance of its
rights under this Warrant. The Holder and the Corporation each agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees
to waive the defense in any action for specific performance that a remedy at
law would be adequate. In any action or proceeding brought to enforce any
provision of this Warrant or where any provision hereof is invalidly asserted
as a defense, the successful party to such action or proceeding shall be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
[rest of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Warrant to
be executed in its corporate name by one of its officers thereunto duly
authorized, all as of the day and year first above written.
HYBRID NETWORKS, INC.
By:
---------------------------
Carl S. Ledbetter
Chief Executive Officer
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<PAGE>
FORM OF SUBSCRIPTION
(To be executed upon exercise of Warrant)
To: HYBRID NETWORKS, INC.
The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the attached Warrant for, and to exercise
thereunder, shares of Common Stock, $.001 par value per share
--------
("Common Stock"), of Hybrid Networks, Inc., a Delaware corporation, and
tenders herewith payment of $ , representing the aggregate purchase
--------
price for such shares based on the price per share provided for in such
Warrant. The undersigned hereby confirms that the representations set forth
in Section 9 of the Warrant are true and complete with respect to the
undersigned as of the date hereof.
Please issue a certificate or certificates for such shares of
Common Stock in the following name or names and denominations and deliver
such certificate or certificates to the person or persons listed below at
their respective addresses set forth below:
If said number of shares of Common Stock shall not be all the
shares of Common Stock issuable upon exercise of the attached Warrant, a new
Warrant is to be issued in the name of the undersigned for the balance
remaining of such shares of Common Stock less any fraction of a share of
Common Stock paid in cash.
Dated: , 19
------------- --
------------------------------
(Name of Holder)
By:
---------------------------
Its:
--------------------------
Address:
----------------------
NOTE: The above signature should
correspond exactly with the name on
the face of the attached Warrant.
<PAGE>
NOTICE OF CONVERSION
To: Hybrid Networks, Inc.
(1) The undersigned hereby elects to convert that portion of
the attached Warrant representing the right to purchase shares of
----------
Common Stock of Hybrid Networks, Inc. into such number of shares of Common
Stock of Hybrid Networks, Inc. as is determined pursuant to Section 2.3 of
such Warrant, which conversion shall be effected pursuant to the terms of
such Warrant.
(2) The undersigned represents that the aforesaid shares are
being acquired for the account of the undersigned for investment and not with
a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling
such shares, except in compliance with applicable federal and state
securities laws. The undersigned hereby confirms that the representations
set forth in Section 9 of the Warrant are true and complete with respect to
the undersigned as of the date hereof.
(3) The undersigned accepts such shares subject to the terms
relating to registration rights under the Investor Rights Agreement (as
defined in the Warrant).
- ------------------------
(Date)
------------------------------
(Name of Holder)
By:
---------------------------
Its:
--------------------------
Address:
----------------------
------------------------------
NOTE: The above signature should
correspond exactly with the name on
the face of the attached Warrant.
<PAGE>
FORM OF ASSIGNMENT
For value received, hereby sells, assigns
----------------------------
and transfers unto (the "Transferee") the
-----------------------------
attached Warrant [ % of the attached Warrant], together with all right,
--
title and interest therein, and does hereby irrevocably constitute and
appoint attorney to transfer said Warrant
----------------------------
[said percentage of said Warrant] on the books of Hybrid Networks, Inc., a
Delaware corporation, with full power of substitution in the premises.
The Transferee, by signing below, hereby confirms that the
representations set forth in Section 9 of the Warrant are true and complete
with respect to the Transferee as of the date hereof, and that the Transferee
agrees to be bound by the restrictions of Section 9 of the Warrant.
If not all of the attached Warrant is to be so transferred, a new
Warrant is to be issued in the name of the undersigned for the balance of
said Warrant.
Dated: , 19
------------- --
------------------------------
(Name of Holder)
By:
---------------------------
Its:
--------------------------
NOTE: The above signature should
correspond exactly with the name on
the face of the attached Warrant.
Agreed to and Accepted
- ------------------------------
Name of Transferee
By:
- ------------------------------
Its:
- ------------------------------
Address:
- ------------------------------
- ------------------------------
<PAGE>
SUBORDINATION AGREEMENT
This Subordination Agreement is made as of October 16, 1997,
by and between the undersigned creditor ("Creditor"), and VENTURE BANKING
GROUP, a division of Cupertino National Bank ("Bank").
Recitals
A. Hybrid Networks, Inc. ("Borrower") has requested and/or
obtained certain loans or other credit accommodations from Bank to Borrower
which are or may be from time to time secured by assets and property of
Borrower.
B. Creditor has extended loans or other credit
accommodations to Borrower, and/or may extend loans or other credit
accommodations to Borrower from time to time.
C. In order to induce Bank to extend credit to Borrower and,
at any time or from time to time, at Bank's option, to make such further
loans, extensions of credit, or other accommodations to or for the account of
Borrower, or to purchase or extend credit upon any instrument or writing in
respect of which Borrower may be liable in any capacity, or to grant such
renewals or extension of any such loan, extension of credit, purchase, or
other accommodation as Bank may deem advisable, Creditor is willing to
subordinate: (i) all of Borrower's indebtedness and obligations to Creditor,
whether presently existing or arising in the future (the "Subordinated Debt")
to all of Borrower's indebtedness and obligations to Bank; and (ii) all of
Creditor's security interests, if any, to all of Bank's security interests in
the Borrower's property.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Creditor subordinates to Bank any security interest or
lien that Creditor may have in any property of Borrower. Notwithstanding the
respective dates of attachment or perfection of the security interest of
Creditor and the security interest of Bank, the security interest of Bank in
the Collateral, as defined in the Loan and Security Agreement, of even date
herewith, between Borrower and Bank (the "Loan Agreement"), shall at all
times be prior to the security interest of Creditor.
2. All Subordinated Debt is subordinated in right of payment
to all obligations of Borrower to Bank now existing or hereafter arising,
together with all costs of collecting such obligations (including attorneys'
fees), including, without limitation, all interest accruing after the
commencement by or against Borrower of any bankruptcy, reorganization or
similar proceeding, and all obligations under the Loan Agreement (the "Senior
Debt"), subject to the following Section 3; provided, however, the
Subordinated Debt shall only be subordinated to the Senior Debt in an amount
up to Five Million Dollars ($5,000,000) of principal, plus costs and interest.
3. Creditor will not demand or receive from Borrower (and
Borrower will not pay to Creditor) all or any part of the Subordinated Debt,
by way of payment, prepayment, setoff, lawsuit or otherwise, nor will
Creditor exercise any remedy with respect to the Collateral, nor will
Creditor commence, or cause to commence, prosecute or participate in any
administrative, legal or equitable action against Borrower, for so long as
any portion of the Senior Debt remains outstanding. The foregoing
notwithstanding, Creditor shall be entitled to receive each regularly
scheduled payment of principal and interest in respect of the Subordinated
Debt, including any installment payment and/or payment of the entire
outstanding principal amount thereof on the maturity date thereof, provided
that an Event of Default, as defined in the Loan Agreement, has not occurred
and is not continuing and would not exist immediately after such payment.
The foregoing notwithstanding, after the occurrence and during the
continuation of an event of default under the Subordinated Debt, Creditor
shall be entitled to accelerate the Subordinated Debt, and exercise its
remedies thereunder, but not
1
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earlier than one hundred eighty (180) days after Bank has received written
certification from Creditor that (1) an event of default has occurred in
respect of the Subordinated Debt, and (2) such event permits an acceleration
of the Subordinated Debt; provided, that for one hundred eighty (180) days
after the date that Bank notifies Creditor that a default has occurred under
the Senior Debt, Creditor shall not be permitted to exercise its remedies on
account of the Subordinated Debt and provided, further, that any payment,
distribution or other amounts received pursuant to the exercise of such
remedies by Creditor shall first be delivered to Bank, in the form received,
for application to the Senior Debt, until the Senior Debt has been repaid in
full.
4. Creditor shall promptly deliver to Bank in the form
received (except for endorsement or assignment by Creditor where required by
Bank) for application to the Senior Debt any payment, distribution, security
or proceeds received by Creditor with respect to the Subordinated Debt other
than in accordance with this Agreement. The foregoing notwithstanding, after
the occurrence and during the continuation of an event of default under the
Subordinated Debt, Creditor shall be entitled to accelerate the Subordinated
Debt, and exercise its remedies thereunder, but not earlier than one hundred
eighty (180) days after Bank has received written certification from Creditor
that (1) an event of default has occurred in respect of the Subordinated
Debt, and (2) such event permits an acceleration of the Subordinated Debt;
provided, that for one hundred eighty (180) days after the date that Bank
notifies Creditor that a default has occurred under the Senior Debt, Creditor
shall not be permitted to exercise its remedies on account of the
Subordinated Debt and provided, further, that any payment, distribution or
other amounts received pursuant to the exercise of such remedies by Creditor
shall first be delivered to Bank, in the form received, for application to
the Senior Debt, until the Senior Debt has been repaid in full.
5. In the event of Borrower's insolvency, reorganization or
any case or proceeding under any bankruptcy or insolvency law or laws
relating to the relief of debtors, these provisions shall remain in full
force and effect, and Bank's claims against Borrower and the estate of
Borrower shall be paid in full before any payment is made to Creditor.
6. For so long as any of the Senior Debt remains unpaid,
Creditor irrevocably appoints Bank as Creditor's attorney-in-fact, and grants
to Bank a power of attorney with full power of substitution, in the name of
Creditor or in the name of Bank, for the use and benefit of Bank, without
notice to Creditor, in any bankruptcy, insolvency or similar proceeding
involving Borrower, at Bank's option, to file the appropriate claim or claims
in respect of the Subordinated Debt on behalf of Creditor if Creditor does
not do so prior to 30 days before the expiration of the time to file claims
in such proceeding and if Bank elects, in its sole discretion, to file such
claim or claims.
7. Creditor shall immediately affix a legend to the
instruments evidencing the Subordinated Debt stating that the instruments are
subject to the terms of this Agreement. Without Bank's prior written
consent, amendment of the documents evidencing or relating to the
Subordinated Debt shall not directly or indirectly modify the provisions of
this Agreement in any manner which might terminate or impair the
subordination of the Subordinated Debt or the subordination of the security
interest or lien that Creditor may have in any property of Borrower. By way
of example, such instruments shall not be amended to (i) increase the rate of
interest with respect to the Subordinated Debt, or (ii) accelerate the
payment of the principal or interest or any other portion of the Subordinated
Debt.
8. This Agreement shall remain effective for so long as
Borrower owes any amounts to Bank under the Loan Agreement or otherwise. If,
at any time after payment in full of the Senior Debt any payments of the
Senior Debt must be disgorged by Bank for any reason (including, without
limitation, the bankruptcy of Borrower), this Agreement and the relative
rights and priorities set forth herein shall be reinstated as to all such
disgorged payments as though such payments had not been made and Creditor
shall immediately pay over to Bank all payments received with respect to the
Subordinated Debt to the extent that such payments would have been prohibited
hereunder. At any
2
<PAGE>
time and from time to time, without notice to Creditor, Bank may take such
actions with respect to the Senior Debt as Bank, in its sole discretion, may
deem appropriate, including, without limitation, terminating advances to
Borrower, increasing the principal amount, extending the time of payment,
increasing applicable interest rates, renewing, compromising or otherwise
amending the terms of any documents affecting the Senior Debt and any
collateral securing the Senior Debt, and enforcing or failing to enforce any
rights against Borrower or any other person. No such action or inaction
shall impair or otherwise affect Bank's rights hereunder. To the extent
permitted by law, Creditor waives the benefits, if any, of Civil Code
Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850, 2899 and 3433.
9. Provided that the Senior Debt has been indefeasibly
finally paid and discharged, Creditor shall be subrogated to the rights of
Bank to receive payments or distributions of cash, property or securities
payable or distributable on account of the Senior Debt, to the extent of all
payments and distributions paid over to or for the benefit of Bank pursuant
to this Agreement. In no event, however, shall Creditor have any rights or
claims against Bank for any alleged impairment of Creditor's subrogation
rights, Creditor acknowledging that any actions taken by Bank with respect to
the Senior Debt or the Collateral are authorized and consented to by
Creditor. No payments or distributions made to Bank to which Creditor would
be entitled except for the subordination provisions of this Agreement, and no
payment to Bank by Creditor, as between Borrower, its creditors (other than
Bank) and Creditor shall be deemed to discharge any of the Senior Debt.
10. This Agreement shall bind any successors or assignees of
Creditor and shall benefit any successors or assigns of Bank. This Agreement
is solely for the benefit of Creditor and Bank and not for the benefit of
Borrower or any other party. Creditor further agrees that if Borrower is in
the process of refinancing a portion of the Senior Debt with a new lender,
and if Bank makes a request of Creditor, Creditor shall agree to enter into a
new subordination agreement with the new lender on substantially the terms
and conditions of this Agreement.
11. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
12. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
conflicts of laws principles. Creditor and Bank submit to the exclusive
jurisdiction of the state and federal courts located in Santa Clara County,
California. CREDITOR AND BANK WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN.
13. This Agreement represents the entire agreement with
respect to the subject matter hereof, and supersedes all prior negotiations,
agreements and commitments. Creditor is not relying on any representations
by Bank or Borrower in entering into this Agreement, and Creditor has kept
and will continue to keep itself fully apprised of the financial and other
condition of Borrower. This Agreement may be amended only by written
instrument signed by Creditor and Bank.
14. In the event of any legal action to enforce the rights of
a party under this Agreement, the party prevailing in such action shall be
entitled, in addition to such other relief as may be granted, all reasonable
costs and expenses, including reasonable attorneys' fees, incurred in such
action.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
"Creditor" "Bank"
HOLDERS OF CONVERTIBLE SUBORDINATED VENTURE BANKING GROUP, a division of
NOTES OF HYBRID NETWORKS, INC. DATED Cupertino National Bank
SEPTEMBER 25, 1997
By: Tudor BVI Futures, Ltd.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza By: /s/ Company Officer
---------------------- -----------------------
Robert P. Forlenza
Vice President By: -----------------------
By: Tudor Arbitrage Partners, L.P.
By: Tudor Global Trading, Inc.
General Partner
By: /s/ Robert P. Forlenza
----------------------
Robert P. Forlenza
Vice President
By: Raptor Global Fund, Ltd.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza
----------------------
Robert P. Forlenza
Vice President
By: Raptor Global Fund, L.P.
By: Tudor Investment Corporation,
Investment Adviser
By: /s/ Robert P. Forlenza
----------------------
Robert P. Forlenza
Vice President
The undersigned approves of the terms of this Agreement.
"Borrower"
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
----------------------
Title: President and CEO
----------------------
4
<PAGE>
SUBORDINATION AGREEMENT
This Subordination Agreement is made as of October 16, 1997,
by and between the undersigned creditor ("Creditor"), and VENTURE BANKING
GROUP, a division of Cupertino National Bank ("Bank").
Recitals
A. Hybrid Networks, Inc. ("Borrower") has requested and/or
obtained certain loans or other credit accommodations from Bank to Borrower
which are or may be from time to time secured by assets and property of
Borrower.
B. Creditor has extended loans or other credit
accommodations to Borrower, and/or may extend loans or other credit
accommodations to Borrower from time to time.
C. In order to induce Bank to extend credit to Borrower and,
at any time or from time to time, at Bank's option, to make such further
loans, extensions of credit, or other accommodations to or for the account of
Borrower, or to purchase or extend credit upon any instrument or writing in
respect of which Borrower may be liable in any capacity, or to grant such
renewals or extension of any such loan, extension of credit, purchase, or
other accommodation as Bank may deem advisable, as of October 31, 1997,
Creditor is willing to subordinate: (i) all of Borrower's indebtedness and
obligations to Creditor, whether presently existing or arising in the future
(the "Subordinated Debt") to all of Borrower's indebtedness and obligations
to Bank; and (ii) all of Creditor's security interests, if any, to all of
Bank's security interests in the Borrower's property.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Creditor subordinates to Bank any security interest or
lien that Creditor may have in any property of Borrower. Notwithstanding the
respective dates of attachment or perfection of the security interest of
Creditor and the security interest of Bank, the security interest of Bank in
the Collateral, as defined in the Loan and Security Agreement, of even date
herewith, between Borrower and Bank (the "Loan Agreement"), shall at all
times be prior to the security interest of Creditor.
2. All Subordinated Debt is subordinated in right of payment
to all obligations of Borrower to Bank now existing or hereafter arising,
together with all costs of collecting such obligations (including attorneys'
fees), including, without limitation, all interest accruing after the
commencement by or against Borrower of any bankruptcy, reorganization or
similar proceeding, and all obligations under the Loan Agreement (the "Senior
Debt"), subject to the following Section 3; provided, however, the
Subordinated Debt shall be subordinated to the Senior Debt only in an amount
up to Five Million Dollars ($5,000,000) of principal, plus costs and interest.
3. Creditor will not demand or receive from Borrower (and
Borrower will not pay to Creditor) all or any part of the Subordinated Debt,
by way of payment, prepayment, setoff, lawsuit or otherwise, nor will
Creditor exercise any remedy with respect to the Collateral, nor will
Creditor commence, or cause to commence, prosecute or participate in any
administrative, legal or equitable action against Borrower, for so long as
any portion of the Senior Debt remains outstanding. The foregoing
notwithstanding, Creditor shall be entitled to receive each regularly
scheduled payment of principal and interest that constitutes Subordinated
Debt, provided that an Event of Default, as defined in the Loan Agreement,
has not occurred and is not continuing and would not exist immediately after
such payment. The foregoing notwithstanding, after the occurrence and during
the continuation of an event of default under the Subordinated Debt, Creditor
shall be entitled to accelerate the Subordinated Debt, and exercise its
remedies thereunder, but not earlier than one hundred eighty (180) days after
Bank has received written certification from Creditor that (1) an event of
default has occurred in respect of the Subordinated Debt, and (2) such event
permits an acceleration
1
<PAGE>
of the Subordinated Debt; provided, that for one hundred eighty (180) days
after the date that Bank notifies Creditor that a default has occurred under
the Senior Debt (provided, that only one (1) such one hundred eighty (180)
day period shall apply to Creditor within any continuous three hundred sixty
(360) day period unless all defaults in any such one hundred eighty (180) day
period are cured before such one hundred eighty (180) day period expires),
Creditor shall not be permitted to exercise its remedies on account of the
Subordinated Debt and provided, further, that any payment, distribution or
other amounts received pursuant to the exercise of such remedies by Creditor
shall first be delivered to Bank, in the form received, for application to
the Senior Debt, until the Senior Debt has been repaid in full.
4. Creditor shall promptly deliver to Bank in the form
received (except for endorsement or assignment by Creditor where required by
Bank) for application to the Senior Debt any payment, distribution, security
or proceeds received by Creditor with respect to the Subordinated Debt other
than in accordance with this Agreement.
5. In the event of Borrower's insolvency, reorganization or
any case or proceeding under any bankruptcy or insolvency law or laws
relating to the relief of debtors, these provisions shall remain in full
force and effect, and Bank's claims against Borrower and the estate of
Borrower shall be paid in full before any payment is made to Creditor.
6. Until an Equity Event (as defined in the Loan Agreement)
and for so long as any of the Senior Debt remains unpaid, Creditor
irrevocably appoints Bank as Creditor's attorney-in-fact, and grants to Bank
a power of attorney with full power of substitution, in the name of Creditor
or in the name of Bank, for the use and benefit of Bank, without notice to
Creditor, to perform at Bank's option the following acts in any bankruptcy,
insolvency or similar proceeding involving Borrower:
(i) To file the appropriate claim or claims in respect
of the Subordinated Debt on behalf of Creditor if Creditor does not do so
prior to 30 days before the expiration of the time to file claims in such
proceeding and if Bank elects, in its sole discretion, to file such claim or
claims; and
(ii) To accept or reject any plan of reorganization or
arrangement on behalf of Creditor and to otherwise vote Creditor's claims in
respect of any Subordinated Debt in any manner that Bank deems appropriate
for the enforcement of its rights hereunder.
7. Creditor shall immediately affix a legend to the
instruments evidencing the Subordinated Debt stating that the instruments are
subject to the terms of this Agreement. Without Bank's prior written
consent, amendment of the documents evidencing or relating to the
Subordinated Debt shall not directly or indirectly modify the provisions of
this Agreement in any manner which might terminate or impair the
subordination of the Subordinated Debt or the subordination of the security
interest or lien that Creditor may have in any property of Borrower. By way
of example, such instruments shall not be amended to (i) increase the rate of
interest with respect to the Subordinated Debt, or (ii) accelerate the
payment of the principal or interest or any other portion of the Subordinated
Debt.
8. This Agreement shall remain effective for so long as
Borrower owes any amounts to Bank under the Loan Agreement or otherwise. If,
at any time after payment in full of the Senior Debt any payments of the
Senior Debt must be disgorged by Bank for any reason (including, without
limitation, the bankruptcy of Borrower), this Agreement and the relative
rights and priorities set forth herein shall be reinstated as to all such
disgorged payments as though such payments had not been made and Creditor
shall immediately pay over to Bank all payments received with respect to the
Subordinated Debt to the extent that such payments would have been prohibited
hereunder. At any time and from time to time, without notice to Creditor,
Bank may take such actions with respect to the Senior Debt as Bank, in its
sole discretion, may deem appropriate, including, without limitation,
terminating advances to Borrower, increasing the principal amount, extending
the time of payment, increasing applicable interest rates, renewing,
compromising or otherwise amending the terms of any
2
<PAGE>
documents affecting the Senior Debt and any collateral securing the Senior
Debt, and enforcing or failing to enforce any rights against Borrower or any
other person. No such action or inaction shall impair or otherwise affect
Bank's rights hereunder. To the extent permitted by law, Creditor waives the
benefits, if any, of Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848,
2849, 2850, 2899 and 3433.
9. This Agreement shall bind any successors or assignees of
Creditor and shall benefit any successors or assigns of Bank. This Agreement
is solely for the benefit of Creditor and Bank and not for the benefit of
Borrower or any other party. Creditor further agrees that if Borrower is in
the process of refinancing a portion of the Senior Debt with a new lender,
and if Bank makes a request of Creditor, Creditor shall agree to enter into a
new subordination agreement with the new lender on substantially the terms
and conditions of this Agreement.
10. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
11. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
conflicts of laws principles. Creditor and Bank submit to the exclusive
jurisdiction of the state and federal courts located in Santa Clara County,
California. CREDITOR AND BANK WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL
OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN.
12. This Agreement represents the entire agreement with
respect to the subject matter hereof, and supersedes all prior negotiations,
agreements and commitments. Creditor is not relying on any representations
by Bank or Borrower in entering into this Agreement, and Creditor has kept
and will continue to keep itself fully apprised of the financial and other
condition of Borrower. This Agreement may be amended only by written
instrument signed by Creditor and Bank.
13. In the event of any legal action to enforce the rights of
a party under this Agreement, the party prevailing in such action shall be
entitled, in addition to such other relief as may be granted, all reasonable
costs and expenses, including reasonable attorneys' fees, incurred in such
action.
14. Creditor's subordination shall be effective as of October
31, 1997.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
"Creditor" "Bank"
BG SERVICES LIMITED VENTURE BANKING GROUP, a division of
Cupertino National Bank
By: /s/ Company Officer By: /s/ Company Officer
---------------------- -----------------------
Title: ------------------- Title: --------------------
3
<PAGE>
The undersigned approves of the terms of this Agreement.
"Borrower"
HYBRID NETWORKS, INC.
By: /s/ Carl S. Ledbetter
------------------------
Title: President and CEO
---------------------
4
<PAGE>
EXHIBIT 11.01
HYBRID NETWORKS, INC.
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Weighted average common shares outstanding for the
period................................................. 2,226 2,223 2,535 2,542 2,575
Common equivalent shares pursuant to Staff Accounting
Bulletin No. 83........................................ 654 654 654 654 654
--------- --------- --------- ----------- ----------
Shares used in per share calculation..................... 2,880 2,877 3,189 3,196 3,229
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Net loss................................................. $ (2,897) $ (5,269) $ (8,515) $ (6,132) $ (10,082)
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Net loss per share....................................... $ (1.01) $ (1.83) $ (2.67) $ (1.92) $ (3.12)
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
</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. 333-36001) of our report dated October 16, 1997, except for Note 16, for
which the date is October 21, 1997, on our audits of the financial statements
and financial statement schedules 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
October 21, 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 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 6,886 5,314
<SECURITIES> 0 0
<RECEIVABLES> 1,348 6,629
<ALLOWANCES> 0 675
<INVENTORY> 943 2,068
<CURRENT-ASSETS> 9,302 13,535
<PP&E> 1,736 2,811
<DEPRECIATION> 558 1,044
<TOTAL-ASSETS> 10,539 16,190
<CURRENT-LIABILITIES> 2,358 9,970
<BONDS> 0 0
0 0
12 13
<COMMON> 2 2
<OTHER-SE> 7,695 (18)
<TOTAL-LIABILITY-AND-EQUITY> 10,539 16,190
<SALES> 2,962 9,152
<TOTAL-REVENUES> 2,962 9,152
<CGS> 3,130 8,214
<TOTAL-COSTS> 8,576 10,824
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28 379
<INCOME-PRETAX> (8,515) (10,082)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,515) (10,082)
<EPS-PRIMARY> (2.67) (3.12)
<EPS-DILUTED> 0 0
</TABLE>
