-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UBFp3vzOnw0HQkDr4PoDB4aJwmFXGv5zJPdH9cBpopS4rXiinrJg/F4siwqcofis kRTBy3qCDLYwTUVst6t3Xw== 0001012870-97-001616.txt : 19970821 0001012870-97-001616.hdr.sgml : 19970821 ACCESSION NUMBER: 0001012870-97-001616 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19970820 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MMC NETWORKS INC CENTRAL INDEX KEY: 0001044660 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770319809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-34005 FILM NUMBER: 97666998 BUSINESS ADDRESS: STREET 1: 1134 E ARQUS AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087311600 MAIL ADDRESS: STREET 1: 1134 E ARQYES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1997 REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MMC NETWORKS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 77-0319809 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 1134 EAST ARQUES AVENUE SUNNYVALE, CALIFORNIA 94086 (408) 731-1600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- PRABHAT K. DUBEY PRESIDENT AND CHIEF EXECUTIVE OFFICER MMC NETWORKS, INC. 1134 EAST ARQUES AVENUE SUNNYVALE, CALIFORNIA 94086 (408) 731-1600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: AARON J. ALTER GREGORY M. GALLO KENNETH M. SIEGEL PETER M. ASTIZ RAMSEY HANNA SCOTT M. STANTON WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION 650 PAGE MILL ROAD 400 HAMILTON AVENUE PALO ALTO, CALIFORNIA 94304 PALO ALTO, CALIFORNIA 94301-1825 (650) 493-9300 (650) 328-6561 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration 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 number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE ===============================================================================
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------- Common Stock, $0.001 par value.......... $36,225,000 $10,977.27 ===============================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT 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 SUCH SECTION 8(a), MAY DETERMINE. =============================================================================== ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE + +WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE + +SECURITIES LAWS OF ANY SUCH JURISDICTION. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS (Subject to Completion) Issued August 20, 1997 Shares [MMC NETWORKS LOGO APPEARS HERE] COMMON STOCK ----------- ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY 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 $ AND $ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS BEEN MADE TO LIST THE SHARES OF COMMON STOCK OFFERED HEREBY ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "MMCN." ----------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 HEREOF. ----------- 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. ----------- PRICE $ A SHARE -----------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) -------- -------------- ----------- Per Share.............. $ $ $ Total(3)............... $ $ $
- ----- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses estimated at $1,000,000 payable by the Company. (3) The Company has granted the Underwriters an option, exercisable within 30 days from the date hereof, to purchase up to an aggregate of additional Shares at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $ , $ and $ , respectively. See "Underwriters." ----------- The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Gray Cary Ware & Freidenrich, A Professional Corporation, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1997, at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ----------- MORGAN STANLEY DEAN WITTER DEUTSCHE MORGAN GRENFELL WESSELS, ARNOLD & HENDERSON , 1997 NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT 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 UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES 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 SALES 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. ---------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary................ 3 The Company....................... 4 Risk Factors...................... 5 Use of Proceeds................... 14 Dividend Policy................... 14 Capitalization.................... 15 Dilution.......................... 16 Selected Financial Data........... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 18
PAGE ---- Business.......................... 24 Management........................ 35 Certain Transactions.............. 43 Principal Stockholders............ 45 Description of Capital Stock...... 47 Shares Eligible for Future Sale... 50 Underwriters...................... 52 Legal Matters..................... 54 Experts........................... 54 Additional Information............ 54 Index to Financial Statements..... F-1
---------------- The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent accountants and quarterly reports containing unaudited financial information for the first three quarters of each year. ---------------- ATMS2000, BitStream Processor, Direct Replication Engine, MMC Networks, NCI, Per-Flow Queuing (PFQ), PS1000, ViX, and the MMC Networks logo are trademarks of the Company. This Prospectus also includes product names and other trade names and trademarks of the Company and of other organizations. ---------------- Except as otherwise noted herein, information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option, (ii) the reincorporation of the Company into Delaware prior to the effective date of this Prospectus, (iii) the conversion of all outstanding shares of Preferred Stock of the Company into shares of Common Stock of the Company that will occur in connection with this offering, and (iv) the authorization of 10,000,000 shares of undesignated Preferred Stock upon the closing of this offering. ---------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACATIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." 2 BACKGROUND GRAPHIC: TIME-LAPSE NIGHT TIME PHOTOGRAPH OF BUSY COMPLEX FREEWAY INTERCHANGE AS A METAPHOR FOR NETWORK TRAFFIC. TEXT: MMC NETWORKS NETWORK PROCESSORS FOR WIRE-SPEED NETWORKING EQUIPMENT PROVIDING NETWORKING VENDORS .HIGH PERFORMANCE .ADVANCED FEATURES .RAPID TIME-TO-MARKET .SOFTWARE PROGRAMMABILITY .LOW SYSTEM COST TEXT BOX: MMC NETWORKS IS A LEADING DEVELOPER AND SUPPLIER OF NETWORK PROCESSORS--HIGH- PERFORMANCE, OPEN-ARCHITECTURE, SOFTWARE-PROGRAMMABLE PROCESSORS OPTIMIZED FOR NETWORKING APPLICATIONS. THESE NETWORK PROCESSORS ENABLE A NEW GENERATION OF HIGH-PERFORMANCE LAN AND WAN NETWORKING EQUIPMENT. MMC NETWORKS' CURRENT PRODUCT FAMILIES ... PS1000 Fast Ethernet ATMS2000 ATM PROVIDE ADVANCED FEATURES AT WIRE SPEED ... Layer 3 Switching and Routing Internetworking of LANs and WANs Security Class of Service Quality of Service Network Management FOR NETWORKING EQUIPMENT TARGETED AT ... ENTERPRISE NETWORKS ... Campus Backbone Web Server Farms Power Workgroup WAN Backbone Wiring Closet Dedicated Distribution Data Centers Remote Access Servers AND SERVICE PROVIDER SERVICES ... Internet Dial Access Frame Relay Dedicated Access ATM xDSL, Cable Integrated Services Sonet/SDH MMC NETWORKS HAS ACHIEVED OVER 35 DESIGN WINS WITH 27 CUSTOMERS, INCLUDING: Cisco NEC Fujitsu Olicom Hitachi SNT Ipsilon Toshiba PROSPECTUS SUMMARY The following summary is qualified in its entirety by more detailed information and the Financial Statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY MMC Networks, Inc. (the "Company" or "MMC Networks") is a leading developer and supplier of network processors--high-performance, open-architecture, software-programmable processors optimized for networking applications. The Company's network processors form the core silicon "engines" of LAN and WAN switches and routers and are designed to allow network equipment vendors to rapidly develop high-performance, feature-rich, cost-effective products supporting a broad range of networking functions. MMC Networks' customers employ the Company's network processors to develop and market multi-gigabit, wire-speed switches and routers with advanced features such as layer 3 switching, internetworking of LANs and WANs, security, class of service, quality of service and network management. The Company's current products, the PS1000 and ATMS2000 families of network processors, provide the core functionality of high-performance Fast Ethernet and Asynchronous Transfer Mode ("ATM") networking equipment, respectively. The Company believes that network equipment vendors are able to reduce design and development costs and accelerate product development cycles for high-performance routers and switches by using the Company's products. All of the Company's products are based on the Company's proprietary ViX architecture, which enables network equipment vendors to easily and cost-effectively implement high-performance, value-added features in their switch and router products. To date, the Company has achieved more than 35 design wins with 27 network equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC, Olicom, SNT and Toshiba) are shipping networking products that incorporate the Company's network processors. MMC Networks outsources all of its semiconductor manufacturing, allowing the Company to focus its resources on designing, developing and marketing its network processor products. THE OFFERING Total Common Stock outstanding prior to this offering.................... 24,803,280 shares(1) Common Stock offered................. shares Common Stock to be outstanding after the offering........................ shares Use of proceeds...................... For general corporate purposes including working capital and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............................. MMCN
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------- ----------------- 1994 1995 1996 1996 1997 ------- -------- -------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues.......................... $ 165 $ 577 $ 10,515 $ 4,690 $ 8,201 Total costs and expenses.......... 453 3,257 10,113 4,544 7,845 Operating income (loss)........... (288) (2,680) 402 146 356 Net income (loss)................. (226) (2,576) 702 326 434 Net income per share (2).......... .02 .01 .01 Shares used to compute net income per share (2).................... 29,048 28,822 29,256
AT JUNE 30, 1997 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........ $ 5,562 Total assets............................................. 11,732 Long-term obligations.................................... 447 Total stockholders' equity............................... 8,723
- ------ (1) Based on the number of shares outstanding as of June 30, 1997. Excludes (i) 5,243,601 shares of Common Stock then issuable upon the exercise of options outstanding under the Company's 1993 Stock Option Plan (the "1993 Plan") with a weighted average exercise price of $1.86 per share, (ii) 1,500,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Plan (the "1997 Plan"), (iii) 300,000 shares reserved for issuance under the Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"), (iv) 150,000 shares of Common Stock reserved for issuance under the Company's 1997 Director Option Plan (the "Director Plan"), and (v) 156,963 shares of Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $.64 per share. See "Management-- Benefit Plans," "Description of Capital Stock" and Notes 5, 8 and 9 of Notes to Financial Statements. (2) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in per share calculations. Net income (loss) per share prior to 1996 has not been presented since such amounts are not meaningful. (3) As adjusted to reflect the sale of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." 3 THE COMPANY MMC Networks is a leading developer and supplier of network processors-- high-performance, open-architecture, software-programmable processors optimized for networking applications. The Company's network processors form the core silicon "engines" of LAN and WAN switches and routers and are designed to allow network equipment vendors to rapidly develop high- performance, feature-rich, cost-effective products supporting a broad range of networking functions. MMC Networks' customers employ the Company's network processors to develop and market multi-gigabit, wire-speed switches and routers with advanced features such as layer 3 switching, internetworking LANs and WANs, security, class of service, quality of service and network management. The Company believes that network equipment vendors are able to reduce design and development costs and accelerate product development cycles for high-performance switches and routers by using the Company's products. The dramatic increase in network traffic, the growing size and complexity of private and public networks and the proliferation of diverse networking technologies and protocols have fueled demand for network switching and routing equipment which delivers superior price/performance, multiprotocol connectivity and support for a variety of advanced networking features. While attempting to meet customers' demands for switches and routers with increased performance and advanced features, heightened competition in the networking equipment market is forcing vendors to accelerate time-to-market for new products, reduce costs, differentiate their products and address the needs of an increasingly segmented customer base. The Company works closely with major network equipment vendors to develop network processors which enable vendors to more rapidly design and bring to market a broad variety of advanced, differentiated, high-performance networking solutions. The Company's current products, the PS1000 and ATMS2000 families of network processors, provide the core functionality of high-performance Fast Ethernet and ATM networking equipment, respectively. All of the Company's products are based on the Company's proprietary ViX architecture, which employs a centralized shared-memory structure and point-to-point connections to provide wire-speed routing performance, scalable port densities and cost-effective feature support without significant performance degradation. The Company's core technologies are designed to support multiple tiers of user-defined quality of service in, frame/cell conversion without external segmentation and reassembly ("SAR") chips and rapid data multicasting and broadcasting capabilities. The Company's network processors employ an open architecture which allows network equipment vendors to more easily implement advanced features and differentiate their product offerings. To date, the Company has achieved more than 35 design wins with 27 network equipment vendors, of which eight (Cisco Systems, Inc., Fujitsu Denso, Ltd., Hitachi Computer Products (America), Inc., Ipsilon Networks, Inc., NEC Corporation, Olicom, Inc., Switched Network Technologies, Inc. ("SNT") and Toshiba Corporation) are shipping networking products that incorporate the Company's network processors. The Company markets its products primarily through a direct sales and marketing organization and provides field support and assistance in product design and development to its network equipment vendor customers through its staff of factory systems engineers and product designers and architects. MMC Networks outsources all of its semiconductor manufacturing, allowing the Company to focus its resources on designing, developing and marketing its network processor products. The Company was incorporated in California in September 1992 and intends to reincorporate in Delaware prior to the effectiveness of this offering. The Company's principal executive offices are located at 1134 East Arques Avenue, Sunnyvale, California 94086, and its telephone number is (408) 731-1600. 4 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully before purchasing the Common Stock offered hereby. This Prospectus contains forward- looking statements that involve risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth below and elsewhere in the Prospectus. Limited Operating History; No Assurance of Future Profitability. The Company was incorporated in 1992 and did not begin shipping products in volume until the fourth quarter of 1995. Accordingly, the Company has a limited operating history upon which investors may evaluate the Company and its prospects. The Company had an accumulated deficit of $1.7 million as of June 30, 1997. Although the Company has experienced significant revenue growth in recent periods and first achieved profitability in the first quarter of 1996, these results should not be considered indicative of future revenue growth, if any, nor is there any assurance that the Company will be profitable in any future period. The Company intends to increase its operating expenses significantly during the balance of 1997 and in 1998, particularly in research and development and sales and marketing. Due to the anticipated increases in the Company's operating expenses, the Company's operating results will be adversely affected if the Company's revenues do not increase significantly over the same period. The sales cycle for the Company's products can range from three to six months or more, with an additional nine to 18 months or more before a network equipment vendor customer commences volume production of equipment which incorporates the Company's products. As a result, there may be a significant delay between the Company increasing its research and development and sales and marketing expenses and its generation of higher revenues, if any, from such expenditures. The Company's prospects must be considered in light of the risks, challenges and difficulties frequently encountered by companies in their early stage of development, particularly companies in rapidly evolving markets such as the data networking and semiconductor industries. To address these risks, the Company must, among other things, successfully increase the scope of its operations, respond to competitive developments, continue to attract, retain and motivate qualified personnel and continue to commercialize products incorporating innovative technologies. There can be no assurance that the Company will be successful in addressing these risks and challenges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Fluctuations in Operating Results. Fluctuations in the Company's operating results have occurred in the past and are likely to occur in the future due to a variety of factors, any of which may have a material adverse effect on the Company's operating results. In particular, the Company's quarterly results of operations may vary significantly due to general business conditions in the networking equipment and semiconductor industries, changes in demand for the network equipment products of the Company's customers, the timing and amount of orders from the Company's network equipment vendor customers, cancellations or delays of customer product orders, new product introductions by the Company or its competitors, cancellations, changes or delays of deliveries of products to the Company by its suppliers, increases in the costs of products from the Company's suppliers, fluctuations in product life cycles, price erosion, competition, changes in the mix of products sold by the Company, availability of semiconductor foundry capacity, variances in the timing and amount of nonrecurring engineering funding and operating expenses, seasonal fluctuations in demand, intellectual property disputes and general economic conditions. The Company has at times recognized a substantial portion of its revenues in the last month of a quarter. Since a large portion of the Company's operating expenses, including rent, salaries and capital lease expenses, is fixed and difficult to reduce or modify, if revenue does not meet the Company's expectations, the material adverse effect of any revenue shortfall will be magnified by the fixed nature of these operating expenses. All of the above factors are difficult for the Company to forecast, and these and other factors could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's lengthy sales cycle limits its visibility regarding future financial performance. As a result of all of the foregoing, there can be no assurance that the Company will be able to sustain profitability on a quarterly or an annual basis. Moreover, the Company believes that period-to-period comparisons are not necessarily meaningful and should not be relied upon as indicative of future operating results. The Company's operating results in a future quarter or quarters are likely to fall below the expectations 5 of public market analysts or investors. In such event, the price of the Company's Common Stock will likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence Upon Development of the Market for Network Processors. The Company's future prospects are dependent upon the acceptance of network processors as an alternative to the ASIC components and general purpose processors traditionally utilized by network equipment vendors. The Company's future prospects are also dependent upon acceptance by the Company's customers of third party sourcing for network processors as an alternative to in-house development. Many of the Company's current and potential customers have substantial technological capabilities and financial resources and currently develop internally the ASIC components and program the general purpose processors utilized in their products. These customers may in the future continue to utilize internally developed ASIC components and general purpose processors or may determine to develop or acquire components, technologies or network processors that are similar to, or that may be substituted for, the Company's products. The Company must anticipate market trends and the price, performance and functionality requirements of such network equipment vendors and must successfully develop and manufacture products that meet these requirements. In addition, the Company must make products available to such customers on a timely basis and at competitive prices. If the Company's network equipment vendor customers fail to accept network processors as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase the Company's products, or if the Company is otherwise unable to develop strong relationships with network equipment vendors, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business--MMC Networks' Strategy" and "--Competition." Customer Concentration. The Company's customer base is highly concentrated. A relatively small number of customers has accounted for a significant portion of the Company's revenues to date, and the Company expects that this trend will continue for the foreseeable future. The Company currently has only eight customers which are using the Company's network processors in volume production. In particular, sales to Cisco accounted for approximately 51.0% and 24.4% of sales in 1996 and the first six months of 1997, respectively. In addition, to date, only Hitachi has commenced production of a product incorporating the Company's PS1000 products. Sales to Hitachi accounted for approximately 17.3% of the Company's sales for the first six months of 1997. Each of the Company's network equipment vendor customers, including Cisco and Hitachi, can cease incorporating the Company's products with limited notice to the Company and with little or no penalty. The Company's agreements with network equipment vendor customers do not require minimum purchases. In addition, certain of the Company's network equipment vendor customers offer or may offer network equipment utilizing ASICs, general purpose processors, network processors and other devices (designed by themselves or third parties) that compete with those offered by the Company, or have pre-existing relationships with current or potential competitors of the Company. Pursuant to the Company's agreements with Cisco and certain of its other customers, under certain circumstances, such customers have the right to manufacture the Company's network processors for resale as part of their products or to otherwise use proprietary technology of the Company in their products. The circumstances in which customers have such rights include certain defaults by the Company, a change of control of the Company and certain other events relating to the Company's inability, or potential inability, to supply products to such customers. In any such event, the Company will not necessarily be entitled to royalty payments or fees for use of its technology. The obligation of customers to pay royalties, if any, may be dependent upon the customer's ability to obtain products at a price lower than that previously charged by the Company to the customer. The Company's longstanding relationship with Cisco may inhibit other leading network equipment vendors from adopting the Company's network processors. Cisco faces intense competition from vendors such as Bay Networks, Inc., 3Com Corporation and FORE Systems, Inc. ("FORE"), none of which currently uses the Company's network processors. Accordingly, the Company's future operating results may be substantially dependent on Cisco's competitive position in the networking equipment market. Any reduction or delay in sales of the Company's products by its network equipment vendor customers could have a material 6 adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will retain its current network equipment vendor customers or that it will be able to recruit additional customers. The loss of one or more of the Company's customers or the inability of the Company to successfully develop relationships with additional significant network equipment vendors could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Sales, Marketing and Technical Support." Erosion of Average Selling Prices. The data networking and semiconductor industries have experienced rapid erosion of average selling prices ("ASPs") due to a number of factors, including rapid technological change, price/performance enhancements and product obsolescence. The Company may experience substantial period-to-period fluctuations in future operating results due to ASP erosion. The Company anticipates that ASPs will decrease in the future in response to product introductions by competitors or the Company or other factors, including price pressures from significant customers. In particular, the market for Ethernet switching and routing components has experienced and is expected to continue to experience significant ASP erosion. Therefore, the Company must continue to develop and introduce new products on a timely basis which incorporate features that can be sold at higher ASPs. Failure to achieve any or all of the foregoing could cause the Company's revenues and gross margins to decline, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Lengthy Sales Cycle. The Company sells its products to network equipment vendors. The Company's sales cycle involves test and evaluation of its products by the potential customer, design of the customer's equipment to incorporate the Company's products and the customer's own sales cycle to its customers. The sales cycle for the test and evaluation of the Company's products can range from three to six months or more with an additional nine to 18 months or more before a customer commences volume production of equipment which incorporates the Company's products. Because of such lengthy sales cycle, the Company may experience a delay between increasing expenses for research and development and sales and marketing efforts and the generation of higher revenues, if any, from such expenditures. In addition, the delays inherent in such lengthy sales cycle raise additional risks of customer decisions to cancel or change product plans, which could result in the loss of anticipated sales by the Company. The Company's business, operating results and financial condition could be materially adversely affected if customers curtail, reduce or delay orders during such sales cycle. See "Business--Sales, Marketing and Technical Support." New Product Development and Technological Change. The data networking and semiconductor industries are characterized by rapidly changing technology, frequent product introductions and evolving industry standards. Accordingly, the Company's future performance depends on a number of factors, including its ability to identify emerging technological trends in its target markets, to develop and maintain competitive products, to enhance its products by adding innovative features that differentiate its products from those of competitors, to bring products to market on a timely basis at competitive prices, to properly identify target markets and to respond effectively to new technological changes or new product announcements by others. No assurance can be given that the Company's design and introduction schedules for any additions and enhancements to its existing and future products will be met, that these products will achieve market acceptance, or that the Company will be able to sell these products at ASPs that are favorable to the Company. In evaluating new product decisions, the Company must anticipate well in advance future demand for product features and performance characteristics, as well as available supporting technologies, manufacturing capacity, industry standards and competitive product offerings. The Company must also continue to make significant investments in research and development in order to continually enhance the performance and functionality of its products to keep pace with competitive products and customer demands for improved performance, features and functionality. Technical innovations of the type required for the Company to remain competitive are inherently complex and require long development cycles. Such innovations must be completed before developments in networking technologies or standards render them obsolete and must be sufficiently compelling to induce network equipment vendors to favor them over alternative technologies. Moreover, the Company must generally incur substantial research and development costs before 7 the technical feasibility and commercial viability of a product line can be ascertained. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements or that the Company will be able to secure the financial resources necessary to fund future development. The failure to successfully develop new products on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Research and Development." Dependence on Independent Manufacturers. The Company outsources all of its semiconductor manufacturing, assembly and test. The Company's suppliers currently deliver fully assembled and tested products on a turnkey basis. The semiconductor industry is highly cyclical and, in the past, foundry capacity has been very limited at times and may become limited in the future. Currently, only one of the Company's products is manufactured by more than one supplier. The Company depends on its suppliers to deliver sufficient quantities of finished product to the Company in a timely manner. Since the Company places its orders on a purchase order basis and does not have a long- term volume purchase agreement with any of its existing suppliers, any of these suppliers may allocate, and in the past have allocated, capacity to the production of other products while reducing deliveries to the Company on short notice. The Company has recently experienced delays in obtaining an adequate supply of certain of its products from one supplier, as well as certain problems regarding the quality of the products delivered by that supplier, and as a result has begun obtaining such products from an alternative supplier. There can be no assurance that the Company will not have similar or more protracted problems in the future with existing or new suppliers. In the event of a loss of, or a decision by the Company to change, a key supplier or foundry, qualifying a new supplier or foundry and commencing volume production could involve delay and expense, resulting in lost revenues, reduced operating margins and possible detriment to customer relationships. The Company must place orders approximately 12 to 14 weeks in advance of expected delivery. As a result, the Company has only a limited ability to react to fluctuations in demand for its products, which could cause the Company to have an excess or a shortage of inventory of a particular product. Moreover, any failure of global semiconductor manufacturing capacity to increase in line with demand could cause foundries to allocate available capacity to larger customers or customers with long-term supply contracts. The inability of the Company to obtain adequate foundry capacity at acceptable prices, or any delay or interruption in supply, could reduce the Company's product revenues or increase the Company's cost of revenues and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company continuously evaluates the benefits, on a product-by-product basis, of migrating to a smaller semiconductor geometry process in order to reduce costs, and has commenced migration of certain products to smaller geometries. The Company believes that the transitioning of its products to increasingly smaller geometries will be important for the Company to remain competitive. No assurance can be given that future process migration will be achieved without difficulty. In the future, the Company expects to change its supply arrangements to assume more of the product manufacturing responsibilities. Such changes will include contracting for wafer manufacturing and subcontracting for assembly and test rather than purchasing finished product. The Company has begun investing in design tools, libraries and personnel with the expectation of assuming greater manufacturing responsibilities by mid-1998. The assumption of greater manufacturing responsibilities involves additional risks including not only the risks discussed above, but also risks associated with variances in production yields, obtaining adequate test and assembly capacity at reasonable cost, and other general risks associated with the manufacture of semiconductors. In addition, the Company also expects that it may enter into volume purchase agreements pursuant to which the Company must commit to minimum levels of purchases and which may require up-front investments. The inability of the Company to effectively assume greater manufacturing responsibilities or manage volume purchase arrangements could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Manufacturing." 8 Competition. The data networking and semiconductor industries are intensely competitive and are characterized by constant technological change, rapid rates of product obsolescence and price erosion. The Company's PS1000 and ATMS2000 product families compete with products from companies such as Texas Instruments Incorporated, Lucent Technologies, Inc., PMC-Sierra Inc., Galileo Technology Ltd., Integrated Telecom Technology, Inc. and I-Cube, Inc. In addition, the Company expects significant competition in the future from major domestic and international semiconductor suppliers. The Company also may face competition from suppliers of products based on new or emerging technologies. Moreover, several established electronics and semiconductor suppliers have recently entered or indicated an intent to enter the switching and routing equipment market. In addition, many of the Company's existing and potential customers internally develop ASICs, general purpose processors, network processors and other devices which attempt to perform all or a portion of the functions performed by the Company's products. Many of the Company's current and prospective competitors offer broader product lines and have significantly greater financial, technical, manufacturing and marketing resources than the Company. In particular, companies such as Texas Instruments and Lucent Technologies have proprietary semiconductor manufacturing ability, preferred vendor status with many of the Company's customers, extensive marketing power and name recognition, greater financial resources than the Company, and other significant advantages over the Company. In addition, current and potential competitors may determine, for strategic reasons, to consolidate, lower the prices of their products or bundle their products with other products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. The Company believes that important competitive factors in its market are performance, price, length of development cycle, design wins with major network equipment vendors, support for new data networking standards, features and functionality, adaptability of products to specific applications, support of product differentiation, reliability, technical service and support, and protection of products by effective utilization of intellectual property laws. Failure of the Company to compete successfully as to any of these or other factors could have a material adverse effect on its operating results. The failure of the Company to successfully develop and market products that compete successfully with those of other suppliers in the market would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company must compete for the services of qualified distributors and sales representatives. To the extent that the Company's competitors offer such distributors or sales representatives more favorable terms or a higher volume of business, such distributors or sales representatives may decline to carry, or discontinue carrying, the Company's products. The Company's business, financial condition and results of operations could be adversely affected by any failure to maintain and expand its distribution network. See "Business--Competition." Product Complexity. Products as complex as those offered by the Company frequently contain errors, defects and bugs when first introduced or as new versions are released. The Company has in the past experienced such errors, defects and bugs. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of such products, which could damage the Company's reputation and adversely affect the Company's ability to retain its existing customers and to attract new customers. Moreover, such errors, defects or bugs could cause problems, interruptions, delays or a cessation of sales to the Company's customers. Alleviating such problems may require significant expenditures of capital and resources by the Company. There can be no assurance that, despite testing by the Company, its suppliers or its customers, errors, defects or bugs will not be found in new products after commencement of commercial production, resulting in additional development costs, loss of, or delays in, market acceptance, diversion of technical and other resources from the Company's other development efforts, claims by the Company's customers or others against the Company, or the loss of credibility with the Company's current and prospective customers. Any such event would have a material adverse effect on the Company's business, financial condition and results of operations. 9 Dependence on Growth in Demand for Networking Equipment. The Company's future success is in large measure dependent on continued growth in the market for networking equipment, in particular the market for mid- to high-end switches and routers which are manufactured and sold by the Company's customers. The market for these products has in the past and may in the future fluctuate significantly based upon numerous factors, including the lack of industry standards, adoption of alternative technologies, capital spending levels and general economic conditions. There can be no assurance with respect to the rate or extent to which the networking equipment market will grow, if at all, nor can there be any assurance that the Company will not experience a decline in demand for its products. Any decrease in the growth of the networking equipment market or decline in demand for the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--MMC Networks' Strategy." Order and Shipment Uncertainties. The Company's sales are generally made pursuant to individual purchase orders that may be canceled or deferred by customers on short notice without significant penalty. Cancellation or deferral of product orders could result in the Company holding excess inventory, which could have a material adverse effect on the Company's profit margins and restrict its ability to fund its operations. The Company recognizes revenue upon shipment of products to the customer. Refusal of customers to accept shipped products or delays or difficulties in collecting receivable accounts could result in significant charges against income, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Protection of Intellectual Property. Since its inception, the Company has devoted significant resources to research and development. The Company relies primarily on a combination of nondisclosure agreements and other contractual provisions as well as patent, trademark, trade secret, and copyright law to protect its proprietary rights. Failure of the Company to enforce and protect its intellectual property rights could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that such intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. From time to time, third parties, including competitors of the Company, may assert patent, copyright and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in any such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially adversely affect the Company's business, financial condition and results of operations. In addition, there can be no assurance that competitors of the Company, many of which have substantially greater resources than the Company and have made substantial investments in competing technologies, do not have, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. The Company has received notice from FORE stating that FORE believes that the Company's products infringe two of FORE's patents and offering the Company a license to such patents. The Company has received a legal opinion from Dergosits & Noah, LLP, its patent counsel, to the effect that certain claims made in the FORE patents are invalid, and that, as to the other claims, the Company's products do not infringe. However, there can be no assurance that FORE will not file a lawsuit against the Company or that the Company will prevail in any such litigation. Furthermore, there can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation or interference proceedings to determine the priority of inventions. The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings are both costly and time consuming. Any such suit or proceeding involving the Company could have a material adverse effect on the Company's business, financial condition and results of operations. 10 Dependence on Key Personnel and Hiring of Additional Personnel. The Company's success depends to a significant degree upon the continued contributions of its key management and other personnel, many of whom would be difficult to replace. The Company does not have employment contracts with any of its key personnel and only maintains limited key man life insurance on two of its officers. In addition, the Company believes that its success depends to a significant extent on the ability of its management to operate effectively, both individually and as a group. Several members of the Company's management team have joined the Company in the last 12 months. The Company may experience difficulty in integrating members of its management team. The Company must also attract and retain highly skilled managerial and other personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of the services of any of the key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, companies in the networking industry whose employees accept positions with competitive companies frequently claim that their competitors have engaged in unfair hiring practices. There can be no assurance that the Company will not receive such claims in the future as it seeks to hire qualified personnel or that such claims will not result in material litigation involving the Company. The Company could incur substantial costs in defending itself against any such claims, regardless of their merits. See "Business-- Employees" and "Management--Executive Officers and Directors." Management of Growth. The Company has experienced a period of rapid growth and expansion which has placed, and continues to place, a significant strain on its resources. To accommodate this growth, the Company will be required to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of its accounting and other internal management systems, all of which may require substantial management effort. There can be no assurance that such efforts can be accomplished successfully. In addition, this growth as well as the Company's product development activities have necessitated an increase in the number of the Company's employees, resulting in increased responsibilities for the Company's management. If the Company sustains its growth in the future, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire, train, motivate and manage its expanding employee base. There can be no assurance that the Company's systems, procedures and controls will be adequate to support the Company's operations. Any failure to improve the Company's operational, financial and management information systems, or to hire, train, motivate or manage its employees could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Associated with Expansion of International Business Activities. Substantially all of the Company's sales to date have been to customers located in the United States, including sales to U.S.-based affiliates of non-U.S. network equipment vendors. If the Company's international sales increase, the Company will be subject to additional risks inherent in international operations. All of the Company's international sales to date are U.S. dollar-denominated. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products less competitive in international markets. In addition, the Company procures a portion of its manufacturing, assembly and test services from suppliers located outside the United States. International business activities may be limited or disrupted by the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, currency exchange fluctuations, political instability, trade restrictions and changes in tariffs. Demand for the Company's products could also be adversely affected by seasonality of international sales and economic conditions in the Company's primary overseas markets. These international factors could have a material adverse effect on future sales of the Company's products to international customers and, consequently, on the Company's business, financial condition and results of operations. See "Business--Sales, Marketing and Technical Support" and "--Manufacturing." Need for Additional Capital. The Company may require substantial additional working capital to fund its business, particularly to finance inventories and accounts receivable and for product development. The Company believes that the net proceeds of this offering, together with its existing cash balances and available line of credit 11 and cash flow expected to be generated from future operations, will be sufficient to meet the Company's capital requirements through the next twelve months, although the Company could be required, or could elect, to seek to raise additional capital before such time. The Company's future capital requirements will depend on many factors, including the rate of revenue growth, if any, the timing and extent of spending to support product development efforts and the expansion of sales and marketing efforts, the timing and size of business or technology acquisitions, the timing of introductions of new products and enhancements to existing products, and market acceptance of the Company's products. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms or at all. Any such additional financing may result in significant dilution to the Company's then existing investors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Risks Associated with Potential Acquisitions. As part of its business strategy, the Company expects to review acquisition prospects that would complement its existing product offerings, augment its market coverage or enhance its technological capabilities, or that may otherwise offer growth opportunities. While the Company has no current agreements or negotiations underway with respect to any such acquisitions, the Company may make acquisitions of businesses, products or technologies in the future. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect the Company's operating results and/or the price of the Company's Common Stock. Acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention to other business concerns, risks of entering markets in which the Company has no or limited prior experience and potential loss of key employees of acquired organizations. No assurance can be given as to the ability of the Company to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future, and the failure of the Company to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds." Cyclicality of Semiconductor Industry. The semiconductor industry has historically been characterized by significant downturns and wide fluctuations in supply and demand. From time to time, the industry has also experienced significant fluctuations in anticipation of changes in general economic conditions. This cyclicality has been characterized by significant variances in product demand, production capacity and accelerated erosion of unit ASPs. Industry-wide fluctuations in the future could have a material adverse effect on the Company's business, financial condition and results of operations. Expected Volatility of Stock Price. In recent years the stock market in general, and the market for shares of high technology, data networking and semiconductor companies in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. The trading price of the Company's Common Stock is expected to be subject to extreme fluctuations in response to both business- related issues, such as quarterly variations in operating results, announcements of new products by the Company or its competitors, the gain or loss of significant network equipment vendor customers, and stock market- related influences, such as changes in analysts' estimates, the presence or absence of short-selling of the Company's Common Stock and events affecting other companies that the market deems to be comparable to the Company. In addition, technology stocks have from time to time experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Moreover, the trading prices of many high technology, data networking and semiconductor stocks are at or near their historical highs and reflect price/earning ratios substantially above historical norms. There can be no assurance that the trading price of the Company's Common Stock will not decline below its initial offering price to the public. See "Underwriters." Discretionary Use of Proceeds of this Offering. The Company has no current specific plans for the use of the net proceeds of this offering. The Company's management will retain broad discretion in the allocation of the net proceeds of this offering. There can be no assurance that the proceeds will be utilized in a manner that the stockholders deem optimal or that the proceeds can or will be invested to yield a significant return upon the 12 completion of this offering. Upon completion of this offering, the Company will receive net proceeds of approximately $ million (assuming no exercise of the Underwriters' over-allotment option and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company), substantially all of which will be invested in investment- grade, interest-bearing securities for an indefinite period. See "Use of Proceeds." Effect of Antitakeover Provisions. Certain provisions of the Company's Certificate of Incorporation and Bylaws and of Delaware law could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock. Such provisions may also inhibit increases in the market price of the Common Stock that could result from takeover attempts. The Certificate of Incorporation authorizes 10,000,000 shares of undesignated Preferred Stock. The Board of Directors of the Company, without further stockholder approval, may issue this Preferred Stock with such terms as the Board of Directors may determine, which could have the effect of delaying or preventing a change in control of the Company. The issuance of Preferred Stock could also adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. Such Preferred Stock could be utilized to implement, without stockholder approval, a stockholders' right plan that could be triggered by certain change in control transactions, which could delay or prevent a change in control of the Company or could impede a merger, consolidation, takeover or other business combination involving the Company, or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company. The Company's Bylaws and indemnity agreements provide that the Company will indemnify officers and directors against losses that they may incur in legal proceedings resulting from their service to the Company. In addition, the Company's charter documents provide for a classified Board of Directors and eliminate the right of stockholders to call special meetings of stockholders and to take action by written consent. Moreover, Section 203 of the Delaware General Corporation Law restricts certain business combinations with "interested stockholders" as defined by that statute. The provisions of the Certificate of Incorporation and of Delaware law are intended to encourage potential acquirors to negotiate with the Company and allow the Board the opportunity to consider alternative proposals in the interest of maximizing stockholder value. However, such provisions may also have the effect of discouraging acquisition proposals or delaying or preventing a change in control of the Company, which in turn may have an adverse effect on the market price of the Company's Common Stock. In addition to the foregoing, certain of the Company's customers would have the right to manufacture the Company's network processors for resale as part of their products, or otherwise use the Company's proprietary technology in their products, in the event of a change of control of the Company. Such contract provisions may have the effect of discouraging acquisition proposals. See "Description of Capital Stock." Control by Principal Stockholders. A substantial majority of the Company's capital stock is held by a limited number of stockholders. At the completion of this offering, the Company's officers and directors and parties affiliated or related to such persons will own approximately % of the shares of Common Stock outstanding or issuable upon conversion of convertible securities. Accordingly, such stockholders are likely, for the foreseeable future, to continue to be able to control major decisions of corporate policy and determine the outcome of any major transaction or other matter submitted to the Company's stockholders or Board of Directors, including potential mergers or acquisitions involving the Company, amendments to the Company's Certificate of Incorporation, and the like. Stockholders other than such principal stockholders are therefore likely to have little or no influence on decisions regarding such matters. See "Principal Stockholders." Dilution. Investors participating in this offering will incur immediate and substantial dilution in the net tangible book value of their shares of Common Stock in the amount of approximately $ per share, at an assumed public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. Additional dilution will occur upon the exercise of outstanding stock options. See "Dilution." 13 Shares Eligible for Future Sale. Sales of the Company's Common Stock in the public market after this offering could adversely affect the market price of the Company's Common Stock. Upon completion of this offering, the Company will have approximately shares of Common Stock outstanding, of which approximately shares (approximately if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction or registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are held by affiliates of the Company, as that term is defined in Rule 144 under the Securities Act. The officers and directors and all existing stockholders of the Company have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this offering. However, Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. Holders of 21,118,743 shares of Common Stock will have certain rights with respect to registration of such shares of Common Stock for sale to the public. Sales of Common Stock by existing stockholders in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. In addition, approximately 5,170,795 shares are issuable upon exercise of outstanding options granted under the Company's stock option plans as of the date of this Prospectus. The Company intends to file a registration statement immediately after the closing of this offering to allow resale of such option shares. See "Management--Benefit Plans," "Description of Capital Stock-- Registration Rights" and "Shares Eligible for Future Sale." USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby are estimated to be $ , at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The principal purposes of this offering are to obtain additional capital, to create a public market for the Company's Common Stock, to enhance the Company's ability to use its Common Stock as consideration for acquisitions and as a means of attracting and retaining key employees, and to facilitate future access by the Company to public capital markets. As of the date of this Prospectus, the Company has no specific plans as to the use of the net proceeds of this offering. The Company ultimately expects to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures. A portion of the proceeds may also be used to make strategic acquisitions of complementary businesses, technologies or products. Although the Company evaluates such potential acquisitions from time to time, the Company currently has no understanding, commitment or agreement with respect to any such acquisitions. Pending such uses, the Company intends to invest the net proceeds of this offering in U.S. investment grade, interest-bearing securities. DIVIDEND POLICY Since January 1, 1995, the Company has not declared or paid any cash dividends on its Common Stock. The Company presently intends to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. In addition, the Company's bank line of credit agreement prohibits the payment of dividends without prior consent of the bank. 14 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the sale of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, and the conversion of all outstanding shares of Preferred Stock into 13,341,780 shares of Common Stock. This table should be read in conjunction with the Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
JUNE 30, 1997 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Long-term obligations..................................... $ 447 $ 447 ------- ------ Stockholders' equity: Preferred Stock: no par value, 13,498,737 shares authorized, 13,341,780 issued and outstanding, actual; $.001 par value, 10,000,000 shares authorized, no shares issued and outstanding, as adjusted............. 10,247 -- Common Stock: no par value, 60,000,000 shares authorized, 11,461,500 shares issued and outstanding, actual; $.001 par value, 100,000,000 shares authorized, shares issued and outstanding, as adjusted (1).................................................... 438 Additional paid-in capital.............................. -- Notes receivable from stockholders...................... (295) Accumulated deficit..................................... (1,667) ------- ------ Total stockholders' equity.............................. 8,723 ------- ------ Total capitalization.................................. $ 9,170 $ ======= ======
- -------- (1) Based on the number of shares outstanding as of June 30, 1997. Excludes (i) 5,243,601 shares of Common Stock then issuable upon the exercise of options outstanding under the Company's 1993 Plan with a weighted average exercise price of $1.86 per share, (ii) 1,500,000 shares of Common Stock reserved for issuance under the Company's 1997 Plan, (iii) 300,000 shares reserved for issuance under the Company's 1997 Purchase Plan, (iv) 150,000 shares of Common Stock reserved for issuance under the Company's 1997 Director Plan, and (v) 156,963 shares of Common Stock issuable upon the exercise of outstanding warrants with a weighted average exercise price of $.64 per share. See "Management--Benefit Plans," "Description of Capital Stock" and Note 5, 8 and 9 of Notes to Financial Statements. 15 DILUTION The net tangible book value of the Company as of June 30, 1997, was approximately $8,723,000, or $.35 per share of Common Stock. Net tangible book value per share represents the amount of total tangible assets of the Company reduced by the amount of its total liabilities and divided by the total number of shares of Common Stock outstanding. Without taking into account any other changes in such net tangible book value after June 30, 1997, other than to give effect to the sale by the Company of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of June 30, 1997, would have been $ , or $ per share. This amount represents an immediate increase in such net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share........................ $ Net tangible book value per share as of June 30, 1997................. $ .35 Increase per share attributable to new investors...................... ----- Pro forma net tangible book value per share after the offering......... --- Dilution per share to new investors.................................... $ ===
The following table summarizes, on a pro forma basis as of June 30, 1997, the differences between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share, based upon an assumed initial public offering price of $ per share (before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company) with respect to the shares offered by the Company hereby:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------ --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- --------- ---------- --------- Existing stockholders...... 24,803,280 % $ % $ New investors.............. ---------- ----- --------- ---------- Total.................... 100.0% $ 100.0% ========== ===== ========= ==========
The above computations assume that (i) the Underwriters' over-allotment option is not exercised and (ii) no options or warrants are exercised after June 30, 1997. As of June 30, 1997, there were outstanding options to purchase an aggregate of 5,243,601 shares of Common Stock at a weighted average exercise price of $1.86 per share and warrants, exercisable for 156,963 shares of Common Stock, with a weighted average exercise price of $.64 per share. To the extent the above options and warrants have been or are exercised, there will be further dilution to new investors. See "Management--Benefit Plans," "Description of Capital Stock" and Note 5 of Notes to Financial Statements. 16 SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included elsewhere in this Prospectus. The balance sheet data as of December 31, 1995 and 1996 and the statement of operations data for the years ended December 31, 1994, 1995, and 1996 are derived from the audited financial statements included elsewhere in this Prospectus. The balance sheet data as of December 31, 1992, 1993 and 1994 and the statement of operations data for period from inception to December 31, 1992 and the year ended December 31, 1993 are derived from audited financial statements of the Company not included herein. The balance sheet data as of June 30, 1997 and the statement of operations data for the six-month periods ended June 30, 1996 and 1997 are derived from unaudited financial statements included elsewhere in this Prospectus. In the opinion of management, such unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company and the results of operations for the indicated periods. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the full year.
SIX MONTHS PERIOD FROM ENDED INCEPTION TO YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------------------------ ---------------- 1992 1993 1994 1995 1996 1996 1997 ------------ --------- --------- ---------- ---------- ------- ------- (IN THOUSANDS, EXECEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues................ $ -- $ -- $ 165 $ 577 $ 10,515 $ 4,690 $ 8,201 Cost of revenues........ -- -- 23 304 3,576 1,595 2,535 ----- -------- -------- ---------- ---------- ------- ------- Gross profit............ -- -- 142 273 6,939 3,095 5,666 ----- -------- -------- ---------- ---------- ------- ------- Operating expenses: Research and development, net...... (87) (186) 132 1,802 3,312 1,590 2,751 Selling, general and administrative........ 21 184 298 1,151 3,225 1,359 2,559 ----- -------- -------- ---------- ---------- ------- ------- Total operating expenses.............. (66) (2) 430 2,953 6,537 2,949 5,310 ----- -------- -------- ---------- ---------- ------- ------- Operating income (loss). 66 2 (288) (2,680) 402 146 356 ----- -------- -------- ---------- ---------- ------- ------- Other income (expense): Interest income........ -- 5 64 146 427 253 155 Interest expense....... -- -- (2) (42) (110) (65) (68) ----- -------- -------- ---------- ---------- ------- ------- Total other income..... -- 5 62 104 317 188 87 ----- -------- -------- ---------- ---------- ------- ------- Income (loss) before income taxes........... 66 7 (226) (2,576) 719 334 443 Provision for income taxes.................. -- -- -- -- 17 8 9 ----- -------- -------- ---------- ---------- ------- ------- Net income (loss)...... $ 66 $ 7 $ (226) $ (2,576) $ 702 $ 326 $ 434 ===== ======== ======== ========== ========== ======= ======= Net income per share(1). $ .02 $ .01 $ .01 ========== ======= ======= Shares used to compute net income per share(1)............... 29,048 28,822 29,256 ========== ======= =======
DECEMBER 31, JUNE 30, ------------------------------- --------------- 1992 1993 1994 1995 1996 1996 1997 ---- ---- ------ ------ ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........ $ 27 $ 23 $2,920 $8,102 $ 6,318 $ 7,036 $ 5,562 Working capital................ 68 19 2,777 7,177 7,113 7,287 6,851 Total assets................... 75 33 3,322 9,527 10,676 10,333 11,732 Long-term obligations.......... -- -- 100 301 636 740 447 Total stockholders' equity..... 68 19 2,830 7,446 8,177 7,788 8,723
- -------- (1) For an explanation of the number of shares used to compute net income per share, see Note 2 of Notes to Financial Statements. Net income (loss) per share prior to 1996 has not been presented since such amounts are not meaningful. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those discussed in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW MMC Networks is a leading developer and supplier of network processors-- high-performance, open-architecture, software-programmable processors optimized for networking applications. From its inception in September 1992 through late 1995, the Company was engaged principally in research and development, and a substantial portion of the Company's operating expenses during such period was related to such research and development activities. The Company commenced volume shipments of its ATMS2000 products in late 1995 and of its PS1000 products in 1996. The Company's operating results to date in 1997 reflect increased market acceptance and sales of the Company's products. The Company recognizes revenue at the time of product shipment to its customers. Product returns and sales allowances, which have not been significant through June 30, 1997, are estimated and provided for at the time of sale. Substantially all of the Company's revenues have been derived from sales of its ATMS2000 and PS1000 product families to a small number of customers. Sales to the Company's three largest customers in 1996 and for the six months ended June 30, 1997 accounted for 76.0% and 63.8% of total revenues, respectively. The Company expects that significant customer concentration will continue for the foreseeable future. As a result, the Company's business, financial condition and operating results may be materially adversely affected by any cancellation, delay or deferral of orders by any of its significant customers. See "Risk Factors--Customer Concentration" and "Business--Products" and "-- Customers." The Company markets and sells its products primarily through a direct sales and marketing organization. Substantially all of the Company's sales to date have been to customers located in the United States, including sales to U.S.- based affiliates of non-U.S. network equipment vendors. The Company has sales representatives in the United States, Canada, Israel, Japan, Taiwan and the United Kingdom. The Company has been profitable for the last six quarters. As of June 30, 1997, the Company had an accumulated deficit of $1.7 million. Although the Company has experienced revenue growth in recent periods and first achieved profitability in the first quarter of 1996, these results should not be considered indicative of future revenue growth, if any, nor is there any assurance that the Company will be profitable in any future period. See "Risk Factors--Limited Operating History; No Assurance of Future Profitability" and "--Fluctuations in Operating Results." As described above, in the period from 1992 to late 1995, the Company was primarily engaged in initial research and development. In late 1995, the Company began commercial sales of its products and focused on adding features and functionality to such products. Because of the Company's significantly different levels of operations during 1994, 1995 and 1996, year-to-year comparisons may be less meaningful than comparisons of recent quarterly results. The following discussion summarizes the Company's quarterly results of operations in 1996 and in the first six months of 1997. 18 RESULTS OF OPERATIONS QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain statement of operations data for each quarter of 1996 and for the first two quarters of 1997, as well as such data expressed as a percentage of the Company's revenues for each quarter. This information has been presented on the same basis as the audited Financial Statements appearing elsewhere in this Prospectus and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary to present fairly the unaudited quarterly results. This information should be read in conjunction with the Company's audited Financial Statements and notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of results for any future period. See "Risk Factors-- Fluctuations in Operating Results."
QUARTER ENDED ------------------------------------------------------ MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1996 1996 1996 1996 1997 1997 -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Revenues................ $2,162 $2,528 $2,336 $3,489 $3,421 $4,780 Cost of revenues........ 903 692 845 1,136 1,118 1,417 ------ ------ ------ ------ ------ ------ Gross profit............ 1,259 1,836 1,491 2,353 2,303 3,363 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development, net...... 600 990 577 1,145 1,096 1,655 Selling, general and administrative........ 605 754 833 1,033 1,062 1,497 ------ ------ ------ ------ ------ ------ Total operating expenses............. 1,205 1,744 1,410 2,178 2,158 3,152 ------ ------ ------ ------ ------ ------ Operating income........ 54 92 81 175 145 211 Interest income, net.... 113 75 61 68 45 42 ------ ------ ------ ------ ------ ------ Income before income taxes.................. 167 167 142 243 190 253 Provision for income taxes.................. 4 4 3 6 4 5 ------ ------ ------ ------ ------ ------ Net income.............. $ 163 $ 163 $ 139 $ 237 $ 186 $ 248 ====== ====== ====== ====== ====== ====== AS A PERCENTAGE OF REVE- NUES: Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........ 41.8 27.4 36.2 32.6 32.7 29.6 ------ ------ ------ ------ ------ ------ Gross profit............ 58.2 72.6 63.8 67.4 67.3 70.4 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development, net...... 27.7 39.2 24.6 32.8 32.1 34.7 Selling, general and administrative........ 28.0 29.8 35.7 29.6 31.0 31.3 ------ ------ ------ ------ ------ ------ Total operating expenses............. 55.7 69.0 60.3 62.4 63.1 66.0 ------ ------ ------ ------ ------ ------ Operating income........ 2.5 3.6 3.5 5.0 4.2 4.4 Interest income, net.... 5.2 3.0 2.6 2.0 1.4 .9 ------ ------ ------ ------ ------ ------ Income before income taxes.................. 7.7 6.6 6.1 7.0 5.6 5.3 Provision for income taxes.................. .2 .2 .1 .2 .1 .1 ------ ------ ------ ------ ------ ------ Net income.............. 7.5% 6.4% 6.0% 6.8% 5.4% 5.2% ====== ====== ====== ====== ====== ======
19 Revenues. Substantially all product revenues to date have been derived from sales of the Company's ATMS2000 and PS1000 product families to network equipment vendors. During 1996, several of the Company's customers began shipping production volumes of networking systems which incorporate the Company's ATMS- 2000 products. Starting in the second quarter of 1996, the Company introduced and began shipping its PS1000 products. During the second quarter of 1996, revenues increased to $2.5 million from $2.2 million for the first quarter of 1996 due primarily to a substantial increase in shipments of the Company's ATMS2000 product family and to higher sales of reference design kits. The decline in revenue in the third quarter of 1996 to $2.3 million reflected reduced shipments of ATMS2000 products. The growth in revenues in the fourth quarter of 1996 and the second quarter of 1997 reflected increased sales of both the ATMS2000 and PS1000 product families to new and existing customers. Cost of Revenues; Gross Profit. Cost of revenues consists principally of the cost of purchased packaged semiconductor products from outside manufacturers and warranty costs. Gross margin in the first quarter of 1996 was 58.2%, primarily as a result of significant start-up production costs. Gross margin improved to 72.6% in the second quarter of 1996, due in part to a substantial increase in shipments of ATMS2000 products and increased shipments of reference design kits, which typically have a higher gross margin than finished products. The decline in gross margin to 63.8% in the third quarter of 1996 reflected a shift in product mix. The increases in gross margin in the fourth quarter of 1996 and the first and second quarters of 1997 to 67.4%, 67.3% and 70.4%, reflected lower per unit prices paid to the Company's contract manufacturers and increased sales of higher margin products. Research and Development Expenses, Net. Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities as well as related subcontracting costs. These costs are reduced by non-recurring engineering ("NRE") funding provided by the Company's customers to facilitate acceleration of certain product development projects. Research and development expenditures prior to applying NRE funding have increased in absolute dollars in each quarter, reflecting the addition of research and development personnel and associated costs. Net research and development expenses have varied from quarter to quarter depending in part on the amount of NRE funding earned by the Company in a particular quarter. Research and development expenses increased as a percentage of revenues in the second quarter of 1996 due to unusually high contract engineering and pre-production charges associated with the launch of PS1000 products. During the third quarter of 1996, the Company earned higher than typical NRE funding, which commensurately reduced research and development expenses in that quarter. The Company anticipates that research and development expenses will continue to increase in absolute dollars as the Company continues to increase the number of research and development personnel and incurs pre-production charges associated with new products. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist mainly of employee-related expenses, commissions to sales representatives and trade exhibition and facilities expenses. During the first three quarters of 1996, selling, general and administrative expenses increased in absolute dollars and as a percentage of revenues due primarily to increased commissions on higher sales, increased product marketing costs associated with the introduction of new products, the establishment of a sales office in Boston, and additional personnel. In the third quarter of 1996, selling, general and administrative expenses increased to 35.7% of revenues, due in part to the Company's move to new facilities with higher rent. In the second quarter of 1997, selling, general and administrative expenses increased to $1.5 million from $1.1 million in the first quarter of 1997, due primarily to the hiring of additional sales and marketing personnel. The Company anticipates that selling, general and administrative expenses will continue to increase in absolute dollars due to increased sales activity as well as costs associated with being a publicly held company. Fluctuations in the Company's operating results have occurred in the past and are likely to occur in the future due to a variety of factors, any of which may have a material adverse effect on the Company's operating results. In particular, the Company's quarterly results of operations may vary significantly due to general business conditions in the networking equipment and semiconductor industries, changes in demand for the networking 20 equipment products of the Company's customers, the timing and amount of orders from the Company's network equipment vendor customers, cancellations or delays of customer product orders, new product introductions by the Company or its competitors, cancellations, changes or delays of deliveries of products to the Company by its suppliers, increases in the costs of products from the Company's suppliers, fluctuations in product life cycles, price erosion, competition, changes in the mix of products sold by the Company, availability of semiconductor foundry capacity, variances in the timing and amount of nonrecurring engineering funding and operating expenses, seasonal fluctuations in demand, intellectual property disputes and general economic conditions. The Company has at times recognized a substantial portion of its revenues in the last month of a quarter. Since a large portion of the Company's operating expenses, including rent, salaries and capital lease expenses, is fixed and difficult to reduce or modify, if revenue does not meet the Company's expectations, the material adverse effect of any revenue shortfall will be magnified by the fixed nature of these operating expenses. All of the above factors are difficult for the Company to forecast, and these and other factors could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's lengthy sales cycle limits its visibility regarding future financial performance. As a result of all of the foregoing, there can be no assurance that the Company will be able to sustain profitability on a quarterly or an annual basis. Moreover, the Company believes that period-to-period comparisons are not necessarily meaningful and should not be relied upon as indicative of future operating results. The Company's operating results in a future quarter or quarters are likely to fall below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock will likely be materially adversely affected. SIX MONTHS ENDED JUNE 30, 1996 AND 1997 Revenues. Revenues increased from $4.7 million for the six months ended June 30, 1996 to $8.2 million in the six months ended June 30, 1997. This increase in revenues reflected the increased acceptance of the Company's ATMS2000 and PS1000 families of network processors by new and existing customers. Cost of Revenues; Gross Profit. Cost of revenues increased from $1.6 million for the six months ended June 30, 1996 to $2.5 million for the six months ended June 30, 1997 reflecting increased sales of the Company's network processors to new and existing customers, including volume shipments of the Company's new PS1000 product family. Gross margin increased from 66.0% for the six months ended June 30, 1996 to 69.1% for the six months ended June 30, 1997. Gross margin was lower in the first six months of 1996 as a result of higher costs associated with the commencement of volume production during this period. Research and Development Expenses, Net. Net research and development expenses increased from $1.6 million for the six months ended June 30, 1996 to $2.8 million for the six months ended June 30, 1997 due to the addition of research and development personnel and associated costs. As a percentage of total revenues, research and development expenses were 33.9% and 33.5% for the six months ended June 30, 1996 and 1997, respectively, reflecting the Company's continuing investments in research and new product development. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $1.4 million for the six months ended June 30, 1996 to $2.6 million for the six months ended June 30, 1997 due primarily to increased sales commissions on higher sales, increased product marketing costs associated with new products, additional personnel, higher costs associated with the Company's new facility and the establishment of a sales office in Boston. Interest Income. Interest income reflects interest earned on average cash, cash equivalents and short-term investment balances. Interest income was $253,000 and $155,000 for the six months ended June 30, 1996 and 1997, respectively, reflecting a decrease in cash balances and investments from period to period. Interest Expense. Interest expense reflects interest on borrowings against lease lines to finance the acquisition of capital equipment. Interest expense was $65,000 and $68,000 for the six months ended June 30, 1996 and 1997, respectively. 21 Provision for Income Taxes. Due to the utilization of net operating loss carryforwards, the provision for income taxes in the first six months of 1996 and 1997 consisted solely of federal and state alternative minimum taxes. YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 Revenues. Revenues for 1994, 1995 and 1996 were $165,000, $577,000 and $10,515,000, respectively. The Company commenced sales of its network processors in late 1995 and substantially increased shipments to its customers in 1996. Cost of Revenues; Gross Profit. Cost of revenues was $23,000, $304,000 and $3.6 million in 1994, 1995 and 1996, respectively, reflecting increased sales in these periods. Gross margin was 86.1%, 47.3% and 66.0% for 1994, 1995 and 1996, respectively. In 1994, revenues were primarily attributable to sales of reference design kits. In 1995, the Company commenced shipments of its first ATMS2000 products, and cost of revenues reflected start-up manufacturing costs. In 1996, increased gross margin reflected increased production volumes resulting in lower unit prices paid to the Company's contract manufacturers. Research and Development Expenses, Net. Net research and development expenses were $132,000, $1.8 million and $3.3 million in 1994, 1995 and 1996, respectively. Research and development expenses as a percentage of revenues were 80.0%, 312.3% and 31.5% in 1994, 1995 and 1996, respectively. The increases in research and development expenses in absolute dollars primarily reflected the addition of personnel and related costs during these periods. The decrease in research and development expenses as a percentage of revenues in 1996 reflected the substantial increase in product shipments in 1996. Selling, General and Administrative. Selling, general and administrative expenses were $298,000, $1.2 million and $3.2 million in 1994, 1995 and 1996, respectively. These increases in absolute dollars were primarily due to increased commissions on higher sales, increased product marketing costs associated with new products, additional personnel, costs associated with the Company's new facility commencing in September 1996 and the establishment of a sales office in Boston. Selling, general and administrative expenses as a percentage of total revenues were 180.6%, 199.5% and 30.7% in 1994, 1995 and 1996, respectively. The decrease in selling, general and administrative expenses as a percentage of revenues in 1996 reflected the substantial increase in product shipments in 1996. Interest Income. Interest income totaled $64,000, $146,000 and $427,000 in 1994, 1995 and 1996, respectively. The increases reflect interest earned on higher balances of cash, cash equivalents and short-term investments resulting from sales of Preferred Stock in July 1994 and November 1995. Interest Expense. Interest expense totaled $2,000, $42,000 and $110,000 in 1994, 1995 and 1996, respectively. The increase in interest expense resulted from increased borrowing against established lease lines to finance the acquisition of additional capital equipment. Provision for Income Taxes. The provision for income taxes of $17,000 in 1996 represents federal and state alternative minimum taxes. No current provisions for income taxes were recorded in 1994 or 1995 as the Company incurred net operating losses for income tax purposes from July 12, 1994, the date on which the Company elected to be taxed as a Subchapter C corporation, through December 31, 1995. In addition, no deferred benefit for income taxes was recorded in 1994 or 1995 as the Company was in a net deferred tax asset position for which a full valuation allowance was provided. At December 31, 1996, the Company had federal and state net operating loss carryforwards of approximately $2.0 million and $700,000, respectively. The federal net operating loss carryforwards expire in 2010. The state net operating loss carryforwards expire in 2000. As of December 31, 1996, the Company also had research and development credit carryforwards for federal and state tax purposes of approximately $169,000 and $145,000, respectively. The federal research and development credit carryforwards expire beginning in 2009 through 2011. The state research and development credit carryforwards expire beginning in 1999 through 2001. 22 Under the Tax Reform Act of 1986, the amount of net operating losses that can be utilized may be limited in certain circumstances including, but not limited to, a cumulative stock ownership change of more than 50% over a three- year period. See Note 4 of Notes to Financial Statements. LIQUIDITY AND CAPITAL RESOURCES From inception, the Company has financed its operations and capital requirements primarily through sales of Preferred Stock. At June 30, 1997, the Company had $5.6 million in cash, cash equivalents and short-term investments, a decrease of $756,000 from December 31, 1996. This decrease was primarily attributable to an increase in accounts receivable resulting from increased sales. As of June 30, 1997, the Company had an accumulated deficit of $1.7 million. In April 1997 the Company entered into a $5.0 million revolving bank credit facility, which bears interest at the bank's prime rate, and a $3.0 million bank lease line, which bears interest at the bank's prime rate plus .5%. Both facilities expire in April 1998. At June 30, 1997, the Company had not made any borrowings under either facility. As of such date, however, the Company had $832,000 in borrowings under two prior lease facilities. See Notes 8 and 9 of Notes to Financial Statements. Through June 30, 1997, the Company had acquired approximately $3.2 million in capital assets. The Company intends to purchase approximately $3.0 million of additional capital assets during the remainder of 1997, but currently has no other significant commitments to acquire capital equipment. The Company uses a number of independent suppliers to manufacture substantially all of its products. As a result, the Company relies on these suppliers to allocate to the Company a sufficient portion of foundry capacity to meet the Company's needs and deliver sufficient quantities of the Company's products on a timely basis. See "Risk Factors--Dependence on Independent Manufacturers." These arrangements allow the Company to avoid utilizing its capital resources for manufacturing facilities and work-in-process inventory and focus substantially all of its resources on the design, development and marketing of its products. Net cash provided by (used in) financing activities was $3.0 million, $7.1 million, ($252,000) and ($110,000) in 1994, 1995, 1996 and the first six months of 1997, respectively, resulting primarily from the issuance of $3.1 million of Preferred Stock in 1994 and $7.2 million of Preferred Stock in 1995, and the repayment of principal on capital lease obligations in 1996 and the first six months of 1997, respectively. The Company requires substantial working capital to fund its business, particularly to finance accounts receivable and inventory, and for investments in property and equipment. The Company's need to raise capital in the future will depend on many factors, including the rate of sales growth, market acceptance of the Company's existing and new products, the amount and timing of research and development expenditures, the timing and size of acquisitions of businesses or technologies, the timing of the introduction of new products and the expansion of sales and marketing efforts. There can be no assurance that additional equity or debt financing, if required, will be available on terms satisfactory to the Company, if at all. See "Risk Factors--Need for Additional Capital." The Company believes the net proceeds of this offering combined with its existing capital resources and cash generated from operations, if any, will be sufficient to meet the Company's needs for at least the next 12 months, although the Company could seek to raise additional capital during that period. 23 BUSINESS MMC Networks is a leading developer and supplier of network processors-- high-performance, open-architecture, software-programmable processors optimized for networking applications. The Company's network processors form the core silicon "engines" of LAN and WAN switches and routers, and are designed to allow network equipment vendors to rapidly develop high- performance, feature-rich, cost-effective products supporting a broad range of networking functions. MMC Networks' customers employ the Company's network processors to develop and market multi-gigabit, wire-speed switches and routers with advanced features such as layer 3 switching, internetworking of LANs and WANs, security, class of service, quality of service and network management. The Company's current products, the PS1000 and ATMS2000 families of network processors, provide the core functionality of high-performance Fast Ethernet and ATM network switches, respectively. The Company believes that network equipment vendors are able to reduce design and development costs and accelerate product development cycles for high-performance routers and switches by using the Company's products. All of the Company's products are based on the Company's proprietary ViX architecture, which enables network equipment vendors to easily and cost-effectively implement high-performance value-added features in their switch and router products. To date, the Company has achieved more than 35 design wins with 27 network equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC, Olicom, SNT and Toshiba) are shipping networking products that incorporate the Company's network processors. MMC Networks outsources all of its semiconductor manufacturing, allowing the Company to focus its resources on designing, developing and marketing its network processor products. INDUSTRY BACKGROUND The proliferation of high-performance personal computers, workstations and servers along with the growing reliance on increasingly data-intensive networked applications has resulted in dramatic growth in traffic over data networks. In addition, as organizations and individuals increasingly rely on intranets and the Internet, networks have been extended to connect branch offices, home offices, mobile users and, more recently, customers and suppliers. The rise in data traffic has been accompanied by substantial growth in the number of protocols employed in LAN and WAN networking, including Ethernet, Token Ring, Fiber-Distributed Data Interface ("FDDI"), WAN serial lines, X.25, Frame Relay and dial-up access. More recently, Fast Ethernet, Gigabit Ethernet, higher-speed Frame Relay and ATM networks are beginning to be deployed. These trends continue to drive demand for high-performance networking equipment that supports internetworking a variety of types of LANs and WANs. As the size and performance requirements of networks have grown, network equipment vendors have increasingly focused on advanced switching and routing devices to enable large-scale, high-performance networks. Known as layer 3 switches, IP switches, high-speed routers or switching routers, these devices are designed to enable a network hierarchy that facilitates the implementation of such networks. In addition to improved performance and multiprotocol connectivity, enterprises and network service providers are increasingly demanding networking equipment that supports a broad variety of advanced features, without compromising performance. For example, as the reach of enterprise data networks has spread to WANs and the Internet, network administrators need security at multiple points in the network. As businesses become more dependent on intranets and the Internet, they are increasingly focused on differentiated classes or priorities of service for certain of their applications and users to make more efficient use of networking resources. Similarly, new applications such as video conferencing, multimedia training and Internet telephony require end-to-end quality of service guaranteed across entire networks. Finally, in order to implement advanced features and functionality across complex, high speed networks, network administrators also need better network management capabilities to help them analyze the traffic flowing through the network, to anticipate traffic growth, and to quickly isolate and solve network problems. While attempting to respond to customer demands for more performance, new capabilities, greater security and better management, network equipment vendors face growing competition, evolving networking standards 24 and increasing market segmentation. Rapid growth in the data networking industry has attracted a multitude of new entrants who are competing with or, in many instances, are being acquired by major network equipment vendors. In order to compete effectively, network equipment vendors must improve their time-to-market and lower their costs while continuing to increase performance and add advanced features and differentiated functionality. At the same time, network equipment vendors must support multiple evolving industry standards and protocols and must address the diverse needs of customers in an increasingly segmented networking market. For example, a small office may require a simple network built with one Ethernet LAN switch, a large corporation may require multiple Fast Ethernet high-speed routers connected to an ATM campus backbone switch, and an Internet service provider may require a dedicated OC-3 or SDH-1 backbone switch with downlinks that support dedicated and dial-up connectivity. In order to address the needs of their increasingly diverse customer base and provide support for a broad array of networking protocols and functionalities without substantially degrading performance, network equipment vendors have employed increasingly capable semiconductor devices in their networking equipment, the most important being those used as the switching or routing "engines." Network equipment vendors have traditionally relied on two general approaches for these semiconductor engines: general purpose processors which are software-programmable or custom-developed ASICs. Each of these approaches has advantages but involves significant trade-offs with respect to performance, feature implementation, time-to-market or cost. Switches and routers utilizing general purpose processors can be brought to market relatively rapidly, can be easily adapted to changes in industry protocols and standards and can be programmed in software to add additional features, but these benefits are usually not achievable without significant performance degradation or unacceptably high unit production cost. Alternatively, switches and routers based on ASICs can be designed to achieve high performance and produced at relatively low unit cost, but the ASIC development cycle is usually too time consuming to permit the development of high-performance ASICs with advanced feature sets while meeting network equipment vendors' time-to- market constraints. In addition, ASICs involve the risk of additional delays associated with multiple iterations that may be required in the ASIC development cycle, provide little flexibility to conform to rapidly evolving standards and protocols and lack the full feature support that would allow them to address multiple segments of the networking market. Consequently, neither approach achieves network equipment vendors' requirements for high performance and advanced features without imposing an unacceptable time-to- market and/or cost burden. MARKET OPPORTUNITY FOR NETWORK PROCESSORS The Company believes that these market trends have created a significant opportunity for network processors--high-performance, open-architecture, software-programmable processors optimized for networking applications. These network processors enable the design and development of switching and routing solutions that incorporate advanced features, operate without significant performance degradation, address evolving standards and multiple market segments through software programmability, and can be produced in a cost- efficient manner and within the time-to-market constraints of the competitive networking equipment market. The Company believes that network processors offer network equipment vendors the ability to reduce the time and expense involved in developing customized chip sets for individual network switching products, while allowing vendors to focus on developing networking systems which are powerful, cost-effective, differentiated and feature-rich to satisfy the needs of their increasingly diverse customer bases. MMC NETWORKS' SOLUTION MMC Networks is a leading developer and supplier of network processors enabling a new generation of high-performance networking equipment. These network processors are designed to allow network equipment vendors to rapidly develop high-performance, feature-rich, cost-effective, scalable LAN and WAN switches and routers targeting the specific needs of distinct customer segments. The Company believes that, by designing-in the Company's network processors, network equipment vendors can simultaneously reduce development costs, accelerate time-to-market and focus on enhancing system differentiation with advanced features and functionality. Using the Company's network processors as building blocks, MMC Networks' customers are 25 offering or designing multi-gigabit, wire-speed switches and routers with enhanced features including internetworking among multiple types of LANs and WANs, security, class of service, quality of service and network management without significant performance degradation. The Company currently offers the PS1000 Fast Ethernet and ATMS2000 ATM families of network processors. All of the Company's products are based on the Company's ViX architecture, which is designed to enable network equipment vendors to construct cost-effective, high-bandwidth, high-port-count, feature- rich, modular and stand-alone switches and routers. The Company's proprietary Per Flow Queuing ("PFQ") technology extends the ViX architecture to support class of service and quality of service for network switches. To date, the Company has achieved more than 35 design wins with 27 network equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC, Olicom, SNT and Toshiba) are shipping networking products that incorporate the Company's network processors. MMC NETWORKS' STRATEGY MMC Networks' strategy is to enable network equipment vendors to rapidly develop and introduce differentiated products by leveraging the high- performance, feature-rich, software-programmable and cost-effective network processors offered by the Company. Key elements of the Company's strategy include: Target High-Growth Markets. MMC Networks' network processors target the rapidly growing enterprise and service provider markets. These markets require high-performance, feature-rich, mid- to high-end LAN and WAN networking equipment solutions. The Company believes that as these markets continue to grow, they will become increasingly specialized. Consequently, network equipment vendors will need to deliver a broader mix of products in order to satisfy increasingly sophisticated and diverse customer performance and feature requirements. The Company focuses on the design and development of network processors that enable network equipment vendors to rapidly design and bring to market a broad variety of differentiated networking solutions meeting the performance and feature requirements of this evolving market. Facilitate Customer Success. Increasing competition and evolving networking standards have exerted and will continue to exert pressure on network equipment vendors to introduce new products rapidly and cost-effectively. MMC Networks' network processors are designed to improve network equipment vendors' time-to- market and lower their development costs by providing them with software programmable processing functionality to enable them to address evolving standards and multiple market segments. The Company works closely with its customers to design network processors that enable performance and functionality compatible with such customers' current and future needs and that complement network equipment vendors' product development efforts. Extend Technology Leadership. MMC Networks has made substantial investments in the technologies that underlie its network processors, with the goal of setting new price/performance benchmarks and enabling the widespread use of sophisticated networking functionality. For example, the Company's ViX architecture, which forms the basis of all of its products, is designed to enable network equipment vendors to implement value-added features without significant performance degradation. MMC Networks is continually developing new technologies for its network processors, such as the Company's next generation network processors which are designed to integrate the processing of data from different protocols. Leverage Fabless Semiconductor Model. MMC Networks seeks to leverage the flexibility of its fabless semiconductor business model to lower technology and production risks, increase profitability and reduce time-to-market. The Company's fabless model allows it to focus on its core network processor design competencies, while minimizing the capital and operating infrastructure requirements. In addition, the Company's reliance on mainstream semiconductor design and manufacturing technologies rather than newer, more expensive manufacturing processes reduces the risks inherent in newer, less proven process technologies. TECHNOLOGY MMC Networks' network processors are high-performance, multi-gigabit, open- architecture, software-programmable processors with instruction sets that have been optimized for processing and switching data, voice 26 and video packets and cells. The Company believes that the key underlying technologies employed in its network processors give it a substantial competitive advantage. The core technologies employed in current products or to be implemented in future products include the Company's ViX architecture, Per-Flow Queuing technology, Direct Replication Engine technology, Virtual SAR technology and Programmable BitStream Processor technology. ViX Architecture. The ViX architecture is a switch fabric architecture that uses a patented point-to-point connection matrix that permits the use of a wide, centralized, shared-memory structure, while separating control information from user data. The ViX architecture's use of "point-to-point connections" is designed to enable network equipment vendors to easily scale the number of ports in their switches and routers, unlike shared-bus architectures that run into clock frequency, bus capacitance and pin count limitations. The use of a "wide, centralized shared-memory structure" enables network equipment vendors to scale the bandwidth and amount of buffer memory, unlike crossbar architectures which become increasingly expensive as bandwidth and buffer requirements increase. The "separation of control information from user data" enables network equipment vendors to more easily implement high- performance processing, queuing, replication and switching functions for networking applications, unlike shared-bus and crossbar architectures, which may require complex processors to coordinate multiple functions across multiple ports and the replication of user data within their buffers. In addition, the ViX architecture is designed as an open architecture, providing external access to the appropriate timing and control signals, which enables network equipment vendors to more easily implement differentiated features and functionality. Per-Flow Queuing Technology. All networking switches and routers must buffer data when networks become congested. Networks that use conventional switches and routers usually buffer data on a linear, first-in-first-out ("FIFO") basis. As data accumulates in the buffer, new data sits "behind" all of the information that previously arrived at the switch/router. High-priority information sent to that switch or router is not distinguished from other data and is therefore "stuck" in the back of the buffer until such other data is sent. MMC Networks' PFQ technology is designed to alleviate the limitations of FIFO queuing by assigning each piece of data to its own unique queue and then scheduling the sending of the data according to software-programmable algorithms developed by the network equipment vendor, thus allowing the switch or router to implement class of service or quality of service functionality. Switches and routers incorporating PFQ technology can be designed to support up to 500,000 queues, providing enough queues for large-scale networks. Direct Replication Engine Technology. When data must be broadcast to all ports on a switch or router or "multicast" to select ports, routers and switches must replicate data packets for each port connection. This process may significantly degrade performance. MMC Networks' Direct Replication Engine technology is designed to provide wire-speed multicast and broadcast capability by leveraging the separation of control information from user data enabled by the ViX architecture. This capability allows the switch or router to store a single copy of the data to be transmitted and replicate it to multiple ports in a single instruction cycle. Virtual SAR Technology. Conventional switches and routers use expensive segmentation and reassembly ("SAR") chips to convert frames to cells and vice versa, thus enabling the internetworking of ATM with Ethernet, frame relay and other packet-based protocols. The Company's Virtual SAR technology, which will be implemented in its next generation of network processors, is expected to provide the ability to convert frames to cells and vice versa, thus eliminating the need for expensive external SAR chips. Programmable BitStream Processor Technology. MMC Networks' Programmable BitStream Processor technology, which will be incorporated in its next generation of network processors, is expected to perform control information processing functionality including real-time parsing, matching and table look- up, as well as bit stream manipulations such as adding, deleting, substituting, appending and pre-pending. This functionality is expected to enable network equipment vendors to build high-performance switches and routers with additional services that address network security, class of service and quality of service, and improve management throughout the network. 27 TARGET MARKETS AND PRODUCTS MMC Networks' products serve two primary markets: the enterprise network market and the service provider market. The Company's Fast Ethernet and ATM products are being designed into networking equipment intended for both of these markets. The following table summarizes the key product and service applications within each of these markets:
ENTERPRISE NETWORK SERVICE PROVIDER SERVICES Campus Backbones WebServer Farms Internet Dial-up Access Power Workgroups WAN Backbones FrameRelay Dedicated Access Wiring Closets Dedicated Distribution ATM xDSL, Cable Data Centers Remote Access Servers Integrated Services Sonet/SDH
The Company's PS1000 and ATMS2000 product families provide the core functionality for Fast Ethernet and ATM switches and routers developed by network equipment vendors targeting both the enterprise network and service provider markets. The Company also offers reference design kits, which assist customers in their technical evaluation of the Company's products. See "-- Technology." The PS1000 Family. The PS1000 network processor family implements the core functionality of a high- performance Fast Ethernet switch, provides extensions for layer 3 routing and is optimized for power workgroup, wiring closet and LAN backbone applications. The PS1000 network processor family enables network equipment vendors to build low-cost, highly-integrated solutions supporting scalable port densities from eight to 128 10-Mbps Ethernet ports, and up to 16 100-Mbps Fast Ethernet ports with the option of one or two ATM uplinks. The flexible PS1000 ViX-based architecture allows a high degree of customer product differentiation in terms of bandwidth segmentation, port type implementations, support for external frame forwarding, prioritization and uplinks. The following table sets forth MMC Networks' PS1000 product family:
DATE OF PRODUCT DESCRIPTION INTRODUCTION PS1001 PSP Packet switch processor which provides the Second quarter central core of the switching operation 1996 PS1002 FEIU Fast Ethernet interface unit comprised of Second quarter four 10/100-Mbps full-duplex Fast Ethernet 1996 MAC ports PS1003 EIU Ethernet interface unit comprised of six Fourth quarter 10-Mbps MAC ports and two 10/100-Mbps MAC 1996 ports PS1004 AIU ATM interface unit that provides an ATM Expected in third uplink for Ethernet switches quarter 1997 PS1005 ARL Address resolution logic device that Third quarter 1996 provides full frame forwarding and filtering logic PS1007 NCB Network component interconnect ("NCI") bus Third quarter 1996 to CPU bridge PS1008 NPB NCI bus to PCI bus bridge Second quarter 1997
A 16-port full-duplex Fast Ethernet switch can be constructed using a set of four PS1001s, four PS1002s, four PS1005s, and either a PS1007 or PS1008. This chip set is priced at approximately $1,125 per set in quantities of 1,000 per year. PS1004 processors may be used to add optional ATM uplinks to the switch. The ATMS2000 Family. The ATMS2000 network processor family provides the core functionality of a high-performance ATM switch and the capabilities for layer 3 routing. The ATMS2000 network processor family is optimized for feature-rich building or campus backbones, power workgroups and WAN access. The ATMS2000 network processor family provides a cost-effective solution for 2.5- or 5-Gbps switches and routers with port densities of up to 32 OC-3 ports or eight OC-12 ports. The flexible ViX-based architecture enables the centralized implementation of value-added features such as PFQ, as well as customer- defined features, without the need to change any of the linecards in the network. 28 The following table sets forth MMC Networks' ATMS2000 product family:
DATE OF PRODUCT DESCRIPTION INTRODUCTION ATMS2001 Memory access buffer which acts as an Second quarter MBUF interface between the ATMS2002 PIF and a 1995 common memory bank ATMS2002 PIF Port interface which interfaces the Second quarter ATMS2000 switch core with ATM Physical 1995 Layer Devices ATMS2003 Switch controller which manages data queues Second quarter SWC1 and provides an interface to the CPU 1995 ATMS2004 Switch controller which manages the reading Second quarter SWC2 and writing of data to various external 1995 data structures and performs pipeline control ATMS2101 Optional feature chip set that monitors and First quarter 1997 XChecker polices cell traffic, providing statistics, usage parameter control and/or packet discard ATMS2110 Optional feature chip set that offloads First quarter 1997 XPort cell reception and transmission from the CPU ATMS2200 Co-processor that implements PFQ Second quarter XStream 1997
A 32-port OC-3 5-Gbps switch or router utilizing the Company's ATMS2000 network processor requires six ATMS2001s, eight ATMS2002s, and one each of the ATMS2003 and ATMS2004. This chip set is priced at approximately $2,000 per set in quantities of 1,000 per year. The ATMS2101, ATMS2110 and ATMS2200 may be used to add additional features to the network processor. Reference Design Kits. To facilitate the adoption by network equipment vendors and speed the design cycle for its network processors, MMC Networks designs and makes available system-level reference design kits. The Company's reference design kits include a reference machine, schematics, layout details, documentation and firmware, including device drivers and diagnostic software. Source code for the reference machines can be licensed from the Company, as can the bus models for those companies who design their own interfaces to the network processors. Products Under Development. The Company expects to continue to enhance and refine its network processors, while adding additional operational features designed to make the Company's products more attractive to a wide range of network equipment vendors. In particular, the Company is developing a new family of network processors based on its ViX architecture, which is designed to implement the Company's new Virtual SAR and Programmable BitStream Processing technologies. CUSTOMERS MMC Networks sells its products to a variety of network equipment vendors. To date, the Company has achieved more than 35 design wins with 27 network equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC, Olicom, SNT and Toshiba) are shipping networking products that incorporate the Company's network processors. To qualify as a design win, a customer must have (i) purchased network processor prototypes, a reference design kit or software drivers from the Company, and (ii) commenced development of a product incorporating the Company's network processors. During the design-in process, the Company works closely with each customer to assist in resolving technical questions and to help the customer achieve volume production of its products. There can be no assurance that any design win will result in a released product by a network equipment vendor. 29 For the six months ended June 30, 1997, sales to Cisco and Hitachi accounted for 24.4% and 17.3% of the Company's total revenues, respectively. For the year ended December 31, 1996, sales to Cisco and Hitachi accounted for 51.0% and 10.3% of total revenues, respectively. In addition, sales to Mitsui Comtek Corp., a distributor which serves Japan, accounted for 22.1% and 14.7% of the Company's total revenues for the six months ended June 30, 1997 and the year ended December 31, 1996, respectively. The Company currently has purchase agreements with Cisco, Olicom and Optical Data Systems, Inc. None of the Company's customer purchase agreements contains a minimum purchase requirement. Customers typically purchase the Company's products pursuant to short-term purchase orders that may be canceled without charge if notice is given within an agreed-upon period. The Company's future success depends 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 will retain its current network equipment vendor customers or that it will be able to recruit additional customers. The loss of one or more of the Company's customers or the inability of the Company to successfully develop relationships with additional significant network equipment vendors could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors-- Customer Concentration." SALES, MARKETING AND TECHNICAL SUPPORT The Company targets customers based on industry leadership, technology leadership and target applications. The Company maintains close working relationships with its customers in order to design and develop solutions which specifically address their needs. The Company markets its products through a direct sales and marketing organization, headquartered in Sunnyvale, California, with a sales office in Boston, and through sales representatives in the United States, Canada, Israel, Japan, Taiwan and the United Kingdom. Sales representatives are selected for their understanding of the networking marketplace and their ability to provide effective field sales support for MMC Networks' products. The Company's relationships with many of its representatives have been established within the last year, and the Company is unable to predict the extent to which some of these representatives will be successful in marketing and selling the Company's products. Sales to U.S. customers account for the substantial majority of MMC Networks' revenues. Although the Company has a number of international customers, substantially all of these customers currently order through, and receive shipments at, their U.S. operations. The Company has a number of marketing programs designed to inform network equipment vendors about the capabilities and benefits of the Company's products. The Company's marketing efforts include participation in industry trade shows, technical conferences and technology seminars, preparation of competitive analyses, sales training, publication of technical and educational articles in industry journals, maintenance of MMC Networks' World Wide Web site, advertising, and direct mail distribution of Company literature. Technical support to customers is provided through factory system engineers and, if necessary, product designers and architects. Local field support is provided in person or by telephone. The Company plans to hire additional support staff for remote offices, as the need arises. The Company believes that providing network equipment vendors with comprehensive product service and support is critical to maintaining a competitive position in the networking market and is critical to shortening customers' design-in cycles. The Company works closely with its customers to monitor the performance of its product designs and to provide support at each stage of customer product development. RESEARCH AND DEVELOPMENT The Company's success will depend to a substantial degree upon its ability to develop and introduce in a timely fashion new products and enhancements to its existing products that meet changing customer requirements and emerging industry standards. MMC Networks has made and plans to continue to make substantial investments in research and development and to participate in the development of industry standards. 30 The Company focuses its development efforts on network processor product development. Before a new product is developed, the Company's research and development engineers work with marketing managers and customers to develop a comprehensive requirements specification. After the product is designed and commercially released, Company engineers continue to work with customers on early design-in efforts to understand requirements for future generations and upgrades. Most of the Company's engineers are involved in algorithm and chip design and verification. In addition, the Company also has a group of software engineers and reference machine designers. The Company's research and development expenditures, net of nonrecurring engineering funding, totaled $2.8 million in the first six months of 1997 and $3.3 million in the year ended December 31, 1996, representing 33.5% and 31.5% of revenues for such periods, respectively. Research and development expenses primarily consist of salaries and related costs of employees engaged in ongoing research, design and development activities and subcontracting costs. These expenses are reduced by non-recurring engineering fees paid by the Company's customers to facilitate product development projects. Currently, there are 39 employees and full-time contractors engaged in research and development. The Company performs its research and product development activities at its headquarters in Sunnyvale, California. The Company is seeking to hire additional skilled development engineers, who are currently in short supply. The Company's business, operating results and financial condition could be adversely affected if it encounters delays in hiring additional engineers. See "Risk Factors--Dependence on Key Personnel and Hiring of Additional Personnel." The Company's future performance depends on a number of factors, including its ability to identify emerging technological trends in its target markets, to develop and maintain competitive products, to enhance its products by adding innovative features that differentiate its products from those of competitors, to bring products to market on a timely basis at competitive prices, to properly identify target markets and to respond effectively to new technological changes or new product announcements by others. No assurance can be given that the Company's design and introduction schedules for any additions and enhancements to its existing and future products will be met, that these products will achieve market acceptance, or that these products will be able to be sold at ASPs that are favorable to the Company. In evaluating new product decisions, the Company must anticipate well in advance the future demand for product features and performance characteristics, as well as available supporting technologies, manufacturing capacity, industry standards and competitive product offerings. The Company must also continue to make significant investments in research and development in order to continually enhance the performance and functionality of its products to keep pace with competitive products and customer demands for improved performance, features and functionality. Technical innovations of the type required for the Company to remain competitive are inherently complex and require long development cycles. Such innovations must be completed before developments in networking technologies or standards render them obsolete and must be sufficiently compelling to induce network equipment vendors to favor them over alternative technologies. Moreover, the Company must generally incur substantial research and development costs before the technical feasibility and commercial viability of a product line can be ascertained. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements or that the Company will be able to secure the financial resources necessary to fund future development. The failure to successfully develop new products on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--New Product Development and Technological Change." MANUFACTURING Currently, the Company outsources all of its semiconductor manufacturing, assembly and test. The Company's suppliers currently deliver fully assembled and tested products on a turnkey basis. This "fabless" semiconductor manufacturing model allows the Company to focus substantially all of its resources on the design, development and marketing of products and significantly reduces the capital requirements of the Company. In 1995 and 1996, MMC Networks subcontracted its semiconductor manufacturing to Oki Semiconductor and NEC in Japan and Motorola, Inc. in the United States. In 1997, the Company added TSMC in Taiwan. In 31 1998, it is expected that a growing percentage of the Company's production will be contracted to TSMC and potentially other new suppliers as new products reach volume production. The Company chose these four manufacturers in large part due to their conformance with international standards of technology, their capacity, their quality and their support for the state-of-the-art design tools used by MMC Networks. Only one of the Company's products is currently manufactured by more than one supplier. MMC Networks uses mainstream CMOS processes for the manufacturing of its products instead of depending on leading edge processes in order to help reduce technical risks and production capacity constraints. The Company's main products currently are fabricated in .5 and .8 micron CMOS. The Company continuously evaluates the benefits, on a product-by-product basis, of migrating to a smaller geometry process in order to reduce costs, and has commenced migration of certain products to smaller geometries. The Company believes that transitioning its products to increasingly smaller geometries will be important for the Company to remain competitive. No assurance can be given that future process migration will be achieved without difficulty. Since the Company places its orders on a purchase order basis and does not have a long term volume purchase agreement with any of its existing suppliers, any of these suppliers may allocate, and in the past have allocated, capacity to the production of other products while reducing deliveries to the Company on short notice. The Company has recently experienced delays in obtaining an adequate supply of certain of its products from one supplier, as well as certain problems regarding the quality of the products delivered by that supplier, and as a result has begun obtaining such products from an alternative supplier. There can be no assurance that the Company will not have similar or more protracted problems in the future with existing or new suppliers. In the event of a loss of, or a decision by the Company to change, a key supplier or foundry, qualifying a new supplier or foundry and commencing volume production could involve delay and expense, resulting in lost revenues, reduced operating margins and possible detriment to customer relationships. The Company must place orders approximately 12 to 14 weeks in advance of expected delivery. As a result, the Company has only a limited ability to react to fluctuations in demand for its products, which could cause the Company to have an excess or a shortage of inventory of a particular product. Moreover, any failure of global semiconductor manufacturing capacity to increase in line with demand could cause foundries to allocate available capacity to larger customers or customers with long-term supply contracts. The inability of the Company to obtain adequate foundry capacity at acceptable prices, or any delay or interruption in supply, could reduce the Company's product revenues or increase the Company's cost of revenues and could have a material adverse effect on the Company's business, financial condition and results of operations. In the future, the Company expects to change its supply arrangements to assume more of the product manufacturing responsibilities. Such changes will include contracting for wafer manufacturing and subcontracting for assembly and test rather than purchasing finished product. The Company has begun investing in design tools, libraries and personnel with the expectation of assuming greater manufacturing responsibilities by mid 1998. The assumption of greater manufacturing responsibilities involves additional risks including not only the risks discussed above, but also risks associated with variances in production yields, obtaining adequate test and assembly capacity at reasonable cost, and other general risks associated with the manufacture of semiconductors. In addition, the Company also expects that it may enter into volume purchase agreements pursuant to which the Company must commit to minimum levels of purchases and which may require up front investments. The inability of the Company to effectively transition to greater manufacturing responsibilities or manage volume purchase arrangements could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Dependence on Independent Manufacturers." COMPETITION The data networking and semiconductor industries are intensely competitive and are characterized by constant technological change, rapid rates of product obsolescence and price erosion. The Company's PS1000 and ATMS2000 product families compete with products from companies such as Texas Instruments, Lucent Technologies, PMC-Sierra, Galileo Technology, Integrated Telecom and I- Cube. In addition, the Company 32 expects significant competition in the future from major domestic and international semiconductor suppliers. The Company also may face competition from suppliers of products based on new or emerging technologies. Moreover, several established electronics and semiconductor suppliers have recently entered or indicated an intent to enter the switching and routing equipment market. In addition, many of the Company's existing and potential customers internally develop ASICs, general purpose processors, network processors and other devices which attempt to perform all or a portion of the functions performed by the Company's products. Many of the Company's current and prospective competitors offer broader product lines and have significantly greater financial, technical, manufacturing and marketing resources than the Company. In particular, companies such as Texas Instruments and Lucent Technologies have proprietary semiconductor manufacturing ability, preferred vendor status with many of the Company's customers, extensive marketing power and name recognition, greater financial resources than the Company, and other significant advantages over the Company. In addition, current and potential competitors may determine, for strategic reasons, to consolidate, lower the prices of their products substantially or to bundle their products with other products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. The Company believes that important competitive factors in its market are performance, price, length of development cycle, design wins with major network equipment vendors, support for new data networking standards, features and functionality, adaptability of products to specific applications, support of product differentiation, reliability, technical service and support, and protection of products by effective utilization of intellectual property laws. Failure of the Company to compete successfully as to any of these or other factors could have a material adverse effect on its operating results. The failure of the Company to successfully develop and market products that compete successfully with those of other suppliers in the market would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company must compete for the services of qualified distributors and sales representatives. To the extent that the Company's competitors offer such distributors or sales representatives more favorable terms or a higher volume of business, such distributors or sales representatives may decline to carry, or discontinue carrying, the Company's products. The Company's business, financial condition and results of operations could be adversely affected by any failure to maintain and expand its distribution network. See "Risk Factors--Competition." INTELLECTUAL PROPERTY The Company's future success and ability to compete are dependent, in part, upon its proprietary technology. The Company has been granted one patent in the United States, the claims of which cover certain aspects of its ViX architecture, and has received notice of allowance of one additional patent. In addition, the Company has filed 21 other patent applications, 11 in the United States and ten outside the United States, relating to other aspects of systems employing the ViX architecture. There can be no assurance that any patents will issue pursuant to the Company's current or future patent applications or that patents issued pursuant to such applications will not be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that the rights granted under any such patents will provide competitive advantages to the Company or be adequate to safeguard and maintain the Company's proprietary rights. In addition, the Company claims copyright protection for certain proprietary software and documentation. The Company also attempts to protect its trade secrets and other proprietary information through agreements with its customers, suppliers, employees and consultants, and through other security measures. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. In addition, the laws of certain countries in which the Company's products are or may be manufactured or sold, including Japan and Taiwan, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. While the Company's ability to compete may be affected by its ability to protect its intellectual property, the Company believes that, because of the rapid pace of technological change in the networking industry, its 33 technical expertise and ability to introduce new products on a timely basis will be more important in maintaining its competitive position than protection of its intellectual property and that patent, trade secret and copyright protection are important but must be supported by expanding the knowledge, ability and experience of the Company's personnel and introducing and enhancing products. Although the Company continues to implement protective measures and intends to defend vigorously its intellectual property rights, there can be no assurance that these measures will be successful. Many participants in the semiconductor and networking industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties, including competitors of the Company, may assert patent, copyright and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in any such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially adversely affect the Company's business, financial condition and results of operations. In addition, there can be no assurance that competitors of the Company, many of which have substantially greater resources than the Company and have made substantial investments in competing technologies, do not have, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. The Company has received notice from FORE stating that FORE believes that the Company's products infringe two of FORE's patents and offering the Company a license to such patents. The Company has received a legal opinion from Dergosits & Noah, LLP, its patent counsel, to the effect that certain claims made in the FORE patents are invalid, and that as to the other claims, the Company's products do not infringe. However, there can be no assurance that FORE will not file a lawsuit against the Company or that the Company will prevail in any such litigation. Furthermore, there can be no assurance that the Company will not in the future become subject to patent infringement claims and litigation or interference proceedings to determine the priority of inventions. The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings are both costly and time consuming. Any such suit or proceeding involving the Company could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Protection of Intellectual Property." EMPLOYEES As of July 31, 1997, the Company had a total of 69 full-time employees and nine full-time contractors. Of the total number of employees, 39 were in research and development, 14 in marketing and technical support, seven in sales, and 18 in operations and administration. The Company's employees are not represented by any collective bargaining agreement, and the Company has never experienced a work stoppage. The Company believes its employee relations are good. The Company's future success is heavily dependent upon its ability to hire and retain qualified technical, marketing and management personnel. The competition for such personnel is intense, particularly for engineering personnel with related networking and integrated circuit design expertise and for technical support personnel with networking engineering expertise. FACILITIES The Company's main executive, administrative and technical offices occupy approximately 35,000 square feet in Sunnyvale, California, under a lease that expires in March 1999. Of the 35,000 square feet, approximately 8,000 square feet is occupied by another company under a sublease that expires in January 1998. The Company believes that its existing facilities are adequate to meet its requirements through 1998. The Company leases its Boston area office on a month-to-month basis. 34 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company as of June 30, 1997.
NAME AGE POSITION - ---- --- -------- Prabhat K. Dubey................ 46 President, Chief Executive Officer and Director Amos Wilnai..................... 57 Chairman of the Board and Executive Vice President, Business Development Sena C. Reddy................... 49 Executive Vice President, Operations William R. Walker............... 55 Vice President, Chief Financial Officer and Secretary Alexander Joffe................. 40 Vice President, Engineering Brent R. Bilger................. 39 Vice President, Marketing John A. Teegen.................. 38 Vice President, Sales John G. Adler (1)............... 60 Director Irwin Federman (2).............. 61 Director Andrew S. Rappaport (2)......... 39 Director Geoffrey Y. Yang (1)............ 38 Director
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. PRABHAT K. DUBEY has served as the Company's President and Chief Executive Officer, and as a director, since he joined the Company in October 1994. From March 1994 to August 1994, Mr. Dubey was the Chief Operating Officer of Wireless Access, Inc., a supplier of communications devices and chip sets. From August 1989 to March 1994, he served as Vice President and General Manager of the Wireless & Messaging DSP IC Group at Lucent Technologies, a communications products company and former subsidiary of AT&T Corporation. Mr. Dubey holds a Ph.D. in Physics from the Indian Institute of Technology and an M.B.A. from the University of Western Ontario. AMOS WILNAI has served as the Chairman of the Board of Directors since he founded the Company in September 1992. Since September 1994, Mr. Wilnai has also served as the Company's Executive Vice President of Business Development. From September 1992 to October 1994, he was the President of the Company. Mr. Wilnai has a B.S.E.E. degree from the Technion Institute of Technology in Israel and an M.S.E.E. degree from the Polytechnic Institute in Brooklyn. SENA C. REDDY has served as the Company's Executive Vice President of Operations since he joined the Company in January 1997. Prior to joining the Company, Mr. Reddy spent more than 11 years at Cirrus Logic Inc., a semiconductor company, where he served as the Senior Vice President of Operations from April 1994 to January 1997, Vice President of Manufacturing from July 1991 to April 1994, and the Director of Wafer Fabrication and Technology from September 1985 to June 1991. Mr. Reddy holds an M.S.E.E. degree from Oklahoma State University. WILLIAM R. WALKER has served as the Company's Vice President, Chief Financial Officer and Secretary since joining the Company in June 1996. From May 1987 to June 1996, Mr. Walker was with Zilog, Inc., a semiconductor manufacturer, where he served most recently as Senior Vice President and Chief Financial Officer. Mr. Walker received a B.S. degree from the University of Wisconsin and an M.B.A. from the University of Maryland. Mr. Walker is also a Certified Public Accountant. ALEXANDER JOFFE has served as the Company's Vice President of Engineering since July 1994. From March 1993 to July 1994, Mr. Joffe was the Company's Director of Engineering. Prior to joining the Company, 35 Mr. Joffe spent more than eight years with Motorola Semiconductor Products, a semiconductor manufacturing subsidiary of Motorola, Inc., where he served most recently as an engineering manager. Mr. Joffe holds a B.S.E.E. degree from the Technion Institute of Technology in Israel. BRENT R. BILGER has served as the Company's Vice President of Marketing since joining the Company in April 1997. Prior to joining the Company, Mr. Bilger spent more than seven years with Cisco, a network equipment vendor, where he served most recently as the Director of Marketing for service providers. Mr. Bilger also served as the Director of Marketing of high-end routers and ATM products during part of his tenure at Cisco. Mr. Bilger received a B.A. degree from Dartmouth College, a B.E. degree from Thayer School, Dartmouth College, and an M.S.E.E. degree from Cornell University. JOHN A. TEEGEN has served as the Company's Vice President of Sales since joining the Company in January 1997. From August 1994 to January 1997, Mr. Teegen was the Vice President of Worldwide Sales for Intellon Corporation, a semiconductor company. From August 1987 to August 1994, Mr. Teegen was employed by VLSI Technology, Inc., also a semiconductor company, where he served in a variety of sales management positions, most recently as the Vice President of Consumer and Industrial Sales. Mr. Teegen holds a B.S.E.E. degree from the University of Florida. JOHN G. ADLER has served as a director of the Company since March 1997. Mr. Adler has been the Chairman of the Board of Directors of Adaptec, Inc., an electronic equipment manufacturing company, since May 1990. Mr. Adler also served as the President of Adaptec, Inc. from May 1985 to August 1992 and as its Chief Executive Officer from December 1986 to July 1995. Mr. Adler holds a B.S.E.E. degree from University of Mississippi and was a Sloan Executive Fellow at Stanford University in 1971. He also serves on the advisory council of the College of Engineering at San Jose State University and is on the Dean's Advisory Board of the Leavey School of Business and Administration at Santa Clara University. IRWIN FEDERMAN has served as a director of the Company since July 1994. Mr. Federman has been a general partner of U.S. Venture Partners, a venture capital firm, since April 1990. From 1988 to 1990 he was a Managing Director of Dillon Read & Co., an investment banking firm, and a general partner in its venture capital affiliate, Concord Partners. Mr. Federman also serves on the boards of directors of TelCom Semiconductor, Inc., a semiconductor products company, SanDisk Corporation, a semiconductor company, Western Digital Corporation, a disk drive manufacturer, Komag Incorporated, a thin film media manufacturer, NeoMagic Corporation, a developer of multimedia accelerators, Checkpoint Software Technology, Ltd., a network security software company and QuickLogic Corporation, a manufacturer of programmable logic devices. He is on the Dean's Advisory Board of Santa Clara University's Leavey School of Business and Administration. Mr. Federman received a B.S. degree in Accounting from Brooklyn College, is a Certified Public Accountant, and was awarded an honorary Doctorate of Engineering Science from Santa Clara University. ANDREW S. RAPPAPORT has served as a director of the Company since July 1994. Mr. Rappaport has been a partner of August Capital, LLC, a venture capital firm, since July 1996. Prior to that time, Mr. Rappaport was the President of The Technology Research Group, Inc. a Boston-based strategic management consulting firm which he founded in August 1984. He is also a director of Storm Technology, Inc., a photoelectronics manufacturing company. Mr. Rappaport attended Princeton University. GEOFFREY Y. YANG has served as a director of the Company since July 1994. Mr. Yang has been a general partner of Institutional Venture Partners, a venture capital firm, since June 1989. He also serves on the Board of Directors of Excite, Inc., an Internet search engine company. Mr. Yang holds a B.A. in Economics from Princeton University, a B.S.E. in Engineering and Management Systems from Princeton University, as well as an M.B.A. from Stanford University. There are no family relationships among any of the Company's directors or executive officers. 36 The Company's Board of Directors is divided into three classes: Classes I, II and III. The initial term of the Class I directors expires at the Company's annual meeting of stockholders in 1998; the initial term of the Class II directors expires at the Company's annual meeting of stockholders in 1999; and the initial term of the Class III directors expires at the Company's annual meeting of stockholders in 2000. Thereafter, the term of each class of directors will be three years. All directors hold office until the annual meeting of stockholders at which their respective class is subject to reelection and until their successors are duly elected and qualified, or until their earlier resignation or removal. BOARD COMMITTEES Audit Committee. The Audit Committee of the Board of Directors reviews and monitors the corporate financial reporting and the internal and external audits of the Company, including among other things, the Company's internal audit and control functions, the results and scope of the annual audit and other services provided by the Company's independent accountants, and the Company's compliance with legal matters with a significant impact on the Company's financial reports. In addition, the Audit Committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, the Company's independent accountants. The Audit Committee also monitors transactions between the Company and its officers, directors and employees for any potential conflicts of interest. The current members of the Audit Committee are Irwin Federman and Andrew S. Rappaport. Compensation Committee. The Compensation Committee of the Board of Directors reviews and makes recommendations to the Board regarding the Company's compensation policy and all forms of compensation to be provided to executive officers and directors of the Company, including among other things, annual salaries and bonuses, and stock option and other incentive compensation arrangements. In addition, the Compensation Committee reviews bonus and stock compensation arrangements for all other employees of the Company. As part of the foregoing, the Compensation Committee also administers the Company's 1997 Stock Plan and 1997 Employee Stock Purchase Plan. The current members of the Compensation Committee are John G. Adler and Geoffrey Y. Yang. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the Company's fiscal year ended December 31, 1996, the members of the Compensation Committee were John G. Adler and Irwin Federman. No interlocking relationship exists between any member of the Company's Board of Directors or the Compensation Committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. See "Certain Transactions." DIRECTOR COMPENSATION The Company's directors do not receive cash compensation for their services as members of the Board of Directors. Under the Company's 1997 Director Option Plan, however, each of the Company's directors who is not also an employee of the Company is automatically granted an option to purchase (i) 40,000 shares of the Company's Common Stock at a purchase price equal to the fair market value of such shares on the date of grant, upon becoming a director, and (ii) an additional 10,000 shares of the Company's Common Stock at a purchase price equal to the fair market value of such shares on the date of grant, following the announcement of the Company's earnings for the prior fiscal year, provided that such director has served on the Board of Directors for the preceding six months. Such directors do not receive any other compensation for their services as members of the Board of Directors. See "--Benefit Plans--1997 Director Option Plan." 37 EXECUTIVE COMPENSATION The following table sets forth for the fiscal year ended December 31, 1996 (the "Last Fiscal Year") certain information with respect to the compensation of the Company's Chief Executive Officer and each of the two other executive officers of the Company who were serving as executive officers of the Company at the end of the Last Fiscal Year and whose total annual salary and bonus during such fiscal year exceeded $100,000 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL -------------- COMPENSATION SECURITIES ---------------- UNDERLYING NAME AND POSITION SALARY BONUS OPTIONS(#) ----------------- -------- ------- ---------- Prabhat K. Dubey.............................. $165,000 -- -- President and Chief Executive Officer Amos Wilnai................................... 150,000 -- -- Executive Vice President, Business Development Alexander Joffe............................... 140,000 $50,000 300,000 Vice President, Engineering
OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information with respect to the Named Executive Officers regarding grants of options to purchase Common Stock of the Company made during the Last Fiscal Year.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------ ANNUAL RATES OF PERCENTAGE OF STOCK PRICE TOTAL OPTIONS APPRECIATION FOR OPTIONS GRANTED TO EXERCISE OPTION TERM(1) GRANTED EMPLOYEES PRICE EXPIRATION --------------------- NAME (# OF SHARES) IN 1996 ($/SHARE) DATE 5% 10% ---- ------------- ------------- --------- ---------- ---------- ---------- Prabhat K. Dubey (2).... -- -- -- -- -- -- Amos Wilnai............. -- -- -- -- -- -- Alexander Joffe (3)..... 300,000(4) 9.2% $.67 5/9/06 $ 125,785 $ 318,764
- -------- (1) Amounts represent hypothetical gains that could be achieved if the option was exercised at the end of the option term to purchase all of the underlying stock subject to such option, assuming such stock had appreciated during the term of the option at the assumed annualized rates of 5% and 10%, respectively. The assumed 5% and 10% rates of stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of its Common Stock. Actual gains, if any, on stock option exercises are dependent on the future performance of the Company, overall conditions and the option holder's continued employment with the Company throughout the entire vesting period and option term. This table does not take into account any appreciation in the fair market value of the Company's Common Stock from the date of grant to the date of this offering, other than the columns reflecting assumed rates of appreciation of 5% and 10%, respectively. (2) On April 25, 1997, the Board of Directors granted an option to Mr. Dubey to purchase 225,000 shares of the Company's Common Stock for a purchase price of approximately $3.33 per share. Such option will vest with respect to 56,250 shares on April 25, 1998, and with respect to an additional 4,688 shares each full month of continuous employment with the Company thereafter. The exercise price equaled the fair market value of the Common Stock on the date of grant, as determined by the Board of Directors. 38 (3) On April 25, 1997, the Board of Directors granted an option to Mr. Joffe to purchase 150,000 shares of the Company's Common Stock for a purchase price of approximately $3.33 per share. Such option will vest with respect to 37,500 shares on April 25, 1998, and with respect to an additional 3,125 shares each full month of continuous employment with the Company thereafter. The exercise price equaled the fair market value of the Common Stock on the date of grant, as determined by the Board of Directors. (4) Represents an option to purchase 300,000 shares of the Company's Common Stock granted on May 9, 1996 under the Company's 1993 Plan. Such option vested with respect to 75,000 shares on the first anniversary of the date of grant, and has vested and will continue to vest with respect to an additional 6,250 shares each full month of continuous employment with the Company thereafter. The exercise price equaled the fair market value of the Common Stock on the date of grant, as determined by the Board of Directors. FISCAL YEAR END OPTION VALUES The following table sets forth certain information with respect to the number and value of the stock options held by each of the Named Executive Officers at the end of the Last Fiscal Year. No options were exercised by the Named Executive Officers during the Last Fiscal Year.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Prabhat K. Dubey............ -- -- -- -- Amos Wilnai................. -- -- -- -- Alexander Joffe............. -- 300,000 -- $399,990
- -------- (1) Represents the difference between the fair market value of the shares underlying such option at fiscal year-end ($2.00 per share, as determined by the Board of Directors) and the exercise price of such option (approximately $.67 per share). BENEFIT PLANS 1993 Stock Plan. The Company's 1993 Stock Plan (the "1993 Plan") provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") to employees of the Company, and the grant of nonstatutory stock options and stock purchase rights ("SPRs") to employees and consultants of the Company. As of August 1, 1997, options to purchase an aggregate of 5,170,795 shares of Common Stock of the Company were outstanding under the 1993 Plan. The Board of Directors has determined that no further options will be granted under the 1993 Plan after the completion of this offering. 1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") was approved by the Board of Directors in August 1997 and is expected to be approved by the stockholders in September 1997. The 1997 Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options and SPRs to employees, directors and consultants. The following shares have been reserved for issuance under the 1997 Plan: (a) 1,500,000 shares of Common Stock, which includes shares which have been reserved but unissued under the 1993 Plan; (b) any shares returned to the 1993 Plan as a result of termination of options under the 1993 Plan; and (c) shares added to the 1997 Plan pursuant to automatic annual increases equal to the lesser of (i) 1,000,000 shares, (ii) 5% of all then outstanding shares of Common Stock of the Company, or (iii) a lesser amount determined by the Board of Directors. Unless terminated sooner, the 1997 Plan will terminate automatically in August 2007. The 1997 Plan may be administered by the Board of Directors or a committee thereof (as applicable, the "Administrator"). The Administrator has the power to determine the terms of the options or SPRs granted, 39 including the exercise price of the option or SPR, the number of shares subject to each option or SPR, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Administrator has the authority to amend, suspend or terminate the 1997 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1997 Plan. Options and SPRs granted under the 1997 Plan are not generally transferable by the optionee, and each option and SPR is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1997 Plan must generally be exercised within three months after the end of an optionee's status as an employee, director or consultant of the Company, or within 12 months after such optionee's termination by death or disability, but in no event later than the expiration of the option's 10 year term. Unless the Administrator determines otherwise, the agreements governing the terms of the SPRs (each an "SPR Agreement") will grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for the shares of Common Stock repurchased pursuant to an SPR Agreement will be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option will lapse at a rate determined by the Administrator. The exercise price of all incentive stock options granted under the 1997 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options and SPRs granted under the 1997 Plan is determined by the Administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price must at least be equal to the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1997 Plan may not exceed ten years. The 1997 Plan provides that in the event of a merger of the Company with or into another corporation, or a sale of substantially all of the Company's assets, each option is to be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options are not assumed or substituted for by the successor corporation, the Administrator will provide for the optionee to have the right to exercise such options or SPRs as to all of the optioned stock, including shares as to which such options or SPRs would not otherwise be exercisable. If the Administrator makes an option or SPR exercisable in full in the event of a merger or sale of assets, the Administrator will notify the optionee that the option or SPR will be fully exercisable for a period of 15 days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. 1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors in August 1997 and is expected to be approved by the stockholders in September 1997. A total of 300,000 shares of Common Stock has been reserved for issuance under the 1997 Purchase Plan, plus shares added to the plan pursuant to automatic annual increases equal to the lesser of (i) 400,000 shares, (ii) .8% of all then outstanding shares of Common Stock of the Company, or (iii) a lesser amount determined by the Board of Directors. The 1997 Purchase Plan, which is intended to qualify under Section 423 of the Code, contains consecutive, overlapping, 24-month offering periods. Each offering period includes four six-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commences on the first trading day on or after the date of this Prospectus and ends on the last trading day on or before October 31, 1999. Employees are eligible to participate in the 1997 Purchase Plan if they are customarily employed by the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, any employee who (i) immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all classes of the capital stock of the Company, or (ii) whose rights 40 to purchase stock under all employee stock purchase plans of the Company accrues at a rate which exceeds $25,000 worth of stock for each calendar year may not purchase stock under the 1997 Purchase Plan. The 1997 Purchase Plan permits participants to purchase Common Stock through payroll deductions of up to 10% of the participant's "compensation." Compensation is defined as the participant's base gross earnings and commissions excluding payments for overtime, shift premiums, incentive compensation, incentive payments, bonuses and other compensation. The maximum number of shares a participant may purchase during a single purchase period is 5,000 shares. Amounts deducted and accumulated by the participant are used to purchase shares of Common Stock at the end of each purchase period. The price of stock purchased under the 1997 Purchase Plan is 85% of the lower of the fair market value of the Common Stock at the beginning of the offering period or at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. Rights granted under the 1997 Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each outstanding option granted thereunder may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute such outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 1997 Purchase Plan will terminate in August 2007. The Board of Directors has the authority to amend or terminate the 1997 Purchase Plan, except that no such action may adversely affect any outstanding rights to purchase stock granted under the 1997 Purchase Plan. 1997 Director Option Plan. The 1997 Director Option Plan (the "Director Plan") was adopted by the Board of Directors in August 1997 and is expected to be approved by the stockholders in September 1997. The Director Plan provides for the grant of nonstatutory stock options to non-employee directors. The Director Plan has a term of ten years, unless terminated sooner by the Board of Directors. A total of 150,000 shares of Common Stock have been reserved for issuance under the Director Plan, plus annual increases equal to (i) the number of shares of stock underlying options granted under the Director Plan in the immediately preceding year, or (ii) a lesser amount determined by the Board of Directors. The Director Plan provides that each non-employee director will automatically be granted an option to purchase 40,000 shares of Common Stock (the "First Option") on the date which such person first becomes a non- employee director, unless immediately prior to becoming a non-employee director, such person was an employee director of the Company. In addition to the First Option, each non-employee director will automatically be granted an option to purchase 10,000 shares (a "Subsequent Option") on the date two days after the announcement of the Company's fiscal year-end earnings of each year, if on such date he or she will have served on the Board of Directors for at least the preceding six months. Each First Option and each Subsequent Option will have a term of 10 years. Each First Option will vest as to 25% of the optioned stock one year from the date of grant, and as to an additional 1/48 of the optioned stock each full month thereafter, provided the person continues to serve as a Director on such dates. Each Subsequent Option will vest as to 1/12 of the optioned stock each full month after the date of grant. The exercise price of each First Option and each Subsequent Option is 100% of the fair market value per share of the Common Stock, generally determined with reference to the closing price of the Common Stock as reported on the Nasdaq National Market on the last trading day prior to the date of grant. 41 In the event of a merger of the Company or the sale of substantially all of the assets of the Company, each outstanding option may be assumed or an equivalent option substituted for by the successor corporation. If an option is assumed or substituted for by the successor corporation, it will continue to vest as provided in the Director Plan. However, if a non-employee director's status as a director of the Company or the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the non-employee director, each option granted to such non-employee director will become fully vested and exercisable. If the successor corporation does not agree to assume or substitute for such options, they will become fully vested and exercisable for a period of 15 days from the date the Board of Directors notifies the optionee of the option's full exercisability, after which period such options will terminate. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within 12 months after such director's termination by death or disability, but in no event later than the expiration of the option's 10 year term. No option granted under the Director Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for (i) any breach of their duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchase or redemptions, or (iv) any transaction from which the director derived an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors and executive officers and may indemnify its other officers and employees and other agents to the fullest extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence on the part of indemnified parties. The Company's Bylaws also permit it to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Bylaws would permit indemnification. The Company has entered into agreements to indemnify its directors and executive officers, in addition to indemnification provided for in the Company's Bylaws. These agreements, among other things, indemnify the Company's directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or executive officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 42 CERTAIN TRANSACTIONS Since January 1, 1994, there has not been any transaction or series of similar transactions to which the Company was or is a party in which the amount involved exceeded or exceeds $60,000 and in which any director, executive officer, holder of more than 5% of any class of the Company's voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than the transactions described below. Series A Preferred Stock Financing. On July 12, 1994, the Company issued and sold an aggregate of 9,255,000 shares of Series A Preferred Stock for an aggregate purchase price of $3,085,000, or approximately $.33 per share. The investors in such shares included, among others, venture capital funds affiliated with Institutional Venture Partners ("IVP") and U.S. Venture Partners ("USVP"), each of which holds more than 5% of the Company's voting securities as of the date of this Prospectus. The number of shares purchased and the aggregate purchase price paid by affiliates of IVP and USVP in connection with such transaction are as follows:
NUMBER OF SHARES AGGREGATE NAME OF PURCHASER PURCHASED PURCHASE PRICE - ----------------- ---------------- -------------- Institutional Venture Partners VI, L.P.......... 4,410,000 $1,455,300 Institutional Venture Management VI, L.P. ...... 90,000 29,700 U.S. Venture Partners IV, L.P................... 3,892,500 1,284,525 Second Ventures Limited Partnership II.......... 472,500 155,925 U.S.V.P. Entrepreneur Partners II, L.P. ........ 135,000 44,550 Upon the closing of this offering, each share of Series A Preferred Stock will automatically convert into one share of Common Stock of the Company. Series B Preferred Stock Financing. On November 16, 1995, the Company issued and sold an aggregate of 4,086,780 shares of Series B Preferred Stock for an aggregate purchase price of $7,219,967, or approximately $1.77 per share. The investors in such shares included, among others, venture capital funds affiliated with Kleiner Perkins Caulfield & Byers ("KPCB"), IVP and USVP, each of which holds more than 5% of the Company's voting securities as of the date of this Prospectus. The number of shares purchased and the aggregate purchase price paid by affiliates of KPCB, IVP and USVP in connection with such transaction are as follows: AGGREGATE NUMBER OF SHARES APPROXIMATE NAME OF PURCHASER PURCHASED PURCHASE PRICE - ----------------- ---------------- -------------- Kleiner Perkins Caulfield & Byers VII........... 1,194,672 $2,114,569 KPCB VII Founders Fund.......................... 129,856 229,845 KPCB Information Sciences Zaibatsu Fund II...... 33,964 60,116 Institutional Venture Partners VI, L.P.......... 851,322 1,506,840 IVP Founders Fund I, L.P. ...................... 36,226 64,120 Institutional Venture Management VI, L.P........ 18,114 32,062 U.S. Venture Partners IV, L.P................... 783,396 1,386,602 Second Ventures Limited Partnership II.......... 95,094 168,316 U.S.V.P. Entrepreneur Partners II, L.P.......... 27,172 48,094
Upon the closing of this offering, each share of Series B Preferred Stock will automatically convert into one share of Common Stock of the Company. 43 Shareholder Rights Agreements. In connection with the Series A Preferred Stock financing described above, the Company entered into a shareholder rights agreement with, among others, Amos Wilnai, Alexander Joffe and holders of the Company's Series A Preferred Stock, pursuant to which the Company granted, among other things, certain stock registration rights to such parties. In connection with the Series B Preferred Stock financing described above, the Company amended such agreement to, among other things, add the holders of Series B Preferred Stock as parties thereto. Under the agreement, as amended, Mr. Wilnai and Mr. Joffe have certain registration rights with respect to an aggregate of 7,875,000 of the shares of Common Stock held by them or issuable upon the exercise of stock options granted to them. In addition, the holders of Common Stock of the Company issued upon the conversion of the Company's Series A Preferred Stock and Series B Preferred Stock have certain registration rights with respect to such shares. See "Description of Capital Stock--Registration Rights." Indemnification Agreements. The Company has entered into indemnification agreements with each of its directors and executive officers. See "Management--Limitation on Liability and Indemnification Matters." Loans to Officers. From time to time the Company has made loans to certain executive officers of the Company to fund the exercise price of stock options held by such officers. These loans are evidenced by full recourse promissory notes which mature on the earlier to occur of (i) the fifth anniversary of the issuance date, in the case of the notes issued to Prabhat K. Dubey and Mr. Joffe, and the third anniversary of the issuance date, in the case of the notes issued to William R. Walker, (ii) a date which is 30 days after the termination of the respective officer's employment with the Company for any reason other than death or disability, in the case of the notes issued to Mr. Dubey and Mr. Joffe, and six months after the termination of Mr. Walker's employment with the Company, in the case of the notes issued to Mr. Walker, and (iii) a date which is one year after the date of termination of the respective officer's employment with the Company due to death or disability, in the case of the notes issued to Mr. Dubey and Mr. Joffe. Such promissory notes are also secured by the shares of Common Stock purchased with the proceeds of such loans. With respect to the notes issued to Mr. Walker, in the event that Mr. Walker should sell any of the shares pledged to secure such notes, the proceeds from such sale must be applied first to prepay the interest and then the principal, if any, due and payable on such notes. The following table sets forth the name and position of such officers, certain information with respect to the promissory notes issued to evidence such loans, and the number of shares of the Company's Common Stock purchased with the proceeds of such loans.
ANNUAL PRINCIPAL SHARES INTEREST ISSUANCE MATURITY NAME AND POSITION AMOUNT PURCHASED RATE(%) DATE DATE ----------------- --------- --------- -------- -------- -------- Prabhat K. Dubey................ $ 60,000 1,800,000 .00 10/31/95 10/31/00 President and Chief Executive Officer Alexander Joffe................. 47,400 1,800,000 .00 11/3/95 11/3/00 Vice President, Engineering William R. Walker............... 100,000 150,000 5.75 12/17/96 12/17/99 Vice President, Chief Financial 70,000 105,000 5.75 1/2/97 1/2/00 Officer and Secretary
The entire principal amount and accrued interest, if any, on each of the loans described in the table set forth above remains outstanding as of the date of this offering. On March 7, 1997, the Company made a loan to Mr. Dubey in the aggregate principal amount of $100,000 and bearing interest at the rate of 6.07% per annum. The loan is evidenced by a full recourse promissory note, dated October 31, 1996, which matures on the earlier to occur of (i) October 31, 1999, or (ii) a date which is six months after the date of any termination of Mr. Dubey's employment with the Company. The promissory note is secured by a pledge of 1,800,000 shares of the Company's Common Stock owned by Mr. Dubey and currently held in escrow. The entire principal amount and accrued interest on the loan to Mr. Dubey remains outstanding as of the date of this Prospectus. 44 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's outstanding Common Stock as of June 30, 1997, and as adjusted to reflect the sale of the securities offered by the Company in this offering held by (i) each person (or group of affiliated persons) who is known by the Company to beneficially own more than 5% of the Company's Common Stock, (ii) each of the Company's directors and Named Executive Officers, and (iii) all directors and executive officers of the Company as a group.
PERCENTAGE OF SHARES NUMBER OF BENEFICIALLY OWNED(2) SHARES -------------------------- NAMES AND ADDRESSES OF BENEFICIAL BENEFICIALLY BEFORE THE AFTER THE OWNERS(1) OWNED(2) OFFERING OFFERING --------------------------------- ------------ ----------- ---------- Institutional Venture Partners(3)..... 5,405,662 21.8% 3000 Sand Hill Road Bldg. 2, Suite 290 Menlo Park, CA 94025 U.S. Venture Partners(4).............. 5,405,662 21.8 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Kleiner Perkins Caulfield & Byers(5).. 1,358,492 5.5 2750 Sand Hill Road Menlo Park, CA 94025 Alexander Joffe(6).................... 1,893,750 7.6 Prabhat K. Dubey(7)................... 1,800,000 7.3 Amos Wilnai(8)........................ 1,737,226 7.0 Nitzan Wilnai......................... 1,313,206 5.3 Sigal Wilnai.......................... 1,313,206 5.3 Yael Wilnai........................... 1,313,206 5.3 John G. Adler......................... -- * Irwin Federman(9)..................... -- * Andrew S. Rappaport................... 225,000 * Geoffrey Y. Yang(10).................. -- * All directors and executive officers as a group (11 persons) (6)(7)(8)(11)........................ 16,722,300 67.2
- -------- * Less than 1%. (1) Except as otherwise noted below, the address of each person listed in the table is c/o MMC Networks, Inc., 1134 East Arques Avenue, Sunnyvale, California 94086. (2) Number of shares beneficially owned and the percentage of shares beneficially owned are based on (i) 24,803,280 shares outstanding as of June 30, 1997, and (ii) shares outstanding after this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting and investment power with respect to such shares. All shares of Common Stock subject to options currently exercisable or exercisable within 60 days after June 30, 1997 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the number of shares beneficially owned and the percentage ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, such persons have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. (3) Includes 5,261,322 shares held by Institutional Venture Partners VI, L.P., 108,114 shares held by Institutional Venture Management VI, L.P., and 36,226 shares held by IVP Founders Fund I, L.P. Geoffrey Y. Yang, a director of the Company, is a General Partner of Institutional Venture Management VI, L.P., which is the General Partner of each of such limited partnerships. (4) Includes 4,675,896 shares held by U.S. Venture Partners IV, L.P., 567,594 shares held by Second Ventures Limited Partnership II, and 162,172 shares held by U.S.V.P. Entrepreneur Partners II, L.P. Irwin 45 Federman, a director of the Company, is a General Partner of Presidio Management Group IV, L.P., which is the General Partner of each of such limited partnerships. (5) Includes 1,194,672 shares held by Kleiner Perkins Caufield & Byers VII, 129,856 shares held by KPCB VII Founders Fund, and 33,964 shares held by KPCB Information Sciences Zaibatsu Fund II. (6) Includes 93,750 shares issuable pursuant to options currently exercisable or exercisable within 60 days of June 30, 1997. (7) Includes 502,590 shares held by Dr. Ranjana Sharma as custodian for Mr. Dubey's minor children. Mr. Dubey disclaims beneficial ownership of all such shares. (8) Does not include 1,313,206 shares held by each of Nitzan Wilnai, Sigal Wilnai and Yael Wilnai, Mr. Wilnai's adult children. Also does not include 75,470 shares held by Miriam Wilnai, Mr. Wilnai's mother. Mr. Wilnai disclaims beneficial ownership of all such shares. (9) Does not include 4,675,896 shares held by U.S. Venture Partners IV, L.P., 567,594 shares held by Second Ventures Limited Partnership II, and 162,172 shares held by U.S.V.P. Entrepreneur Partners II, L.P. As the General Partner of Presidio Management Group IV, L.P., which is the General Partner of each of such limited partnerships, Mr. Federman may be deemed to share voting and investment power with respect to such shares. However, Mr. Federman disclaims beneficial ownership of all such shares except to the extent of his pecuniary interest therein. (10) Does not include 5,261,322 shares beneficially owned by Institutional Venture Partners VI, L.P., 108,114 shares held by Institutional Venture Management VI, L.P., and 36,226 shares held by IVP Founders Fund I, L.P. As a General Partner of Institutional Venture Management VI, L.P., which is the General Partner each of such limited partnerships, Mr. Yang may be deemed to share voting and investment power with respect to such shares. However, Mr. Yang disclaims beneficial ownership of all such shares except to the extent of his pecuniary interest therein. (11) Includes shares held by Institutional Venture Partners VI, L.P., Institutional Venture Management VI, L.P., IVP Founders Fund I, L.P. U.S. Venture Partners IV, L.P., Second Ventures Limited Partnership II, and U.S.V.P. Entrepreneur Partners II, L.P. 46 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of this offering, the Company will be authorized to issue 100,000,000 shares of Common Stock, $.001 par value, and 10,000,000 shares of undesignated Preferred Stock, $.001 par value. Immediately after the completion of this offering, the Company estimates there will be an aggregate of shares of Common Stock issued and outstanding and approximately 5,170,795 shares of Common Stock issuable upon exercise of outstanding options. Upon completion of this offering, there will be no shares of Preferred Stock issued and outstanding. The following description of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by the Company's Certificate of Incorporation and Bylaws and by the provisions of applicable Delaware law. The Certificate of Incorporation and Bylaws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and which may have the effect of delaying, deferring, or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Board of Directors. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of Common Stock do not have cumulative voting rights under the Company's Bylaws or Certificate of Incorporation, and therefore, holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. Holders of the Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to the rights of preferred stockholders and the terms of any existing or future agreements between the Company and its debtholders. Since January 1, 1995, the Company has not declared or paid any cash dividends on its Common Stock. The Company presently intends to retain future earnings, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future. In addition, the Company's bank line of credit agreement prohibits the payment of dividends without prior consent of the bank. In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities and subject to the prior rights of any holders of Preferred Stock then outstanding. PREFERRED STOCK Effective upon the closing of this offering, the Company will be authorized to issue 10,000,000 shares of undesignated Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's stockholders. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the market price, and the voting and other rights, of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. The Company has no current plans to issue any shares of Preferred Stock. TRANSFER AGENT AND REGISTRAR The Company's transfer agent and registrar is BankBoston, N.A. Its telephone number is (800) 730-6001. 47 WARRANTS In October 1994, in conjunction with the execution and delivery of a Master Lease Agreement by and between the Company and Dominion Ventures, Inc. ("Dominion"), the Company issued a warrant (the "Dominion Warrant") to Dominion to purchase 123,000 shares of the Company's Series A Preferred Stock at a purchase price of approximately $.33 per share. Upon completion of this offering, such warrant will convert into the right to purchase an equivalent number of shares of the Company's Common Stock at the same exercise price per share. The Dominion Warrant may be exercised at any time before October 31, 2003. The Dominion Warrant contains provisions relating to adjustment of the exercise price and the number of shares of stock issuable upon exercise thereof under certain circumstances, including stock splits, reverse stock splits, combinations and reclassifications of the Company's Preferred Stock. The Dominion Warrant also provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal in value to the value of the warrant so surrendered. In February 1996, in conjunction with the execution and delivery of a Master Equipment Lease Agreement by and between the Company and Lighthouse Capital Partners, L.P. ("Lighthouse"), the Company issued another warrant (the "Lighthouse Warrant") to Lighthouse to purchase 33,963 shares of the Company's capital stock at a purchase price of approximately $1.77 per share. Upon completion of this offering, such warrant will convert into the right to purchase an equivalent number of shares of the Company's Common Stock at the same exercise price per share. The Lighthouse Warrant may be exercised at any time before January 31, 2003. The Lighthouse Warrant contains provisions relating to adjustment of the exercise price and the number of shares of stock issuable upon exercise thereof under certain circumstances, including stock splits, reverse stock splits, combinations and reclassifications of the Company's Preferred Stock. The Lighthouse Warrant also provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal in value to the value of the warrant so surrendered. LISTING The Company has applied to designate its Common Stock for quotation on the Nasdaq National Market under the trading symbol "MMCN." REGISTRATION RIGHTS Following the closing of this offering, the holders of approximately 21,118,743 shares of Common Stock (the "Registrable Securities"), will be entitled to certain rights with respect to the registration of such shares under the Securities Act. In the event that the Company proposes to register any of its securities under the Securities Act, either for its own account or the account of other security holders, the holders of Registrable Securities are entitled to notice of such registration and are entitled to include their Registrable Securities in such registration, subject to certain marketing and other limitations. Beginning six months after the closing of this offering, certain holders of Registrable Securities have the right to require the Company, on not more than two occasions, to file a registration statement under the Securities Act in order to register all or any part of their Registrable Securities. The Company may in certain circumstances defer such registrations and the underwriters have the right, subject to certain limitations, to limit the number of shares included in such registrations. Further, holders of Registrable Securities may require the Company to register all or a portion of their shares with registration rights on Form S-3, when such form becomes available to the Company, subject to certain conditions and limitations. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS Certain provisions of the Company's Certificate of Incorporation and Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of the Common Stock. Such provisions may also inhibit fluctuations in the market 48 price of the Common Stock that could result from takeover attempts. The Company is also afforded the protections of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change in control of the Company or could impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company. In addition, the Board of Directors has authority to issue up to 10,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the stockholders. The rights of the holders of the Company's 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 desirable 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, thereby delaying, deferring or preventing a change in control of the Company. Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and as a result, the issuance of such Preferred Stock could have a material adverse effect on the market value of the Common Stock. The Company has no present plan to issue shares of Preferred Stock. The Company's Certificate of Incorporation provides that, so long as the Board of Directors consists of more than two directors, the Board of Directors will be divided into three classes of directors serving staggered three-year terms. As a result, only one of the three classes of the Company's Board of Directors will be elected each year. The classified board structure may have the effect of delaying or inhibiting any attempt to acquire control of the Company. The Company's Certificate of Incorporation also provides that, upon the completion of the offering, stockholders can take action only at a duly called annual or special meeting of stockholders. Accordingly, stockholders of the Company will not be able to take action by written consent in lieu of a meeting. In addition, the Company's Bylaws permit only a majority of the Board of Directors (or a committee thereof) to call a special meeting of stockholders, and require prior notice of matters to be brought before stockholder meetings. These provisions may have the effect of delaying hostile takeovers or delaying changes in control or management of the Company. 49 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale (as described below), 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 an aggregate of shares of Common Stock (based upon shares outstanding at June 30, 1997), assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining shares of Common Stock held by existing stockholders will continue to be "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, all Restricted Shares will be available for sale in the public market upon expiration of the lock-up arrangements at least 180 days after the date of this Prospectus. The officers and directors and all existing stockholders of the Company have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this offering. However, Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. 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 shares immediately after this offering), or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on 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 90 days 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; therefore, unless otherwise restricted, "144(k) shares" may therefore be sold immediately upon the completion of this offering. In general, under Rule 701 of the Securities Act as currently in effect, any employee, consultant or advisor of the Company who purchases shares from the Company in connection with a compensatory stock or option plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. Upon completion of this offering, the holders of 21,118,743 shares of Common Stock issuable upon conversion of Preferred Stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchases by Affiliates) immediately upon the effectiveness of such registration. 50 The Company intends to file a registration statement under the Securities Act covering shares of Common Stock reserved for issuance under the 1993 Plan, the 1997 Plan, the Director Plan and the 1997 Purchase Plan. See "Management-- Benefit Plans." Such registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to the Affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. As of June 30, 1997, options to purchase 5,243,601 shares of Common Stock were issued and outstanding under the 1993 Plan, and no options to purchase shares had been granted under the 1997 Plan, the Director Plan or the 1997 Purchase Plan. See "Management--Director Compensation" and "--Benefit Plans." 51 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters named below (the "Underwriters") for whom Morgan Stanley & Co. Incorporated, Deutsche Morgan Grenfell Inc. and Wessels, Arnold & Henderson, L.L.C. are acting as representatives (the "Representatives") have severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective number of shares of Common Stock set forth opposite the names of such Underwriters below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated.................................. Deutsche Morgan Grenfell Inc....................................... Wessels, Arnold & Henderson, L.L.C................................. --- Total............................................................ ===
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the Underwriters' over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Representatives. Pursuant to the Underwriting Agreement, the Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares of Common Stock set forth next to the names of all Underwriters in the preceding table. The Representatives have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of Common Stock offered by them. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. See "Shares Eligible for Future Sale" for a description of certain arrangements by which all officers, directors, stockholders and option holders of the Company have agreed not to sell or otherwise dispose of 52 Common Stock or convertible securities of the Company for up to 180 days after the date of this Prospectus without the prior consent of Morgan Stanley & Co. Incorporated. The Company has agreed in the Underwriting Agreement that it will not, directly or indirectly, without the prior written consent of Morgan Stanley & Co. Incorporated, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable for Common Stock, for a period of 180 days after the date of this Prospectus, except under certain circumstances. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to five percent of the shares of the Common Stock offered hereby (including shares subject to the Underwriters' over-allotment option) for certain parties who have expressed an interest in purchasing such shares in the offering. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiations among the Company and the Representatives. Among the factors considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Preliminary Prospectus is subject to change as a result of market conditions and other factors. 53 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain matters will be passed upon for the Underwriters by Gray Cary Ware & Freidenrich, A Professional Corporation, Palo Alto, California. As of the date of this Prospectus, WS Investment Company 94A and WS Investment Company 95B, investment partnerships composed of certain current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation beneficially own an aggregate of 87,876 shares of Common Stock of the Company, and a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation owns 25,542 shares of Common Stock of the Company. EXPERTS The financial statements of the Company as of December 31, 1995 and 1996 and for each of the three years in the period ended December 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Certain statements in this Prospectus set forth under the captions "Risk Factors--Protection of Intellectual Property" and "Business--Intellectual Property," insofar as they relate to patent infringement claims asserted by FORE, have been passed upon by Dergosits & Noah, LLP, San Francisco, California, patent counsel to the Company, as experts on such matters. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-1, including amendments thereto, under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office upon the payment of the prescribed fees. Such materials may also be obtained from the Commission's web site at http://www.sec.gov. 54 MMC NETWORKS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants.......................................... F-2 Balance Sheets............................................................. F-3 Statements of Operations................................................... F-4 Statements of Stockholders' Equity......................................... F-5 Statements of Cash Flows................................................... F-6 Notes to Financial Statements.............................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MMC Networks, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of MMC Networks, Inc. at December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California March 14, 1997, except as to Note 9, which is as of August 15, 1997 F-2 MMC NETWORKS, INC. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ---------------- JUNE 30, 1995 1996 1997 ------- ------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents...................... $ 250 $ 4,809 $ 2,953 Short-term investments......................... 7,852 1,509 2,609 Accounts receivable, net of allowances of $45, $133 and $165................................. 637 2,025 3,343 Inventories.................................... 154 511 231 Prepaid expenses and other current assets...... 64 122 277 ------- ------- ------- Total current assets......................... 8,957 8,976 9,413 Property and equipment, net...................... 542 1,616 2,235 Other assets..................................... 28 84 84 ------- ------- ------- $ 9,527 $10,676 $11,732 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................... $ 617 $ 586 $ 1,036 Accrued expenses............................... 195 789 1,041 Customer deposits.............................. 850 100 100 Current portion of capital lease obligations... 118 388 385 ------- ------- ------- Total current liabilities.................... 1,780 1,863 2,562 ------- ------- ------- Capital lease obligations, net of current portion......................................... 301 636 447 ------- ------- ------- Commitments and contingencies (Note 8) Stockholders' equity: Series A Convertible Preferred Stock: no par value; 9,378 shares authorized; 9,255 shares issued and outstanding ....................... 3,055 3,055 3,055 Series B Convertible Preferred Stock: no par value; 4,087, 4,121 and 4,121 shares authorized; 4,087 shares issued and outstanding .................................. 7,192 7,192 7,192 Common Stock: no par value; 60,000 shares authorized; 10,365, 11,121 and 11,461 shares issued and outstanding ....................... 127 256 438 Notes receivable from stockholders............. (125) (225) (295) Accumulated deficit............................ (2,803) (2,101) (1,667) ------- ------- ------- Total stockholders' equity................... 7,446 8,177 8,723 ------- ------- ------- $ 9,527 $10,676 $11,732 ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-3 MMC NETWORKS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ----------------------- ------------------ 1994 1995 1996 1996 1997 ----- ------- ------- -------- -------- (UNAUDITED) Revenues......................... $ 165 $ 577 $10,515 $ 4,690 $ 8,201 Cost of revenues................. 23 304 3,576 1,595 2,535 ----- ------- ------- -------- -------- Gross profit................. 142 273 6,939 3,095 5,666 ----- ------- ------- -------- -------- Operating expenses: Research and development, net.. 132 1,802 3,312 1,590 2,751 Selling, general and administrative................ 298 1,151 3,225 1,359 2,559 ----- ------- ------- -------- -------- Total operating expenses..... 430 2,953 6,537 2,949 5,310 ----- ------- ------- -------- -------- Operating income (loss).......... (288) (2,680) 402 146 356 ----- ------- ------- -------- -------- Other income (expense): Interest income................ 64 146 427 253 155 Interest expense............... (2) (42) (110) (65) (68) ----- ------- ------- -------- -------- Total other income .......... 62 104 317 188 87 ----- ------- ------- -------- -------- Income (loss) before income taxes........................... (226) (2,576) 719 334 443 Provision for income taxes....... -- -- 17 8 9 ----- ------- ------- -------- -------- Net income (loss)................ $(226) $(2,576) $ 702 $ 326 $ 434 ===== ======= ======= ======== ======== Net income per share (Note 2).... $ 0.02 $ 0.01 $ 0.01 ======= ======== ======== Shares used to compute net income per share (Note 2) 29,048 28,822 29,256 ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-4 MMC NETWORKS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE NOTES RETAINED PREFERRED STOCK COMMON STOCK RECEIVABLE EARNINGS ---------------- ------------- FROM (ACCUMULATED SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS DEFICIT) TOTAL ------- -------- ------ ------ ------------ ------------ ------- Balance at December 31, 1993................... -- $ -- 6,075 $ 2 $ -- $ 17 $ 19 Issuance of Series A Convertible Preferred Stock, net of issuance costs of $30........... 9,255 3,055 -- -- -- -- 3,055 Issuance of Common Stock in exchange for services............... -- -- 22 -- -- -- -- Distribution to stockholder............ -- -- -- -- -- (18) (18) Net loss................ -- -- -- -- -- (226) (226) ------- -------- ------ ---- ----- ------- ------- Balance at December 31, 1994................... 9,255 3,055 6,097 2 -- (227) 2,830 Issuance of Series B Convertible Preferred Stock, net of issuance costs of $28........... 4,087 7,192 -- -- -- -- 7,192 Exercise of stock options................ -- -- 4,268 125 -- -- 125 Advances to employees for exercise of stock options................ -- -- -- -- (125) -- (125) Net loss................ -- -- -- -- -- (2,576) (2,576) ------- -------- ------ ---- ----- ------- ------- Balance at December 31, 1995................... 13,342 10,247 10,365 127 (125) (2,803) 7,446 Exercise of stock options................ -- -- 741 123 -- -- 123 Advances to employees for exercise of stock options................ -- -- -- -- (100) -- (100) Issuance of Common Stock in exchange for services............... -- -- 15 6 -- -- 6 Net income.............. -- -- -- -- -- 702 702 ------- -------- ------ ---- ----- ------- ------- Balance at December 31, 1996................... 13,342 10,247 11,121 256 (225) (2,101) 8,177 Exercise of stock options (unaudited).... -- -- 325 152 -- -- 152 Advances to employees for exercise of stock options (unaudited).... -- -- -- -- (70) -- (70) Issuance of Common Stock in exchange for services (unaudited)... -- -- 15 30 -- -- 30 Net income (unaudited).. -- -- -- -- -- 434 434 ------- -------- ------ ---- ----- ------- ------- Balance at June 30, 1997 (unaudited)............ 13,342 $ 10,247 11,461 $438 $(295) $(1,667) $ 8,723 ======= ======== ====== ==== ===== ======= =======
The accompanying notes are an integral part of these financial statements. F-5 MMC NETWORKS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- (UNAUDITED) Cash flows from operating activities: Net income (loss)................. $ (226) $(2,576) $ 702 $ 326 $ 434 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.... 15 97 479 181 386 Issuance of Common Stock in exchange for services........... -- -- 6 -- 30 Changes in assets and liabilities: Accounts receivable............. (209) (427) (1,388) (1,071) (1,318) Inventories..................... -- (154) (357) (110) 280 Prepaid expenses and other assets......................... (56) (26) (114) (41) (155) Accounts payable................ 19 598 (31) (76) 450 Accrued expenses................ 52 128 594 17 252 Customer deposits............... 275 575 (750) (147) -- ------- ------- ------- ------- ------- Net cash provided by (used in) operating activities.......... (130) (1,785) (859) (921) 359 ------- ------- ------- ------- ------- Cash flows from investing activities: Sale (purchase) of short-term investments...................... (2,332) (5,520) 6,343 4,197 (1,100) Acquisition of property and equipment........................ -- (162) (673) (110) (1,005) ------- ------- ------- ------- ------- Net cash provided by (used in) investing activities........... (2,332) (5,682) 5,670 4,087 (2,105) ------- ------- ------- ------- ------- Cash flows from financing activities: Proceeds from issuance of Convertible Preferred Stock, net. 3,055 7,192 -- -- -- Proceeds from exercise of stock options.......................... -- -- 23 15 82 Principal payments on capital lease obligations................ (10) (63) (275) (50) (192) Distribution to stockholder....... (18) -- -- -- -- ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities........... 3,027 7,129 (252) (35) (110) ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents.................. 565 (338) 4,559 3,131 (1,856) Cash and cash equivalents at beginning of period............... 23 588 250 250 4,809 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period............................ $ 588 $ 250 $ 4,809 $ 3,381 $ 2,953 ======= ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURE: Cash paid for interest............ $ 2 $ 42 $ 110 $ 65 $ 68 Cash paid for income taxes........ $ -- $ -- $ -- $ -- $ 17 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of property and equipment through capital leases. $ 140 $ 352 $ 880 $ 721 $ --
The accompanying notes are an integral part of these financial statements. F-6 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1--THE COMPANY: MMC Networks, Inc. (the "Company") was incorporated in California on September 25, 1992 as a Subchapter S corporation and became a Subchapter C corporation effective July 12, 1994. The Company is a leading developer and supplier of network processors--high-performance, open-architecture, software- programmable processors optimized for networking applications. The Company sells its products primarily in the United States. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, cash equivalents and short-term investments The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments consist primarily of commercial paper and U.S. Treasury securities with maturities of more than three months when purchased. The Company has categorized its short-term investments as available-for-sale. At December 31, 1995 and 1996, the fair market value of the Company's short-term investments approximated cost. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Property and equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally three years. Warranty costs Anticipated costs related to product warranties are charged to operations as revenues are recognized. The Company has not experienced significant warranty claims to date. Revenue recognition; customer concentration Revenues are recognized upon shipment of product to customers. The following table summarizes the percentage of total revenues accounted for by the Company's significant customers (significant customers are those customers accounting for more than 10% of the Company's total revenues) during 1994, 1995, 1996 and the six months ended June 30, 1997:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED --------------------------- JUNE 30, 1994 1995 1996 1997 ------- ------- ------- ----------- (UNAUDITED) A................................ -- 48% 51% 24% B................................ -- -- 15 22 C................................ -- -- 10 17 D................................ -- 12 -- -- E................................ -- 11 -- -- F................................ -- 11 -- -- G................................ 91% -- -- --
F-7 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Research and development Research and development costs are charged to operations as incurred. The Company on occasion receives nonrecurring engineering funding for development projects to apply or enhance the Company's technology to a particular customer's needs. Such funding is recognized over the term of the respective contract using the percentage of completion method. At the time of recognition, amounts received under research and development contracts are offset against research and development expenses. (See Note 7) Software development costs Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 ("FAS 86") requires the capitalization of certain software development costs once technological feasibility is established, which the Company defines as the completion of a working model. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current sales to total projected product sales, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Income taxes From inception through July 11, 1994, the Company elected to be taxed as a Subchapter S corporation for federal income tax and California franchise tax purposes. As a result, the Company's sole stockholder paid tax on the taxable income of the Company, and no federal income taxes were payable at the corporate level. Beginning July 12, 1994, the Company became taxable as a Subchapter C corporation and since that date has accounted for income taxes using an asset and liability approach. The asset and liability approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Stock-based compensation The Company accounts for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock- Based Compensation." (See Note 5.) Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash, cash equivalents and short-term investments primarily in market rate accounts, commercial paper and U.S. Treasury bills. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. The Company provides an allowance for doubtful accounts receivable based upon the expected collectibility of such receivables. F-8 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Stock splits In October 1996, the Company effected a 2-for-1 stock split of its Common Stock and Convertible Preferred Stock. The accompanying financial statements have been retroactively adjusted to reflect this split. See Note 9 for subsequent stock split. Net income (loss) per share Net income (loss) per share is presently computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of Convertible Preferred Stock (using the if converted method) and stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, Convertible Preferred Stock (using the if converted method) and common equivalent shares (using the treasury stock method and the initial public offering price) issued subsequent to July 31, 1996 have been included in the computation as if they were outstanding for all periods presented. Net income (loss) per share prior to 1996 has not been presented since such amounts are not meaningful. See "recent accounting pronouncements" for a discussion of prospective change in computing net income (loss) per share. Dependence on independent manufacturers The Company outsources all of its semiconductor manufacturing, assembly and test. The Company's suppliers currently deliver fully assembled and tested products on a turnkey basis. The semiconductor industry is highly cyclical and, in the past, foundry capacity has been very limited at times and may become limited in the future. Currently, only one of the Company's products is manufactured by more than one supplier. The Company depends on its suppliers to deliver sufficient quantities of finished product to the Company in a timely manner. Since the Company places its orders on a purchase order basis and does not have a long-term volume purchase agreement with any of its existing suppliers, any of these suppliers may allocate, and in the past have allocated, capacity to the production of other products while reducing deliveries to the Company on short notice. The Company has recently experienced delays in obtaining an adequate supply of certain of its products from one supplier, as well as certain problems regarding the quality of the products delivered by that supplier, and as a result has begun obtaining such products from an alternative supplier. There can be no assurance that the Company will not have similar or more protracted problems in the future with existing or new suppliers. In the event of a loss of, or a decision by the Company to change, a key supplier or foundry, qualifying a new supplier or foundry and commencing volume production could involve delay and expense, resulting in lost revenues, reduced operating margins and possible detriment to customer relationships. F-9 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Recent accounting pronouncements In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). This statement is effective for the Company's quarter ending December 31, 1997 and requires restatement of all prior periods. The Statement redefines earnings per share under generally accepted accounting principles. Under the new standard, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. The following table sets forth unaudited pro forma basic and diluted net income per share, computed in accordance with the requirements of FAS 128, giving effect for the treatment of all common equivalent shares issued subsequent to July 31, 1996 as outstanding for all periods presented pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, for the year ended December 31, 1996 and the six month periods ended June 30, 1996 and 1997.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ----------------- 1996 1996 1997 ------------ -------- -------- (UNAUDITED) Basic income per share.......................... $0.05 $ 0.03 $ 0.03 Diluted income per share........................ 0.02 0.01 0.01
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for the reporting of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income as defined includes all changes in equity (net assets) during a period from nonowner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities. The disclosures prescribed by FAS 130 are effective beginning with the first quarter of calendar 1998. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS 131"). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has not yet determined the impact, if any, of adopting this new standard. The disclosures prescribed by FAS 131 are effective for calendar 1998. Proposed public offering of Common Stock (unaudited) If the offering contemplated by this Prospectus (the "Offering") is consummated, all of the Convertible Preferred Stock outstanding as of the closing date will automatically be converted into an aggregate of 13,341,780 shares of Common Stock based on the shares of Convertible Preferred Stock outstanding as of June 30, 1997. Unaudited pro forma stockholders' equity at June 30, 1997, adjusted for the conversion of Preferred Stock, and giving effect to the Board's actions described in Note 9, is as follows (in thousands, except share and per share data): Preferred Stock: $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding...................................... $ -- Common Stock: $0.001 par value; 100,000,000 shares authorized; 24,803,280 shares issued and outstanding ......................... 20 Additional paid-in capital......................................... 10,665 Notes receivable from stockholders................................. (295) Accumulated deficit................................................ (1,667) ------- $ 8,723 =======
F-10 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Interim results (unaudited) The accompanying balance sheet as of June 30, 1997, the statements of operations and of cash flows for the six months ended June 30, 1996 and 1997, and the statement of stockholders' equity for the six months ended June 30, 1997 are unaudited. In the opinion of management, the statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of the interim periods. The data disclosed in these notes to financial statements at such date and for such period are also unaudited. NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):
DECEMBER 31, ------------- JUNE 30, 1995 1996 1997 ----- ------ ----------- (UNAUDITED) Inventories: Raw materials........... $ 24 $ 99 $ 150 Finished goods.......... 130 412 81 ----- ------ ------ $ 154 $ 511 $ 231 ===== ====== ====== Property and equipment: Computers and equipment. $ 282 $1,397 $1,622 Furniture and fixtures.. 44 59 243 Purchased software...... 328 751 1,347 ----- ------ ------ 654 2,207 3,212 Less accumulated depreciation and amortization............. (112) (591) (977) ----- ------ ------ $ 542 $1,616 $2,235 ===== ====== ======
NOTE 4--INCOME TAXES: The provision for income taxes of $17,000 in 1996 represents federal and state alternative minimum taxes. No current provision for income taxes was recorded in 1994 or 1995 as the Company incurred net operating losses for income tax purposes from July 12, 1994, the date on which the Company elected to be taxed as a Subchapter C corporation, through December 31, 1995. In addition, no deferred benefit for income taxes was recorded in 1994 or 1995 as the Company was in a net deferred tax asset position for which a full valuation allowance was provided. Deferred tax assets consist of the following:
DECEMBER 31, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Net operating loss carryforwards......................... $ 994 $ 737 Research and development credit carryforwards............ 111 314 Inventory reserves and basis differences................. 4 129 Accrued expenses......................................... 64 187 Customer deposits........................................ 341 -- Other.................................................... 71 126 ------- ------- Total deferred tax assets.............................. 1,585 1,493 Valuation allowance...................................... (1,585) (1,493) ------- ------- Net deferred tax assets................................ $ -- $ --
F-11 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Because the Company only emerged from the development stage in 1996 and consequently, does not have an extensive history of profitability, management believes that it is more likely than not that the Company will not realize its deferred tax assets. Consequently, a full valuation allowance has been provided at both December 31, 1995 and 1996. At December 31, 1996, the Company had federal and state net operating loss carryforwards of approximately $2.0 million and $700,000, respectively, available to reduce future taxable income. The federal net operating loss carryforwards expire in 2010. The state net operating loss carryforwards expire in 2000. At December 31, 1996, the Company had research and development credit carryforwards for federal and state tax reporting purposes of $169,000 and $145,000, respectively. The federal research and development credit carryforwards expire beginning in 2009 through 2011. The state research and development credit carryforwards expire beginning in 1999 through 2001. Under the Tax Reform act of 1986, the amount of net operating losses that can be utilized may be limited in certain circumstances including, but not limited to, a cumulative stock ownership change of more than 50% over a three- year period, as defined. NOTE 5--CAPITAL STOCK: Convertible Preferred Stock The Company has authorized 13,498,737 shares of Convertible Preferred Stock, of which 9,378,000 shares have been designated Series A Convertible Preferred Stock ("Series A") and 4,120,737 shares have been designated Series B Convertible Preferred Stock ("Series B"). The Convertible Preferred Stock has certain rights, preferences and privileges with respect to dividends, conversion, liquidation and voting as described below. In July 1994, the Company issued 9,255,000 shares of Series A at $0.33 per share. In November 1995, the Company issued 4,086,780 shares of Series B at $1.77 per share. At December 31, 1996, the Company had reserved 13,341,780 shares of Common Stock for issuance upon conversion of outstanding shares of Convertible Preferred Stock. Each share of Convertible Preferred Stock is convertible into one share of Common Stock, subject to adjustment for anti-dilution, and will be converted into Common Stock in the event of the closing of a public offering of the Company's Common Stock for which aggregate gross proceeds equal at least $7,500,000. Shares of Convertible Preferred Stock have voting rights equal to Common Stock on an as-if converted basis. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, holders of Series A and Series B are entitled to receive $0.33 and $1.77 per share, respectively, plus any declared but unpaid dividends, prior to any distribution to the holders of Common Stock. 1993 Stock Plan In April 1993, the Company's Board of Directors (the "Board") adopted the 1993 Stock Plan (the "1993 Plan"). The 1993 Plan, as amended, provides for the granting of stock options and stock purchase rights to employees, directors and consultants for the purchase of up to 10,725,000 shares of Common Stock. Options granted under the 1993 Plan are for periods not to exceed ten years, and may be either incentive stock options ("ISOs") or nonstatutory stock options ("NSOs"). ISOs are granted at exercise prices which are not less than 100% of the estimated fair value of the Common Stock, as determined by the Board, on the date of the grant. NSOs are granted at prices not less than 85% of the estimated fair value of the Common Stock, as determined by the Board, on the date of the grant. To date all options granted under the 1993 Plan have been granted at the estimated fair market value as of a the date of grant, as determined by the Board. Options granted under the 1993 Plan generally vest at a rate of 25% on the first anniversary of the date of grant and as to 1/48 of the underlying shares per month thereafter. Options may be exercised in exchange for cash or promissory notes payable to the Company. F-12 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Stock purchase rights may be granted either alone, in addition to, or in tandem with other awards granted under the 1993 Plan. Stock purchase rights are granted at prices not less than 85% of the estimated fair value of the shares on the date of grant, as determined by the Board, and must be exercised within thirty days from the date of grant. Shares purchased through the exercise of stock purchase rights are subject to repurchase by the Company at the original purchase price paid by the purchaser in the event the purchaser's employment with the Company is terminated for any reason. Such repurchase option lapses at a rate determined at the date of grant, in no event less than 20% per year. No stock purchase rights have been granted under the 1993 Plan to date. The following table summarizes stock option activity under the 1993 Plan:
WEIGHTED- SHARES AVERAGE AVAILABLE OPTIONS EXERCISE FOR GRANT OUTSTANDING PRICE ---------- ----------- --------- Balance at December 31, 1993................. 7,121,250 303,750 $0.03 Granted...................................... (4,769,439) 4,769,439 0.03 ---------- ---------- Balance at December 31, 1994................. 2,351,811 5,073,189 0.03 Granted...................................... (846,000) 846,000 0.03 Exercised.................................... -- (4,268,250) 0.03 Canceled..................................... 171,000 (171,000) 0.03 ---------- ---------- Balance at December 31, 1995................. 1,676,811 1,479,939 0.03 Authorized................................... 3,300,000 -- -- Granted...................................... (3,265,500) 3,265,500 0.79 Exercised.................................... -- (741,534) 0.17 Canceled..................................... 810,000 (810,000) 0.29 ---------- ---------- Balance at December 31, 1996................. 2,521,311 3,193,905 0.71 Authorized (unaudited)....................... 1,500,000 -- -- Granted (unaudited).......................... (2,754,000) 2,754,000 2.90 Exercised (unaudited)........................ -- (325,116) 0.47 Canceled (unaudited)......................... 379,188 (379,188) 0.73 ---------- ---------- Balance at June 30, 1997 (unaudited)......... 1,646,499 5,243,601 1.86 ========== ==========
The following table summarizes information concerning outstanding and exercisable options as of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- -------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- -------------- $ 0.03 853,155 8.22 $0.03 180,977 $0.03 0.18 to 0.42 627,750 9.16 0.23 -- -- 0.67 to 1.10 1,069,500 9.42 0.75 -- -- 2.00 643,500 9.92 2.00 -- -- --------- ------- $0.03 to 2.00 3,193,905 9.15 0.71 180,977 $0.03 ========= =======
The weighted-average estimated grant-date fair values of options granted under the 1993 Plan during 1995 and 1996, determined using the minimum value model as prescribed by SFAS No. 123, were $0.01 and $0.20, respectively. The fair value of each option is estimated on the date of grant using the minimum value method with the following assumptions for grants during 1995 and 1996: annual dividend yield of 0.0%; risk-free annual interest rates of 5.63% to 7.31% in 1995 and 5.28% to 6.55% in 1996; and an expected option term of four years. F-13 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Had the Company recorded compensation based on the estimated grant-date fair value, using the minimum value model as prescribed by SFAS 123, for options granted under the 1993 Plan, the Company's net income (loss) would have been reduced to the pro forma amounts below for the years ended December 31, 1995 and 1996:
DECEMBER 31, ------------- 1995 1996 ------- ---- (IN THOUSANDS) Net income (loss): As reported................................................ $(2,576) $702 Pro forma.................................................. $(2,576) $661
The pro forma effect on net income (loss) for 1995 and 1996 is not representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. NOTE 6--NOTES RECEIVABLE FROM STOCKHOLDERS: In October and November 1995, the Company made full recourse loans totaling $125,000 to certain employees pursuant to the Company's stock plan. The loans are secured by 4,268,250 shares of the Company's Common Stock. The loans are non-interest bearing and are due in October and November 2000 or earlier in the event of the borrower's termination of employment with the Company. In December 1996, the Company accepted a full recourse promissory note totaling $100,000 from one of its officers upon the exercise of certain stock options pursuant to the Company's 1993 Plan. The note bears interest at 5.75% per annum and is due upon the earlier of three years from the date of the note or six months following termination of employment with the Company. NOTE 7--RESEARCH AND DEVELOPMENT CONTRACTS: During the years ended December 31, 1994, 1995 and 1996, the Company performed research and development under several contracts and recognized $549,000, $280,000 and $863,000, respectively, as an offset against research and development expenses. These contracts provide for the development of technology in exchange for development funding. NOTE 8--COMMITMENTS AND CONTINGENCIES: The Company leases its facility under a noncancelable lease agreement which expires in March 1999. Rent expense under noncancelable operating leases was $48,000, $112,000 and $245,000 during the years ended December 31, 1994, 1995 and 1996, respectively. In 1994, the Company entered into a master lease agreement with a leasing company for the acquisition of property and equipment. The leasing company's commitment to fund purchases of capital equipment under this agreement expired on January 15, 1996. During 1995 and 1996, the Company leased $352,000 and $54,000, respectively, of property and equipment under this agreement which have been classified as capital leases. These capital leases terminate at various dates through 1999. In connection with the master lease agreement the Company issued a warrant to purchase 123,000 shares of Series A at $0.33 per share. The estimated fair value of the warrant was not material on the date of issuance. The warrant expires on the earlier of October 2003 or upon the fourth anniversary of an initial public offering of the Company's Common Stock. A total of 123,000 shares of Series A have been reserved for issuance upon exercise of the warrant. The warrant had not been exercised at December 31, 1996. F-14 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In February 1996, the Company entered into a new master lease agreement with a leasing company for the acquisition of property and equipment. The agreement provides for up to $750,000 for equipment purchases made through June 30, 1997, all of which had been utilized as of December 31, 1996. Capital leases under this agreement terminate at various dates through 1999. In connection with the master lease agreement the Company issued a warrant to purchase 33,963 shares of Series B at $1.77 per share. The estimated fair value of the warrant was not material on the date of issuance. The warrant expires in January 2003. A total of 33,963 shares of Series B have been reserved for issuance upon exercise of the warrant. The warrant had not been exercised at December 31, 1996. As of December 31, 1995 and 1996, property and equipment recorded under capital leases, consisting primarily of computer equipment and purchased software, totaled $492,000 and $1,372,000, respectively, with related accumulated amortization of $112,000 and $517,000, respectively. Future minimum lease payments under all noncancelable operating and capital leases are as follows:
OPERATING CAPITAL LEASES LEASES ---------- ---------- Year ending December 31, 1997................................................ $ 525,000 $ 482,000 1998................................................ 512,000 401,000 1999................................................ 128,000 301,000 ---------- ---------- Total minimum payments............................ $1,165,000 1,184,000 ========== Less amount representing interest..................... 160,000 ---------- Present value of lease obligations................ 1,024,000 Less current portion.................................. 388,000 ---------- Lease obligations, net of current portion......... $ 636,000 ==========
From time to time, third parties, including competitors of the Company, may assert patent, copyright and other intellectual property rights to technologies that are important to the Company. Management does not believe that any such matters that are currently pending will have a material adverse impact on the Company's financial position and results of operations. NOTE 9--SUBSEQUENT EVENTS: In July 1997, the Company effected a 3-for-2 stock split of its Common Stock and Convertible Preferred Stock. The accompanying financial statements have been retroactively adjusted to reflect this split. Certain equity transactions In August 1997, the Company's Board of Directors authorized, subject to stockholder approval, the reincorporation of the Company in Delaware and the associated exchange of one share of each class and series of stock of the predecessor Company for one share of each corresponding class and series of stock of the Delaware successor. The reincorporation will occur prior to completion of the Offering. Effective upon the closing of the Offering, the Company will be authorized to issue 100,000,000 shares of Common Stock and 10,000,000 shares of undesignated Preferred Stock, and the Board of Directors will have the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. F-15 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1997 Stock Plan In August 1997, the Company's Board of Directors adopted, subject to stockholder approval, the 1997 Stock Plan (the "1997 Plan"). The 1997 Plan is intended to serve as the successor equity incentive program to the Company's 1993 Plan. The 1997 Plan provides for the grant of incentive stock options ("ISOs") to employees, officers and employee directors and nonstatutory stock options ("NSOs") and stock purchase rights ("SPRs") to employees, directors and consultants. ISOs granted to participants owning stock possessing more than 10% of the voting power of all classes of stock must have an exercise price at least equal to 110% of the fair market value on the date of grant and are for periods not to exceed five years. All other options granted under the plan must have an exercise price at least equal to the fair market value on the date of grant and are for periods not to exceed ten years. Options granted under the 1997 Plan generally shall vest at a rate of 25% on the first anniversary of the date of grant and as to 1/48 of the underlying shares per month thereafter. Stock purchase rights are for periods and prices determined by the Board. Shares purchased through the exercise of SPRs are subject to repurchase by the Company at the original price paid by the purchaser in the event that the purchaser's employment with the Company terminates. The repurchase right lapses at a rate determined by the Board. The following shares have been reserved for issuance under the 1997 plan: (a) 1,500,000 shares of Common Stock, which includes shares which have been reserved but unissued under the 1993 Plan; (b) any shares returned to the 1993 Plan as a result of termination of options under the 1993 Plan; and (c) shares added to the 1997 Plan pursuant to automatic annual increases equal to the lesser of (i) 1,000,000 shares, (ii) 5% of all then outstanding shares of Common Stock of the Company, or (iii) a lesser amount determined by the Board. Unless terminated sooner, the 1997 Plan will terminate automatically in August 2007. 1997 Director Option Plan In August 1997, the Company's Board of Directors adopted, subject to stockholder approval, the 1997 Director Option Plan (the "Director Plan"). The Director Plan provides for the grant of nonstatutory stock options to non- employee directors. Options granted under the Director Plan are for periods not to exceed ten years and are granted at exercise prices not less than 100% of the fair market value on the date of grant. The Director Plan provides that each non-employee director will automatically be granted a nonstatutory option to purchase 40,000 shares of Common Stock (the "First Option") on the date which such person first becomes a non-employee director, unless immediately prior to becoming a non-employee director, such person was an employee director of the Company. In addition to the First Option, each non-employee director will automatically be granted an option to purchase 10,000 shares (a "Subsequent Option") on the date two days after the announcement of the Company's fiscal year-end earnings of each year, if on such date he or she will have served on the Board of Directors for at least the preceding six months. Each First Option and each Subsequent Option will have a term of 10 years. Each First Option will vest as to 25% of the optioned stock one year from the date of grant, and as to an additional 1/48 of the optioned stock each full month thereafter, provided the person continues to serve as a Director on such dates. Each Subsequent Option will vest as to 1/12 of the optioned stock each full month after the date of grant. A total of 150,000 shares of Common Stock have been reserved for issuance under the Director Plan, plus annual increases equal to (i) the number of shares of stock underlying options granted under the the Director Plan in the immediately preceding year, or (ii) a lesser amount determined by the Board. F-16 MMC NETWORKS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1997 Employee Stock Purchase Plan In August 1997, the Company's Board of Directors adopted, subject to stockholder approval, the 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"). The 1997 Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code and contains 24-month offering periods, with four six-month purchase periods included in each offering period. The 1997 Purchase Plan permits employees to purchase Common Stock of the Company through payroll deductions of up to 10% of the participant's compensation. The price of stock purchased under the 1997 Purchase Plan shall be 85% of the lower of the fair market value of the Common Stock at the beginning of the offering period or at the end of the purchase period. A total of 300,000 shares of Common Stock has been reserved for issuance under the 1997 Purchase Plan, plus shares added to the plan pursuant to automatic annual increases equal to the lesser of (i) 400,000 shares, (ii) 0.8% of all then outstanding shares of Common Stock of the Company, or (iii) a lesser amount determined by the Board. Bank line of credit In April 1997, the Company entered into a revolving credit facility agreement and lease line agreement with a bank. The revolving line of credit provides for working capital advances of up to $5.0 million and bears interest at the bank's prime rate. The lease line allows for advances of up to $3.0 million and bears interest at the bank's prime rate plus 0.5%. The lines expire in April 1998. The lines are secured by the assets of the Company. Among other provisions, the Company is required to maintain certain financial covenants. In addition, payment of dividends is prohibited without the bank's prior consent. At June 30, 1997, there were no amounts outstanding under either facility. F-17 [MMC NETWORKS LOGO APPEARS HERE] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated costs and expenses payable by the Registrant in connection with the sale of the Common Stock being registered hereby, other than underwriting commissions and discounts.
ITEM AMOUNT ---- ---------- SEC Registration Fee........................................... $ 10,977 NASD Filing Fee................................................ 4,123 Nasdaq National Market Listing Fee............................. 50,000 Blue Sky Fees and Expenses..................................... 12,500 Printing and Engraving Expenses................................ 200,000 Legal Fees and Expenses........................................ 300,000 Accounting Fees and Expenses................................... 200,000 Transfer Agent and Registrar Fees.............................. 10,000 Miscellaneous.................................................. 212,400 ---------- Total........................................................ $1,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by Section 145 of the Delaware General Corporation Law (the "DGCL"), the Registrant's Certificate of Incorporation provides that each person who is or was or who had agreed to become a director or officer of the Registrant or who had agreed at the request of the Registrant's Board of Directors or an officer of the Registrant to serve as an employee or agent of the Registrant or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Registrant to the full extent permitted by the DGCL or any other applicable laws. Such Certificate of Incorporation also provides that the Registrant may enter into one or more agreements with any person which provides for indemnification greater or different than that provided in such Certificate, and that no amendment or repeal of such Certificate shall apply to or have any effect on the right to indemnification permitted or authorized thereunder for or with respect to claims asserted before or after such amendment or repeal arising from acts or omissions occurring in whole or in part before the effective date of such amendment or repeal. The Registrant's Bylaws provide that the Registrant shall indemnify to the full extent authorized by law any person made or threatened to be made a party to an action or a proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate was or is a director, officer or employee of the Registrant or any predecessor of the Registrant or serves or served any other enterprise as a director, officer or employee at the request of the Registrant or any predecessor of the Registrant. The Registrant has entered into indemnification agreements with its directors and certain of its officers. The Registrant intends to purchase and maintain insurance on behalf of any person who is a director or officer against any loss arising from any claim asserted against him and incurred by him in any such capacity, subject to certain exclusions. See also the undertakings set out in response to Item 17 herein. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since August 1, 1994, the Registrant has issued and sold the following securities which were not registered under the Securities Act of 1933, as amended (the "Securities Act"): 1. On October 19, 1994, the Registrant issued 21,600 shares of its Common Stock to a consultant as compensation for past services rendered. 2. On November 16, 1995, the Registrant issued and sold an aggregate of 4,086,780 shares of its Series B Preferred Stock, convertible into an equal number of shares of Common Stock of the Registrant, for an aggregate purchase price of $7,219,967, or approximately $1.77 per share, to a total of 20 accredited investors. 3. On April 8, 1996, the Registrant issued 15,000 shares of its Common Stock to a consultant as compensation for past services rendered. 4. On January 22, 1997, the Registrant issued 15,000 shares of its Common Stock to a consultant as compensation for past services rendered. 5. On October 31, 1994, the Registrant issued a Warrant to Purchase Shares of Series A Preferred Stock (the "Dominion Warrant") to Dominion Ventures, Inc. ("Dominion") pursuant to which Dominion has the right to purchase up to an aggregate of 123,000 shares of the Registrant's Series A Preferred Stock for a purchase price of approximately $.33 per share. The Dominion Warrant was issued in connection with the execution and delivery of a Master Lease Agreement between the Registrant and Dominion pursuant to which the Registrant obtained an equipment line of credit from Dominion. 6. On February 23, 1996, the Registrant issued a Preferred Stock Purchase Warrant (the "Lighthouse Capital Warrant") to Lighthouse Capital Partners, L.P. ("Lighthouse Capital") pursuant to which Lighthouse Capital has the right to purchase up to an aggregate of 33,963 shares of the Registrant's Series B Preferred Stock for a purchase price of approximately $1.77 per share. The Lighthouse Capital Warrant was issued in connection with the execution and delivery of a Master Equipment Lease Agreement between the Registrant and Lighthouse Capital pursuant to which the Registrant obtained an equipment line of credit from Lighthouse Capital. 7. From August 1, 1994 to June 30, 1997, the Registrant issued to employees, officers, directors and consultants of the Registrant options to purchase an aggregate of 9,169,500 shares of Common Stock of the Registrant, at exercise prices ranging from $.03 per share to $5.33 per share, pursuant to the Registrant's 1993 Stock Plan. 8. From August 1, 1994 to June 30, 1997, the Registrant issued an aggregate of 5,334,900 shares of Common Stock of the Registrant upon the exercise of options at exercise prices ranging from $.03 per share to $5.33 per share. The sales of securities set forth in paragraphs 1-6 above were deemed to be exempt from the registration requirements of the Securities Act in reliance on Section 4(2) thereof, or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The sale of securities set forth in paragraph 8 above was deemed to be exempt from the registration requirements of the Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The granting of stock options described in paragraph 7 above did not require registration under the Securities Act, or an exemption therefrom, insofar as such grants did not involve a "sale" of securities as such term is used in Section 2(3) of the Securities Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. a. EXHIBITS. 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant (to be filed immediately after the closing of this offering). 3.3 Bylaws of the Registrant. 4.1 Specimen Common Stock certificate of the Registrant (in standard printer form, not provided). 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement for directors and executive officers of the Company. 10.2 1993 Stock Option Plan. 10.3 1997 Employee Stock Purchase Plan. 10.4 1997 Stock Plan. 10.5 1997 Director Option Plan. 10.6 Series A Preferred Stock Purchase Agreement dated July 12, 1994, by and among the Registrant and the Purchasers named therein. 10.7 Series B Preferred Stock Purchase Agreement dated November 16, 1995, by and among the Registrant and the Purchasers named therein. 10.8 First Amended and Restated Shareholder Rights Agreement dated November 16, 1995 by and among the Registrant and the Shareholders named therein. 10.9 Sublease, dated June 14, 1996, by and between Olivetti Advanced Technology Center, Inc. and the Registrant, and the Lease Agreement, dated December 22, 1994, by and between Herman Christensen, Jr., Raymond Christensen and Olivetti Advanced Technology Center, Inc. 10.10+ Development, License and Purchase Agreement, effective as of December 19, 1994 (the "Cisco Agreement"), by and between Cisco Systems, Inc. and the Registrant, as amended by the First Amendment to the Cisco Agreement, effective as of January 30, 1996, and Amendment Number 2 to the Cisco Agreement, dated July 7, 1997. 10.11 Supplier Escrow Agreement, dated as of April 21, 1997, by and between the Registrant, Hitachi Computer Products (America), Inc. and SourceFile. 11.1 Statement of Computation of Net Income Per Share. 23.1 Consent of independent accountants. 23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (See Exhibit 5.1). 23.3 Consent of Dergosits & Noah, LLP. 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule (EDGAR filed version only).
- -------- * Documents to be filed by amendment. + Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46. b. FINANCIAL STATEMENT SCHEDULES. Schedule II--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. II-3 ITEM 17. UNDERTAKINGS. 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 in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the 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. The undersigned Registrant hereby undertakes that, for the purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement 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. The undersigned Registrant hereby undertakes to provide the Underwriters at the closing of this offering, as specified in the Underwriting Agreement, certificates in such denomination and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 20th day of August, 1997. MMC Networks, Inc. /s/ Prabhat K. Dubey By: _________________________________ PRABHAT K. DUBEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Prabhat K. Dubey and William R. Walker, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, with full power of each to act alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys- in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE /s/ Prabhat K. Dubey President, Chief August 20, 1997 - ------------------------------------- Executive Officer PRABHAT K. DUBEY and Director (Principal Executive Officer) /s/ William R. Walker Vice President, August 20, 1997 - ------------------------------------- Finance, Chief WILLIAM R. WALKER Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ Amos Wilnai Chairman August 20, 1997 - ------------------------------------- AMOS WILNAI /s/ John G. Adler Director August 20, 1997 - ------------------------------------- JOHN G. ADLER II-5 SIGNATURE TITLE DATE /s/ Irwin Federman Director August 20, 1997 - ------------------------------------- IRWIN FEDERMAN /s/ Andrew S. Rappaport Director August 20, 1997 - ------------------------------------- ANDREW S. RAPPAPORT /s/ Geoffrey Y. Yang Director August 20, 1997 - ------------------------------------- GEOFFREY Y. YANG II-6 SCHEDULE II MMC NETWORKS, INC. VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING STATEMENT OF FROM AT END OF PERIOD OPERATIONS ALLOWANCE OF PERIOD ---------- ------------ ---------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 1994...... $ -- $ -- $ -- $ -- ==== ==== ==== ==== Year ended December 31, 1995...... $ -- $ 45 $ -- $ 45 ==== ==== ==== ==== Year ended December 31, 1996...... $ 45 $ 88 $ -- $133 ==== ==== ==== ====
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant (to be filed immediately after the closing of this offering). 3.3 Bylaws of the Registrant. 4.1 Specimen Common Stock certificate of the Registrant (in standard printer form, not provided). 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement for directors and executive officers of the Company. 10.2 1993 Stock Option Plan. 10.3 1997 Employee Stock Purchase Plan. 10.4 1997 Stock Plan. 10.5 1997 Director Option Plan. 10.6 Series A Preferred Stock Purchase Agreement dated July 12, 1994, by and among the Registrant and the Purchasers named therein. 10.7 Series B Preferred Stock Purchase Agreement dated November 16, 1995, by and among the Registrant and the Purchasers named therein. 10.8 First Amended and Restated Shareholder Rights Agreement dated November 16, 1995 by and among the Registrant and the Shareholders named therein. 10.9 Sublease, dated June 14, 1996, by and between Olivetti Advanced Technology Center, Inc. and the Registrant, and the Lease Agreement, dated December 22, 1994, by and between Herman Christensen, Jr., Raymond Christensen and Olivetti Advanced Technology Center, Inc. 10.10+ Development, License and Purchase Agreement, effective as of December 19, 1994 (the "Cisco Agreement"), by and between Cisco Systems, Inc. and the Registrant, as amended by the First Amendment to the Cisco Agreement, effective as of January 30, 1996, and Amendment Number 2 to the Cisco Agreement, dated July 7, 1997. 10.11 Supplier Escrow Agreement, dated as of April 21, 1997, by and between the Registrant, Hitachi Computer Products (America), Inc. and SourceFile. 11.1 Statement of Computation of Net Income Per Share. 23.1 Consent of independent accountants. 23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (See Exhibit 5.1). 23.3 Consent of Dergosits & Noah, LLP. 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule (EDGAR filed version only).
- -------- * Documents to be filed by amendment. + Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 Shares ------------------------ MMC NETWORKS, INC. COMMON STOCK, PAR VALUE $.001 PER SHARE UNDERWRITING AGREEMENT , 1997 - --------------------- _____________, 1997 Morgan Stanley & Co. Incorporated Deutsche Morgan Grenfell Inc. Wessels, Arnold & Henderson, L.L.C. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: MMC Networks, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters"), an aggregate of ____________________ shares of the Common Stock, par value $.001 per share of the Company (the "Firm Shares"). The Company also proposes to issue and sell to the several Underwriters not more than an additional ____________________ shares of its Common Stock, par value $.001 per share (the "Additional Shares") if and to the extent that you, as Managers of the Offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The shares of Common Stock, par value $.001 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock". The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the "Registration Statement"; the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement") then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. As part of the offering contemplated by this Agreement, Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares set forth opposite its name on Schedule I to this Agreement, up to ____________ shares, for sale to the Company's employees, officers, and directors and other parties associated with the Company (collectively, "Participants"), as set forth in the Prospectus under the heading "Underwriting" (the "Directed Share Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the first business day after the date on which this Agreement is executed will be offered to the public by Morgan Stanley as set forth in the Prospectus. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company --------------------------------------------- represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i)The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, 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, (ii)the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii)the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph 1(j) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company; and the Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization. (d) This Agreement has been duly authorized, executed and delivered by the Company. (e) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (f) The shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable. (g) The Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. -2- (h) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any agreement or other instrument binding upon the Company that is material to the Company, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (i) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (j) There are no legal or governmental proceedings pending or threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (k) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (l) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (m) The Company (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company. -3- (n) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole. (o) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (p) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (1) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company, except in each case as described in or contemplated by the Prospectus. (q) The Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it which is material to the business of the Company, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company is held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company, in each case except as described in or contemplated by the Prospectus. (r) The Company owns or possesses, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by it in connection with the business now operated by it, and neither the Company nor any of its employees has received any notice of infringement of or conflict with (and knows of no such infringement or conflict) asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company; and the Company has received an opinion from special patent counsel to the Company as to the invalidity of certain third party patents or the non-infringement by the Company's products of certain third party patents. -4- (s) No material labor dispute with the employees of the Company exists, except as described in or contemplated by the Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could result in any material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company. (t) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; the Company has not been refused any insurance coverage sought or applied for; and the Company does not have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company, except as described in or contemplated by the Prospectus. (u) The Company possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company, except as described in or contemplated by the Prospectus. (v) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Furthermore, the Company represents and warrants to Morgan Stanley that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. -5- 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell ------------------------------- to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company at $___________ a share (the "Purchase Price") the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the Underwriters the Additional Shares, and the Underwriters shall have a one-time right to purchase, severally and not jointly, up to ____________________ Additional Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to exercise such option, you shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date upon which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares. The Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending (180) days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder or (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing or (C) the issuance by the Company of Shares of Common Stock under the employee benefit plans described in the Prospectus. 3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the ------------------------ Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the Shares are to be offered to the public initially at $___________ a share (the "Public Offering Price") and to certain dealers selected by you at a price that represents a concession not in excess of $___________ a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $___________ a share, to any Underwriter or to certain other dealers. -6- 4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to -------------------- the Company in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on ____________, 19___, or at such other time on the same or such other date, not later than ____________, 19___, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Closing Date". Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on the date specified in the notice described in Section 2 or at such other time on the same or on such other date, in any event not later than ____________, 19___, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Option Closing Date". Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The Certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the ------------------------------------------- Company to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than 5:00 p.m. (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and -7- adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in clause (a) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, outside counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing or property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; and the Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization. (ii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iii) the shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable; (iv) the Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; (v) this Agreement has been duly authorized, executed and delivered by the Company; (vi) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not -8- contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company that is material to the Company or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares; (vii) the statements (A) in the Prospectus under the captions "____________________", "____________________" "Description of Capital Stock" and "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (viii) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company is a party or to which any of the properties of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (ix) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; and (x) such counsel (A) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules and other financial and statistical data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (B) has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any 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 and (C) has no reason to believe that (except for financial statements and schedules and other financial and statistical data as to which such counsel need not express any belief) the -9- Prospectus contains any untrue statement of a material fact or omits 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. (d) The Underwriters shall have received on the Closing Date an opinion of Gray Cary Ware & Freidenrich, A Professional Corporation, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in subparagraphs (iv), (v), (vii) (but only as to the statements in the Prospectus under "Description of Capital Stock" and "Underwriters") and (x) of paragraph (c) above. With respect to subparagraph (x) of paragraph (c) above, Wilson Sonsini Goodrich & Rosati, Professional Corporation and Gray Cary Ware & Freidenrich, A Professional Corporation, may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. The opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, described in paragraphs (c) above, shall be rendered to the Underwriters at the request of the Company and shall so state therein. (e) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Price Waterhouse, L.L.P., independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut- -------- off date" not earlier than the date hereof. (f) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (g) The Underwriters shall have received on the Closing Date an opinion of special patent counsel for the Company, dated the Closing Date, with respect to certain patent law matters. Such opinion shall be in form and substance satisfactory to the Underwriters. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. -10- 6. COVENANTS OF THE COMPANY. In further consideration of the ------------------------ agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, four (4) signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 5:00 P.M. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in paragraph (c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, 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 opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law forthwith to prepare, file with the Commission and furnish, at is own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending ____________, 19___ that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) that in connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from -11- sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Morgan Stanley will notify the Company as to which Participants will need to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (g) to pay all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. (h) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws as provided in Section 6(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the NASDAQ National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 6 entitled "Indemnity and Contribution", and the last paragraph of Section 7 below, the Underwriters will pay all of their costs and expenses, including fees -12- and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they make. (i) The Company has an agreement with each officer, director and stockholder of the Company, pursuant to which each such person or entity agreed not to offer, sell, sell short or otherwise dispose of any shares of Common Stock or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by such person (or as to which such person has the right to direct the disposition of) for a period of 180 days after the date of this Agreement, directly or indirectly ("Standoff Agreements"). The Company will not release any officer, director or stockholder from their obligations under the Standoff Agreements except with the prior written consent of Morgan Stanley. Furthermore, the Company covenants with Morgan Stanley that the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 7. INDEMNITY AND CONTRIBUTION. -------------------------- (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as -13- amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) The Company agrees to indemnify and hold harmless Morgan Stanley and each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in the prospectus wrapper material prepared by or with the consent of the Company for distribution in foreign jurisdictions in connection with the Directed Share Program attached to the Prospectus or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, when considered in conjunction, with the Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of the Shares which, immediately following the effectiveness of the Registration Statement, were subject to a properly confirmed agreement to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, provided that, the Company shall not be responsible under this subparagraph (c)(3) for any losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Morgan Stanley Entities. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to paragraph (a), (b) or (c) of this Section 7, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and (ii) the fees and expenses of more than one separate firm (in addition to any local -14- counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of any Underwriters, such firm shall be designated in writing by Morgan Stanley. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to Section 7(c) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for Morgan Stanley for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control Morgan Stanley within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act. The indemnifying party 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 from and against any loss or liability 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 the second and third sentences of this paragraph, 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 of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (e) To the extent the indemnification provided for in paragraph (a), (b) or (c) of this Section 7 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares 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 indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or -15- omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information, supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (f) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 7 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 that does not take account of the equitable considerations referred to in paragraph (d) of this Section 7. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 7 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 8. TERMINATION. This Agreement shall be subject to termination by ----------- notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior -16- to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., The Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become -------------------------------------- effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of -------- Shares that any Underwriter has greed to purchase pursuant to this Agreement be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you and the Company for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non- defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non- defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. -17- If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 10. COUNTERPARTS. This Agreement may be signed in two or more ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 11. APPLICABLE LAW. This Agreement shall be governed by and construed in -------------- accordance with the internal laws of the State of New York. 12. HEADINGS. The headings of the sections of this Agreement have been -------- inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, MMC NETWORKS, INC. By: --------------------------------- Name: Title: Accepted as of the date hereof Morgan Stanley & Co. Incorporated Deutsche Morgan Grenfell Inc. Wessels, Arnold & Henderson, L.L.C. Acting severally on behalf of themselves and the several Underwriters named herein. By Morgan Stanley & Co. Incorporated By: --------------------------------- Name: Title: -18- SCHEDULE I Underwriter Number of Firm Shares To Be Purchased - ----------------------------------- ----------------------------------------- Morgan Stanley & Co. Incorporated Deutsche Morgan Grenfell Inc. Wessels, Arnold & Henderson, L.L.C. --------------------------------------- Total................. ======================================= -19- EX-3.1 3 ARTICLES OF INCORPORATION OF THE REGISTRANT EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF MMC NETWORKS, INC. FIRST The name of this corporation is "MMC Networks, Inc." (the "Corporation") SECOND The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. THIRD The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. FOURTH A. The total number of shares which the Corporation shall have authority to issue is One Hundered Thirteen Million, Four Hundred and Ninety Eight Thousand, and Seven Hundred and Thirty Seven (113,498,737) shares of capital stock. B. Of such authorized shares, One Hundred Million (100,000,000) shares shall be designated "Common Stock," par value $0.001 per share. C. Of such authorized shares, Thirteen Million, Four Hundred and Ninety Eight Thousand, and Seven Hundred and Thirty Seven (13,498,737) shares shall be designated "Preferred Stock," par value $0.001 per share. The Preferred Stock shall consist of two series designated Series A Preferred Stock (the "Series A Preferred"), consisting of 9,378,000 shares, and Series B Preferred Stock (the "Series B Preferred"), consisting of 4,120,737 shares. D. A statement of the rights, preferences, privileges and restrictions granted to or imposed on the Preferred Stock and the holders thereof is as follows: 1. Dividends. The holders of the outstanding Preferred Stock shall --------- be entitled to receive, out of any funds legally available therefor, dividends at the rate of $0.03 per share of Series A Preferred and $0.159 per share of Series B Preferred, per annum, payable in preference and priority to any payment of any dividend on Common Stock when and as declared by the Board of Directors. After payment of such dividends, any additional dividends declared shall be distributed among all holders of Series A Preferred, Series B Preferred and Common Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Series A Preferred and Series B Preferred were converted into Common Stock at the then effective Conversion Price (as defined in paragraph 3(a) below). The right to such dividends on the Preferred Stock shall not be cumulative, and no right shall accrue to holders of Preferred Stock by reason of the fact that dividends on such shares are not declared or paid in any prior year. In the event that the Corporation shall have declared but unpaid dividends outstanding immediately prior to, and in the event of, a conversion of Preferred Stock (as provided in paragraph 3 hereof), the Corporation shall, at the option of each holder, pay in cash to each holder of Series A Preferred and Series B Preferred subject to conversion the full amount of any such dividends or allow such dividends to be converted into Common Stock in accordance with, and pursuant to the terms specified in, paragraph 3 hereof. 2. Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series A Preferred and Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the sum of $0.333 and $1.767, respectively (adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares effected after the date this Certificate of Incorporation was filed with the Secretary of State), and, in addition, an amount equal to all declared but unpaid dividends on the Preferred Stock (the "Liquidation Preference"). If, upon occurrence of such event the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Preferred Stock in proportion to the full liquidation preferences to which such holder is entitled. After payment has been made to the holders of the Preferred Stock of the Liquidation Preference, the holders of the Preferred Stock and the Common Stock shall be entitled to receive the remaining assets of the Corporation in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Preferred Stock then held by each such holder were converted into Common Stock at the then effective Conversion Prices (as defined in paragraph 3(a) below) (such proportion being defined herein as "equally on an as-converted basis") until such time as the holders of the Series A Preferred have received an aggregate of $1.167 (including amounts previously paid as the Liquidation Preference of the Series A Preferred pursuant to the preceding paragraph) for each share of Series A Preferred then held by them. If the assets and funds thus distributed among the holders of the Preferred Stock and Common Stock shall be insufficient to permit the payment to the holders of the Series A Preferred of an aggregate of $1.167 then the remaining assets and funds of the Corporation legally available for distribution (after payment of the Liquidation 2 Preferences pursuant to the preceding paragraph) shall be distributed among the holders of the Preferred Stock and Common Stock equally on an as-converted basis. Thereafter, the holders of the Common Stock and Series B Preferred shall be entitled to receive the remaining assets of the Corporation equally on an as-converted basis until such time as the holders of the Series B Preferred have received an aggregate of $3.333 (including amounts previously paid as the Liquidation Preference of the Series B Preferred pursuant to the preceding paragraph) for each share of Series B Preferred then held by them. If the assets and funds thus distributed among the holders of the Series B Preferred and Common Stock shall be insufficient to permit the payment to the holders of the Series B Preferred of an aggregate of $3.333 for each share of Series B Preferred held by them, then the remaining assets and funds of the Corporation legally available for distribution (after payment of the amounts specified in the preceding two paragraphs) shall be distributed among the holders of the Series B Preferred and Common Stock equally on an as-converted basis. Thereafter, the remaining assets of the Corporation shall be distributed to the holders of the Common Stock pro rata based upon the number of shares held by each such holder. (b) For purposes of this paragraph 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, and to include, (i) the Corporation's sale of all or substantially all of its assets or (ii) any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which will result in the holders of the outstanding voting equity securities of the Corporation immediately prior to such transaction holding less than fifty percent (50%) of the voting equity securities of the surviving entity immediately following such transaction. (c) For purposes of this paragraph 2, the amount of assets and surplus funds of this Corporation available for distribution upon a liquidation, dissolution or winding up of this Corporation shall be determined as follows: (i) insofar as it consists of cash, be computed at the aggregate amount of cash held by this Corporation at the time of the liquidation, dissolution or winding up, excluding amounts paid or payable for accrued interest or accrued dividends; and (ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of the liquidation, dissolution or winding up, as determined in good faith by the Board. 3. Conversion. The holders of the Preferred Stock shall have conversion ---------- rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred and Series B ---------------- Preferred shall be convertible, at the option of the holder thereof, at any time into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $0.333, in the case of the Series 3 A Preferred, or $1.767 in the case of the Series B Preferred, by the Conversion Price, determined as hereinafter provided, in effect at the time of conversion. The price at which shares of Common Stock shall be deliverable upon conversion (individually the "Series A Conversion Price" and the "Series B Conversion Price," and collectively the "Conversion Prices") shall initially be $0.333 per share of Common Stock for conversions of Series A Preferred and $1.767 per share of Common Stock for conversions of Series B Preferred. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price (i) in the event of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at an aggregate offering price to the public of not less than $7,500,000, or (ii) at the election of the holders of seventy-five percent (75%) of the outstanding shares of the Preferred Stock. In the event of an offering referred to in subsection (i) above, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such underwritten public offering. (b) Mechanics of Conversion. No fractional shares of Common Stock ----------------------- shall be issued upon conversion of Preferred Stock. In lieu of any fractional share to which a holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of the Common Stock as determined by the Board of Directors. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that he elects to convert the same. Such notice shall also state whether the holder elects, pursuant to paragraph 1 hereof, to receive declared but unpaid dividends on the Preferred Stock proposed to be converted in cash, or to convert such dividends into shares of Common Stock at their fair market value as determined by the Board of Directors. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into a fractional share of Common Stock, and any declared but unpaid dividends on the converted Preferred Stock which the holder elected to receive in cash. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the conversion is in connection with an underwritten public offering of securities registered pursuant to the Securities Act of 1933, the conversion shall be conditioned upon the closing of such public offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to such closing. 4 (c) Adjustments to Conversion Price for Diluting Issues. --------------------------------------------------- (i) Special Definitions. For purposes of this paragraph 3, the ------------------- following definitions shall apply. (A) "Options" shall mean rights, options or warrants to ------- subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Convertible Securities" shall mean any evidences of ---------------------- indebtedness, shares (other than Common Stock, Preferred Stock and warrants to purchase Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (C) "Series A Original Issue Date" shall mean the date on ---------------------------- which a share of Series A Preferred was first issued. (D) "Series B Original Issue Date" shall mean the date on ---------------------------- issued.which a share of Series B Preferred was first (E) "Additional Shares of Common Stock" shall mean all --------------------------------- shares of Common Stock issued (or, pursuant to paragraph 3(c)(iii), deemed to be issued) by the Corporation after the date of filing of this Certificate of Incorporation: (1) upon conversion of shares of Series A Preferred or Series B Preferred Stock; (2) to officers or employees of, or consultants to, the Corporation pursuant to a stock grant, option plan or purchase plan or other employee stock incentive program (collectively, the "Plans") approved by the Board of Directors up to a maximum of 12,225,000 shares (post-split), or such greater number as is approved by unanimous consent of the total number of directors elected and serving as such; (3) as a dividend or distribution on the Preferred Stock; (4) upon exercise or conversion of warrants to purchase shares of Common Stock issued in connection with equipment lease financing transactions or bank financing transactions approved by the Board of Directors, where the issuance of such warrants is not principally for the purpose of raising additional equity capital for the Corporation; and (5) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (1), (2), (3) and (4) or on shares of Common Stock so excluded. (F) "Next Financing" shall mean the next issuance of the -------------- Corporation's securities after the Series B Original Issue Date in which the aggregate sales price of the 5 securities issued to New Investors is at least $4,000,000 at a per share price greater than $1.767 per share; provided, however, that the term Next Financing shall include an issuance of securities by the Corporation if the Corporation has reached an agreement in principle, as evidenced in writing, with New Investors for the New Investors to purchase securities of the Corporation for an aggregate sales price of at least $4,000,000 at a price per share greater than $1.767, but a lesser amount of securities are actually issued and sold to the New Investors solely as a result of the holders of the Series A Preferred and Series B Preferred exercising rights of first refusal to purchase such securities pursuant to the Shareholder Rights Agreement between the holders of the Series A Preferred and Series B Preferred and the Corporation, as the same may be amended from time to time. (G) "New Investors" shall mean persons or entities other ------------- than the holders of Common Stock as of the date of filing of this Certificate of Incorporation or the holders of the Series A Preferred or Series B Preferred. (ii) No Adjustment of Conversion Price: No adjustment in the --------------------------------- Conversion Price of a particular series of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price in effect for such series of Preferred Stock on the date of, and immediately prior to such issue. No adjustment in the Conversion Prices shall be made pursuant to paragraph (iv) below as a result of any stock dividend or subdivision which causes an adjustment in the Conversion Price pursuant to subsection (3)(d) below. (iii) Deemed Issue of Additional Shares of Common Stock. In the ------------------------------------------------- event the Corporation at any time or from time to time after the Series A Original Issue Date or Series B Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to paragraph 3(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Series A Conversion Price or Series B Conversion Price as applicable in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the applicable Conversion Prices shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; 6 (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the applicable Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (C) no readjustment pursuant to clause (B) above shall have the effect of increasing the applicable Conversion Price to an amount which exceeds the lower of (i) the applicable Conversion Price on the original adjustment date, or (ii) the applicable Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Price Upon Issuance of Additional ---------------------------------------------------------- Shares of Common Stock. - ---------------------- (A) Adjustment of Series A Conversion Price Upon Issuance ----------------------------------------------------- of Additional Shares of Common Stock. In the event this Corporation shall issue - ------------------------------------ Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to para graph 3(c)(iii)) without consideration or for a consideration per share less than the Series A Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Series A Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Series A Conversion Price by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock issued and outstanding immediately prior to such issue, (ii) the number of shares of Common Stock issuable upon conversion of the Preferred Stock outstanding immediately prior to such issue and (iii) the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Series A Conversion Price; and the denominator of which shall be the sum of (A) the number of shares of Common Stock issued and outstanding immediately prior to such issue, (B) the number of shares of Common Stock issuable upon conversion of the Preferred Stock outstanding immediately prior to such issue and (C) the number of such Additional Shares of Common Stock so issued. (B) Adjustment of Series B Conversion Price Upon Issuance ----------------------------------------------------- of Additional Shares of Common Stock. - ------------------------------------ (1) Issuance of Additional Shares of Common Stock --------------------------------------------- Before Next Financing. In the event that prior to the Next Financing, this - --------------------- Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to paragraph 3(c)(iii)) without consideration or for a consideration per share less than the Series B Conversion Price in effect on the date of and immediately prior to such issue, then and in 7 such event, the Series B Conversion Price in effect immediately after each such issuance shall be reduced to a price equal to the per share issue price of such Additional Shares of Common Stock. (2) Issuance of Additional Shares of Common Stock --------------------------------------------- After Next Financing. In the event that after the Next Financing this - -------------------- Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to paragraph 3(c)(iii)) without consideration or for a consideration per share less than the Series B Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Series B Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Series B Conversion Price by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock issued and outstanding immediately prior to such issue, (ii) the number of shares of Common Stock issuable upon conversion of the Preferred Stock outstanding immediately prior to such issue and (iii) the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Series B Conversion Price; and the denominator of which shall be the sum of (A) the number of shares of Common Stock issued and outstanding immediately prior to such issue, (B) the number of shares of Common Stock issuable upon conversion of the Preferred Stock outstanding immediately prior to such issue and (C) the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this ------------------------------ paragraph 3(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property. Such consideration shall: ----------------- (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to paragraph 3(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing: 8 (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities; by (y) the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustments for Stock Dividends, Subdivisions, Combinations, or --------------------------------------------------------------- Consolidations. In the event the Corporation after the date of filing of this - -------------- Certificate of Incorporation shall pay a stock dividend on the Common Stock, or the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by reclassification or otherwise, into a greater or lesser number of shares of Common Stock, the Series A Conversion Price and Series B Conversion Price in effect immediately prior to such subdivision or combination shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (e) No Impairment. The Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this paragraph 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against impairment. (f) Notices of Record Date. In the event that this Corporation ---------------------- shall propose at any time after the date of filing of this Certificate of Incorporation: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or 9 (iv) to merge with or into any other corporation (other than a merger in which the holders of the outstanding voting equity securities of the Corporation immediately prior to such merger hold more than fifty percent (50%) of the voting power of the surviving entity immediately following such merger), or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Corporation shall send to the holders of the Preferred Stock: (A) at least twenty (20) days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (B) in the case of the matters referred to in (iii) and (iv) above, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Preferred Stock shares at the address for each such holder as shown on the books of this Corporation and shall be deemed given when so mailed. (g) Recapitalization. If at any time or from time to time there ---------------- shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this paragraph 3 or paragraph 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the Corporation to which a holder of Common Stock deliverable upon conversion of each share of such series would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this paragraph 3 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this paragraph 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. 4. Voting Rights and Directors. --------------------------- (a) Except as otherwise required by law and as provided in paragraph (b) below, the holders of Preferred Stock and the holders of Common Stock shall be entitled to notice of any stockholders' meeting and to vote as a single class upon any matter submitted to the stockholders for a vote, as follows: (i) each holder of Preferred Stock shall have one vote for each full share of Common Stock into which its respective shares of Preferred Stock would be convertible on the record date for the vote and (ii) the holders of Common Stock have one vote per share of Common Stock. 10 (b) For so long as at least 3,000,000 shares of Series A Preferred are outstanding (appropriately adjusted in the event of a stock split, reverse split, recapitalization or similar event), the holders of shares of Series A Preferred, voting as a class, shall be entitled to elect two directors. For so long as at least 1,350,000 shares of Series B Preferred are outstanding (appropriately adjusted in the event of a stock split, reverse split, recapitalization or similar event), the holders of shares of Series B Preferred voting as a class, shall be entitled to elect one director. The holders of shares of Common Stock voting as a class shall be entitled to elect one director, and the remaining directors shall be elected by the holders of the Series A Preferred, Series B Preferred and the holders of Common Stock, voting as provided in Section (4)(a) above. If at least 3,000,000 shares of Series A Preferred or 1,350,000 of Series B Preferred are not outstanding (appropriately adjusted in the event of a stock split, reverse split, recapitalization or similar event), then the director or directors otherwise elected by the holders of such series shall be elected by holders of the Series A Preferred, Series B Preferred and Common Stock, with each share voting as provided in Section (4)(a) above. 5. Protective Provisions. In addition to any other rights provided by --------------------- law, so long as any Preferred Stock shall be outstanding, this Corporation shall not: (a) Without first obtaining the affirmative vote or written consent of the holders of not less than a majority of such outstanding shares of Series A Preferred and Series B Preferred, voting together as a single class on an as- converted basis: (i) amend or repeal any provision of, or add any provision to, this Corporation's Certificate of Incorporation or Bylaws if such action would alter or change adversely the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred or Series B Preferred; (ii) authorize or issue any shares of any class or series of stock or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this Corporation having (A) any preference or priority over, or being on a parity with, the Series A Preferred or Series B Preferred with respect to voting, dividends or upon liquidation, or (B) rights similar to any of the rights of the Series A Preferred or Series B Preferred under this paragraph 5; (iii) reclassify any Common Stock into shares having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred; (iv) consummate a sale of all or substantially all of the Corporation's assets or any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which would result in the holders of the outstanding voting equity securities of the Corporation immediately prior to such transaction holding less than fifty percent (50%) of the voting power of the surviving entity immediately following such transaction; or 11 (v) increase the total number of authorized shares of Series A Preferred or Series B Preferred. (b) Without obtaining the prior affirmative vote or written consent of the holders of not less than seventy-five percent (75%) of such outstanding shares of Series A Preferred and Series B Preferred, amend Section 3(a)(ii) of this Certificate of Incorporation providing for conversion of the Series A Preferred and Series B Preferred into Common Stock upon the election of holders of seventy-five percent (75%) of the outstanding Series A Preferred and Series B Preferred. (c) Without first obtaining the prior affirmative vote or written consent of the holders of not less than the majority of such outstanding shares of the Series B Preferred, voting as a single series: (i) consummate a sale of all or substantially all of the Corporation's assets or any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which would result in the holders of the outstanding voting equity securities of the Corporation immediately prior to such transaction holding less than fifty percent (50%) of the voting power of the surviving entity immediately following such transaction; or (ii) increase the total number of authorized shares of Series B Preferred. 6. Status of Converted Stock. In the event any shares of Preferred ------------------------- Stock shall be converted pursuant to paragraph 3 hereof, the shares so converted shall be canceled and shall not be issuable by the Corporation, and the Certificate of Incorporation of this Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. 7. Residual Rights. All rights accruing to the outstanding shares of --------------- this Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. 8. Consent for Certain Repurchases of Common Stock Deemed to be ------------------------------------------------------------ Distributions. Each holder of Preferred Stock shall be deemed to have consented - ------------- to distributions made by the Corporation in connection with the repurchase of shares of Common Stock issued to or held by employees or consultants upon termination of their employment or services pursuant to agreements providing for such right of repurchase between the Corporation and such persons. 12 FIFTH The name and mailing address of the incorporator are as follows: NAME MAILING ADDRESS ---- --------------- Aaron J. Alter Wilson, Sonsini, Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 SIXTH The Corporation is to have perpetual existence. SEVENTH Elections of directors need not be by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins. EIGHTH The number of directors which constitute the whole Board of Directors of the Corporation shall be designated in the Bylaws of the Corporation. NINTH In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. TENTH To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as it may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. 13 ELEVENTH Section 1. At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall be not so held, such election shall take place at stockholders' meeting called and held in accordance with the Delaware General Corporation Law. The directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designed Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of the stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors so designated by the incorporator. At each annual meeting after the first annual meeting of stockholders, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as if practicable. Section 2. The number of directors which constitute the whole Board of Directors of the Corporation shall be designed in the Bylaws of the Corporation. Section 3. Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office until the next succeeding annual meeting of stockholders of the Corporation and until his or her successor shall have been duly elected and qualified. TWELFTH Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. THIRTEENTH Notwithstanding any other provisions of this Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of the capital stock required by law or this Restated Certificate of Incorporation, the affirmative vote of the holders of at least two-thirds (2/3) of the combined voting power of all of the then-outstanding shares of the Corporation entitled to vote shall be required to alter, amend or repeal Articles ELEVENTH or THIRTEENTH hereof or any provision thereof, unless such amendment shall be approved by a majority of the directors of the Corporation not affiliated or associated with any person 14 or entity holding (or which has announced an intention to obtain) 26% or more of the voting power of the Corporation's outstanding capital stock. FOURTEENTH The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the purposes of forming a corporation pursuant to the Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying, under penalties of perjury, that this is my act and deed and the facts therein stated are true, and accordingly have hereunto set my hand this 8th day of August, 1997. /s/ AARON J. ALTER ---------------------------------------------- Aaron J. Alter Incorporator 15 EX-3.2 4 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MMC NETWORKS, INC. FIRST The name of the Corporation is MMC Networks, Inc. (the "Corporation"). SECOND The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. THIRD The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH A. The total number of shares which the Corporation shall have authority to issue is 110,000,000 shares of capital stock. B. Of such authorized shares, one hundred million (100,000,000) shares shall be designated "Common Stock", and have a par value of $.001. C. Of such authorized shares, ten million (10,000,000) shares shall be designated "Preferred Stock", and have a par value of $.001. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation is authorized to determine or alter the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and within the limitations or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issuance of shares of that series, to determine the designation of any series, and to fix the number of shares of any series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH The Corporation is to have perpetual existence. SIXTH Elections of directors need not be by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins. SEVENTH The number of directors which constitute the whole Board of Directors of the Corporation shall be designated in the Bylaws of the Corporation. EIGHTH In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. NINTH To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as it may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. TENTH Section 1. At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall be not so held, such election shall take place at stockholders' meeting called and held in accordance with the Delaware General Corporation Law. The directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designed Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the -2- term of office of the initial Class III directors shall expire at the third succeeding annual meeting of the stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors so designated by the incorporator. At each annual meeting of stockholders, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as if practicable. Section 2. The number of directors which constitute the whole Board of Directors of the Corporation shall be designated in the Bylaws of the Corporation. Section 3. Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office until the next succeeding annual meeting of stockholders of the Corporation and until his or her successor shall have been duly elected and qualified. ELEVENTH Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. TWELFTH Effective upon the closing of the Corporation's initial public offering of securities pursuant to a registration statement filed under the Securities Act of 1933, as amended, stockholders of the Corporation may not take action by written consent in lieu of a meeting but must take any actions at a duly called annual or special meeting. THIRTEENTH The stockholders of the Corporation may not take action by written consent in lieu of a meeting but must take any actions at a duly called annual or special meeting. FOURTEENTH Notwithstanding any other provisions of this Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of the capital stock required by law or this Restated Certificate of Incorporation, the affirmative vote of the holders of at least two-thirds (2/3) of the combined voting power of all of the then-outstanding shares of the Corporation entitled to vote shall be required to alter, amend or repeal Articles TENTH, TWELFTH THIRTEENTH or FOURTEENTH or any provision thereof, unless such amendment shall be approved by a majority of the directors of the Corporation not affiliated or associated with any person or entity holding (or which has announced an intention to obtain) 20% or more of the voting power of the Corporation's outstanding capital stock. -3- FOURTEENTH The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, MMC Networks, Inc., has caused this Amended and Restated Certificate of Incorporation to be executed by Prabhat K. Dubey, its President and Chief Executive Officer attested by William R. Walker, its Secretary, this ____ day of _________, 1997. _________________________________________ Prabhat K. Dubey President and Chief Executive Officer ATTEST _______________________________ William R. Walker Secretary -4- EX-3.3 5 BYLAWS OF MMC NETWORKS, INC. EXHIBIT 3.3 BYLAWS OF MMC NETWORKS, INC. TABLE OF CONTENTS
PAGE ---- ARTICLE I - CORPORATE OFFICES.............................................. 1 1.1 REGISTERED OFFICE................................................ 1 1.2 OTHER OFFICES.................................................... 1 ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1 2.1 PLACE OF MEETINGS................................................ 1 2.2 ANNUAL MEETING................................................... 1 2.3 SPECIAL MEETING.................................................. 1 2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................. 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE..................... 2 2.6 QUORUM........................................................... 2 2.7 ADJOURNED MEETING; NOTICE........................................ 2 2.8 VOTING........................................................... 2 2.9 WAIVER OF NOTICE................................................. 3 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......................................................... 3 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS......................................................... 4 2.12 PROXIES.......................................................... 4 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE............................ 4 ARTICLE III - DIRECTORS.................................................... 5 3.1 POWERS........................................................... 5 3.2 NUMBER OF DIRECTORS.............................................. 5 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.......... 5 3.4 RESIGNATION AND VACANCIES........................................ 5 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE......................... 6 3.6 FIRST MEETINGS................................................... 6 3.7 REGULAR MEETINGS................................................. 7 3.8 SPECIAL MEETINGS; NOTICE......................................... 7 3.9 QUORUM........................................................... 7 3.10 WAIVER OF NOTICE................................................. 7 3.11 ADJOURNED MEETING; NOTICE........................................ 7 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................ 8 3.13 FEES AND COMPENSATION OF DIRECTORS............................... 8 3.14 APPROVAL OF LOANS TO OFFICERS.................................... 8
-i- TABLE OF CONTENTS (CONTINUED) PAGE ---- ARTICLE IV - COMMITTEES.................................................... 8 4.1 COMMITTEES OF DIRECTORS.......................................... 8 4.2 COMMITTEE MINUTES................................................ 9 4.3 MEETINGS AND ACTION OF COMMITTEES................................ 9 ARTICLE V - OFFICERS....................................................... 9 5.1 OFFICERS......................................................... 9 5.2 ELECTION OF OFFICERS............................................. 10 5.3 SUBORDINATE OFFICERS............................................. 10 5.4 REMOVAL AND RESIGNATION OF OFFICERS.............................. 10 5.5 VACANCIES IN OFFICES............................................. 10 5.6 AUTHORITY AND DUTIES OF OFFICERS................................. 10 5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS..................... 10 ARTICLE VI - INDEMNITY..................................................... 11 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................ 11 6.2 INDEMNIFICATION OF OTHERS........................................ 11 6.3 PREPAYMENT OF EXPENSES........................................... 11 6.4 CLAIMS........................................................... 11 6.5 NON-EXCLUSIVITY OF RIGHTS........................................ 12 6.6 OTHER INDEMNIFICATION............................................ 12 6.7 AMENDMENT OR REPEAL.............................................. 12 ARTICLE VII - RECORDS AND REPORTS.......................................... 12 7.1 MAINTENANCE AND INSPECTION OF RECORDS............................ 12 7.2 INSPECTION BY DIRECTORS.......................................... 13 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................... 13 ARTICLE VIII - GENERAL MATTERS............................................. 13 8.1 CHECKS........................................................... 13 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS................. 13 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................... 14 8.4 SPECIAL DESIGNATION ON CERTIFICATES.............................. 14 8.5 LOST CERTIFICATES................................................ 14 8.6 CONSTRUCTION; DEFINITIONS........................................ 15 8.7 DIVIDENDS........................................................ 15
-ii- TABLE OF CONTENTS (CONTINUED) PAGE ---- 8.8 FISCAL YEAR...................................................... 15 8.9 SEAL............................................................. 15 8.10 TRANSFER OF STOCK................................................ 15 8.11 STOCK TRANSFER AGREEMENTS........................................ 15 8.12 REGISTERED STOCKHOLDERS.......................................... 16 ARTICLE IX - AMENDMENTS.................................................... 16 ARTICLE X - DISSOLUTION.................................................... 16 ARTICLE XI - CUSTODIAN..................................................... 17 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES...................... 17 11.2 DUTIES OF CUSTODIAN.............................................. 17
-iii- BYLAWS ------ OF -- MMC NETWORKS, INC. ----------------- ARTICLE I CORPORATE OFFICES ----------------- 1.1 REGISTERED OFFICE ----------------- The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES ------------- The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 PLACE OF MEETINGS ----------------- Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING -------------- The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING --------------- Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors and by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as expressly provided in a resolution of the Board of Directors, include the power to call such meetings, but such special meetings may not be called by any other person or persons. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS -------------------------------- All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE -------------------------------------------- Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 2.6 QUORUM ------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE ------------------------- When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 VOTING ------ The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 -2- and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. At a stockholders' meeting at which directors are to be elected, or at elections held under special circumstances, a stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast). Each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit. 2.9 WAIVER OF NOTICE ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------------- Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. -3- 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS ----------------------------------------------------------- In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.12 PROXIES ------- Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE ------------------------------------- The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period -4- of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE III DIRECTORS --------- 3.1 POWERS ------ Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS ------------------- The authorized number of directors shall be six (6). The number may be changed by a duly adopted amendment to this bylaw adopted by resolution of the board of directors in accordance with these bylaws. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS ------------------------------------------------------- Except as provided in Section 3.4 of these bylaws and unless otherwise provided in the certificate of incorporation, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES ------------------------- Any director may resign at any time upon written notice to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be -5- filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. Any and all directors may be removed without cause if the removal is approved by the affirmative vote of a majority of the outstanding shares of the corporation entitled to vote. Such approval shall include the affirmative vote of a majority of the outstanding shares of each class and series entitled to vote as a class or series on the subject matter being voted upon and shall also include the affirmative vote of such greater proportion (including all) of the outstanding shares of any class or series if such greater proportion is required by the corporation's certificate of incorporation or by applicable laws. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE ---------------------------------------- The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 FIRST MEETINGS -------------- The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall -6- be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.7 REGULAR MEETINGS ---------------- Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.8 SPECIAL MEETINGS; NOTICE ------------------------ Special meetings of the board of directors may be called by any director on three (3) days' notice to each director, either personally or by mail, telegram, telex or telephone. 3.9 QUORUM ------ At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.10 WAIVER OF NOTICE ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.11 ADJOURNED MEETING; NOTICE ------------------------- If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. -7- 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING ------------------------------------------------- Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.13 FEES AND COMPENSATION OF DIRECTORS ---------------------------------- Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.14 APPROVAL OF LOANS TO OFFICERS ----------------------------- The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.15 REMOVAL OF DIRECTORS -------------------- Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS ----------------------- The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the -8- corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES ----------------- Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of adjournment), and Section 3.12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS -------- 5.1 OFFICERS -------- The officers of the corporation shall be a president, one or more vice presidents, a secretary, and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more assistant vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. -9- 5.2 ELECTION OF OFFICERS -------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS -------------------- The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES -------------------- Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 AUTHORITY AND DUTIES OF OFFICERS -------------------------------- The officers of the corporation shall have such powers and duties in the management of the corporation as may be prescribed by the board of directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the board of directors. The board of directors may require any officer, agent or employee to give security for the faithful performance of his duties. 5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS -------------------------------------------- No officer shall take any action, enter into any agreement, make any representation or, by purposeful inaction, effect any of the actions or decisions which the Board of Directors is prohibited or restricted from enacting pursuant to these Bylaws or the certificate of incorporation and their further amendments. -10- ARTICLE VI INDEMNITY --------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS ------------------------- The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PREPAYMENT OF EXPENSES ---------------------- The corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Article or otherwise. 6.4 CLAIMS ------ If a claim for indemnification or payment of expenses under this Article is not paid in full within sixty days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. -11- 6.5 NON-EXCLUSIVITY OF RIGHTS ------------------------- The rights conferred on any person by this Article 6 shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise. 6.6 OTHER INDEMNIFICATION --------------------- The corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non- profit enterprise. 6.7 AMENDMENT OR REPEAL ------------------- Any repeal or modification of the foregoing provisions of this Article 6 shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF RECORDS ------------------------------------- The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each shareholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period -12- of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS ----------------------- Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS ---------------------------------------------- The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS --------------- 8.1 CHECKS ------ From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS ------------------------------------------------ The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. -13- 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES -------------------------------------- The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES ----------------------------------- If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of -14- the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both the corporation and a natural person. 8.7 DIVIDENDS --------- The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR ----------- The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL ---- The seal of the corporation shall be such as from time to time may be approved by the board of directors. 8.10 TRANSFER OF STOCK ----------------- Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS ------------------------- The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. -15- 8.12 REGISTERED STOCKHOLDERS ----------------------- The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS ---------- The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. ARTICLE X DISSOLUTION ----------- If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be -16- attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XI CUSTODIAN --------- 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES ------------------------------------------- The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN ------------------- The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. -17- EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 MMC NETWORKS, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of this _____ day of __________, 19___, by and between MMC Networks, Inc., a Delaware corporation (the "Company" or "MMC"), and _________________________ ("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. --------------- (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably 1 believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee, acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. (c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Subsections (a) and (b) of this Section 1 or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. AGREEMENT TO SERVE. In consideration of the protection afforded by ------------------ this Agreement, if Indemnitee is a director of the Company he agrees to serve at least for the balance of the current term as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the Company not serving under an employment contract, he agrees to serve in such capacity at least for the balance of the current fiscal year of the Company and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to continue to serve in such capacity at the will of the Company (or under separate agreement, if such agreement exists) so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the by-laws of the Company or any subsidiary of the Company or until such time as he -2- tenders his resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. EXPENSES; INDEMNIFICATION PROCEDURE. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referenced in Section l(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or By-laws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors or any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors or any committee or subgroup of the Board of Directors, independent -3- legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. ------------------------------------------------- (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's By-laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within ---- ----- the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its By-laws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided -4- under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in an indemnified capacity at the time of any action, suit or other covered proceeding. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge --------------------- that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken, and may be required in the future to undertake, with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time ---------------------------------------- to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 8. SEVERABILITY. Nothing in this Agreement is intended to require or ------------ shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any -5- applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law of otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) Claims under Section 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute . 10. CONSTRUCTION OF CERTAIN PHRASES. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall -6- include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. 11. COUNTERPARTS. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon ------------------------ the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. ATTORNEYS' FEES. In the event that any action is instituted by --------------- Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, a court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. NOTICE. All notices, requests, demands and other communications under ------ this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipt is acknowledged by the party addressee, on the date of such receipt, or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby ----------------------- irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware. 16. CHOICE OF LAW. This Agreement shall be governed by and its provisions ------------- construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MMC NETWORKS, INC. By:_____________________ Title:__________________ Address:________________ ________________ AGREED TO AND ACCEPTED INDEMNITEE: ______________________________ (Signature) ______________________________ (Name of Indemnitee) ______________________________ ______________________________ (Address) -8- EX-10.2 7 1993 STOCK OPTION PLAN EXHIBIT 10.2 MMC NETWORKS, INC. (FORMERLY MULTIMEDIA COMMUNICATIONS, INC.) 1993 STOCK PLAN (AS ADOPTED ON APRIL 22, 1993 AND AMENDED ON JUNE 30, 1994, JULY 5, 1994, FEBRUARY 7, 1995, MARCH 5, 1996, OCTOBER 31, 1996 AND JUNE 24, 1997) 1. Purposes of the Plan. The purposes of this Stock Plan are to attract -------------------- and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock purchase rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees appointed ------------- pursuant to Section 4 of the Plan. (b) "Board" means the Board of Directors of the Company. ----- (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" means a Committee appointed by the Board of Directors --------- in accordance with Section 4 of the Plan. (e) "Common Stock" means the Common Stock of the Company. ------------ (f) "Company" means MMC Networks, Inc., a California corporation. ------- (g) "Consultant" means any person who is engaged by the Company or any ---------- Parent or Subsidiary to render consulting or advisory services and is compensated for such services, and any director of the Company whether compensated for such services or not; provided that if and in the event the Company registers any class of any equity security pursuant to the Exchange Act, the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. (h) "Continuous Status as an Employee or Consultant" means that the ---------------------------------------------- employment or consulting relationship with the Company or any Parent or Subsidiary is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any leave of absence approved by the Company, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; provided, further, that on the ninety-first (91st) day of any such leave (where reemployment is not guaranteed by contract or statute) the Optionee's Incentive Stock Option shall cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (i) "Employee" means any person, including officers and directors, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (k) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such exchange or system for the last market trading day prior to the time of determination) as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the Nasdaq National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (l) "Incentive Stock Option" means an Option intended to qualify as an ---------------------- incentive stock option within the meaning of Section 422 of the Code. (m) "Nonstatutory Stock Option" means an Option not intended to qualify ------------------------- as an Incentive Stock Option. (n) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "Option" means a stock option granted pursuant to the Plan. ------ (p) "Optioned Stock" means the Common Stock subject to an Option or a -------------- Stock Purchase Right. (q) "Optionee" means an Employee or Consultant who receives an Option -------- or Stock Purchase Right. -2- (r) "Parent" means a "parent corporation", whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (s) "Plan" means this 1993 Stock Plan. ---- (t) "Restricted Stock" means shares of Common Stock acquired pursuant ---------------- to a grant of a Stock Purchase Right under Section 11 below. (u) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 12 below . (v) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 11 below. (w) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of ------------------------- the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 8,150,000 shares of Common Stock. The shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Initial Plan Procedure. Prior to the date, if any, upon which the ---------------------- Company becomes subject to the Exchange Act, the Plan shall be administered by the Board or a committee appointed by the Board. (b) Plan Procedure After the Date, if any, upon Which the Company ------------------------------------------------------------- becomes Subject to the Exchange Act. ----------------------------------- (i) Administration With Respect to Directors and Officers. With ----------------------------------------------------- respect to grants of Options or Stock Purchase Rights to Employees who are also officers or directors of the Company, the Plan shall be administered by (A) the Board if the Board may administer the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with respect to a plan intended to qualify thereunder as a discretionary plan, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with -3- or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. (ii) Multiple Administrative Bodies. If permitted by Rule 16b-3, ------------------------------ the Plan may be administered by different bodies with respect to directors, non- director officers and Employees who are neither directors nor officers. (iii) Administration With Respect to Consultants and ---------------------------------------------- Other Employees. With respect to grants of Options or Stock Purchase Rights to - --------------- Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the legal requirements relating to the administration of incentive stock option plans, if any, of [state] corporate and securities laws, of the Code, and of any applicable stock exchange (the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (c) Powers of the Administrator. Subject to the provisions of the Plan --------------------------- and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any stock exchange upon which the Common Stock is listed, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(k) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions of any award granted hereunder; (vii) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(f) instead of Common Stock; -4- (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; a nd (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (d) Effect of Administrator's Decision. All decisions, determinations ---------------------------------- and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options or Stock Purchase Rights. 5. Eligibility. ----------- (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option or Stock Purchase Right may, if otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value: (i) of Shares subject to an Optionee's Incentive Stock Options granted by the Company, any Parent or Subsidiary, which (ii) become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) The Plan shall not confer upon any Optionee any right with respect to continuation of employment relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment relationship at any time, with or without cause. (d) Upon the Company or a successor corporation issuing any class of common equity securities required to be registered under Section 12 of the Exchange Act or upon the Plan being assumed by a corporation having a class of common equity securities required to be registered -5- under Section 12 of the Exchange Act, the following limitations shall apply to grants of Options and Stock Purchase Rights to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 300,000 Shares. (ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12. (iii) If an Option is canceled (other than in connection with a transaction described in Section 12, the canceled Option will be counted against the limit set forth in Section 5. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 6. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company, as described in Section 18 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in -------------- the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. --------------------------------------- (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option -6- (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted to any person, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted ----------------------------------------------- hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. -7- Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. In the event ---------------------------------------------------- of termination of an Optionee's Continuous Status as an Employee or Consultant with the Company (but not in the event of an Optionee's change of status from Employee to Consultant (in which case an Employee's Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status) or from Consultant to Employee), such Optionee may, but only within such period of time as is determined by the Administrator, of at least thirty (30) days, with such determination in the case of an Incentive Stock Option not exceeding three (3) months after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (c) Disability of Optionee. In the event of termination of an ---------------------- Optionee's consulting relationship or Continuous Status as an Employee as a result of his or her disability, Optionee may, but only within twelve (12) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Nonstatutory Stock Option on the day three months and one day following such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee, the ----------------- Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Rule 16b-3. Options granted to persons subject to Section 16(b) of ---------- the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -8- (f) Buyout Provisions. The Administrator may at any time offer to buy ----------------- out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options and Stock Purchase Rights. Options and -------------------------------------------------------- Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Stock Purchase Rights. -------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued either ------------------ alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock." (b) Repurchase Option. Unless the Administrator determines otherwise, ----------------- the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine, but at a minimum rate of 20% per year. (c) Other Provisions. The Restricted Stock purchase agreement shall ---------------- contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser. (d) Rights as a Shareholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. -9- 12. Adjustments Upon Changes in Capitalization or Merger. ---------------------------------------------------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Board shall notify the Optionee at least fifteen (15) days prior to such proposed action. To the extent it has not been previously exercised, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with -------------------- or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option or Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. If, in such event, the Option or Stock Purchase Right is not assumed or substituted, the Option or Stock Purchase Right shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger, the option or right confers the right to purchase, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger, the consideration (whether stock, cash, or other securities or property) received in the merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger. -10- 13. Time of Granting Options and Stock Purchase Rights. The date of grant -------------------------------------------------- of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, alter, ------------------------- suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan shall not affect Options or Stock Purchase Rights already granted, and such Options and Stock Purchase Rights shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 16. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. -11- 17. Agreements. Options and Stock Purchase Rights shall be evidenced by ---------- written agreements in such form as the Board shall approve from time to time. 18. Shareholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law and the rules of any stock exchange upon which the Common Stock is listed. 19. Information to Optionees and Purchasers. The Company shall provide to --------------------------------------- each Optionee and to each individual who acquired Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. -12- EX-10.3 8 1997 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.3 MMC NETWORKS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1997 Employee Stock Purchase Plan of MMC Networks, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the Common Stock of the Company. ------------ (d) "Company" shall mean MMC Networks, Inc. and any Designated ------- Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings ------------ and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been --------------------- designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the -------- Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering --------------- Period. (i) "Exercise Date" shall mean the last day of each Purchase Period. ------------- (j) "Fair Market Value" shall mean, as of any date, the value of ----------------- Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately ---------------- twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1999. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this 1997 Employee Stock Purchase Plan. ---- (m) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period --------------- commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. -2- (o) "Reserves" shall mean the number of shares of Common Stock -------- covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges ----------- and the Nasdaq System are open for trading. 3. Eligibility. ----------- (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, ---------------- overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1999. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. -3- (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. ------------------ (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof. A participant may increase or decrease the rate of his or her payroll deductions once during each Purchase Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each --------------- eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the -4- Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 5,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19) on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which -------- a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. ---------- (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. -5- 11. Termination of Employment. ------------------------- Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 13. Stock. ----- (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be three hundred thousand (300,000) shares, plus an annual increase to be added on the date of each annual meeting of the stockholders equal to the lesser of (i) 400,000 shares, (ii) 0.8% of the outstanding shares on such date or (iii) a lesser amount determined by the Board, subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such -6- participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant ------- in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, --------------------------------------------------------------------- Merger or Asset Sale. -------------------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding -7- and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least fifteen (15) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or -------------------- substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least fifteen (15) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld -8- during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent ----------------------------------------------- permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -9- EX-10.4 9 1997 STOCK PLAN EXHIBIT 10.4 MMC NETWORKS, INC. 1997 STOCK PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are: -------------------- . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees, Directors and Consultants, and . to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as ------------- shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the --------------- administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means a committee of Directors appointed by the --------- Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. ------------ (g) "Company" means MMC Networks, Inc., a Delaware corporation. ------- (h) "Consultant" means any person, including an advisor, engaged by ---------- the Company or a Parent or Subsidiary to render services to such entity. (i) "Director" means a member of the Board. -------- (j) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (m) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option. -2- (p) "Notice of Grant" means a written or electronic notice evidencing --------------- certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (q) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" means a stock option granted pursuant to the Plan. ------ (s) "Option Agreement" means an agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "Option Exchange Program" means a program whereby outstanding ----------------------- Options are surrendered in exchange for Options with a lower exercise price. (u) "Optioned Stock" means the Common Stock subject to an Option or -------------- Stock Purchase Right. (v) "Optionee" means the holder of an outstanding Option or Stock -------- Purchase Right granted under the Plan. (w) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (x) "Plan" means this 1997 Stock Plan. ---- (y) "Restricted Stock" means shares of Common Stock acquired ---------------- pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (z) "Restricted Stock Purchase Agreement" means a written agreement ----------------------------------- between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any ---------- successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (bb) "Section 16(b)" means Section 16(b) of the Exchange Act. ------------- (cc) "Service Provider" means an Employee, Director or Consultant. ---------------- -3- (dd) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 13 of the Plan. (ee) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ff) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 ------------------------- of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is (a) 1,500,000 Shares, including the Shares which have been reserved but unissued under the Company's 1993 Stock Plan (as amended) (the "1993 Plan") as of the date of stockholder approval of this Plan, (b) any Shares returned to the 1993 Plan as a result of termination of options under the 1993 Plan, plus (iii) an annual increase to be added on the date of each annual meeting of the stockholders, beginning with the 1999 annual meeting of the stockholders, equal to the lesser of (i) 1,000,000 Shares, (ii) five percent (5%) of the outstanding Shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under -------- the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Multiple Administrative Bodies. The Plan may be ------------------------------ administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator -------------- determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify ---------- transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. -4- (iv) Other Administration. Other than as provided above, the Plan -------------------- shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, --------------------------- and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; -5- (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, ---------------------------------- determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be ----------- granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. ----------- (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 300,000 Shares. -6- (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 300,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become ------------ effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option -------------- Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as -7- "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, --------------------------------- the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the --------------------- acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. -8- 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted ----------------------------------------------- hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ------------------------------------------------- ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service ---------------------- Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall -9- revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the ----------------- Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out ----------------- for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, ------------------ in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the ----------------- Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall ---------------- contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. -10- (d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, ----------------------- the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless -------------------------------------------------------- determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset ------------------------------------------------------------------------ Sale. ---- (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution -------------------------- or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. -11- (c) Merger or Asset Sale. In the event of a merger of the Company with or -------------------- into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right ------------- shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, alter, ------------------------- suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval -------------------- of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to -12- exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the exercise ---------------- of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an -------------------------- Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain ----------------------------- authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at --------------------- all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Stockholder Approval. The Plan shall be subject to approval by the -------------------- stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -13- EX-10.5 10 1997 DIRECTOR OPTION PLAN EXHIBIT 10.5 MMC NETWORKS, INC. 1997 DIRECTOR OPTION PLAN 1. Purposes of the Plan. The purposes of this 1997 Director Option Plan -------------------- are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Board" means the Board of Directors of the Company. ----- (b) "Code" means the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" means the common stock of the Company. ------------ (d) "Company" means MMC Networks, Inc., a Delaware corporation. ------- (e) "Director" means a member of the Board. -------- (f) "Employee" means any person, including officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (g) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (h) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (i) "Inside Director" means a Director who is an Employee. --------------- (j) "Option" means a stock option granted pursuant to the Plan. ------ (k) "Optioned Stock" means the Common Stock subject to an Option. -------------- (l) "Optionee" means a Director who holds an Option. -------- (m) "Outside Director" means a Director who is not an Employee. ---------------- (n) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (o) "Plan" means this 1997 Director Option Plan. ---- (p) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 150,000 Shares, plus an annual increase to be added on the date of each annual meeting of the stockholders equal to (i) the Optioned Stock underlying Options granted in the immediately preceding year, or (ii) a lesser amount determined by the Board (collectively, the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. --------------------------------------------------- (a) Procedure for Grants. All grants of Options to Outside Directors -------------------- under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: -2- (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 40,000 Shares (the "First Option") on the date which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy; provided, however, that a Director who is an Outside Director on the date of adoption of this Plan shall not receive a First Option; provided, further, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option. (iii) Each Outside Director shall be automatically granted an Option to purchase 10,000 Shares (a "Subsequent Option") each year on the date two days after the Company's financial results for the preceding fiscal year are announced to the public, provided he or she is then an Outside Director and, if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of any Option granted hereunder shall be as follows: (A) the term of the Option shall be ten (10) years. (B) the Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (D) subject to Section 10 hereof, each First Option shall become exercisable as to 25% of the Shares subject to the First Option on the first anniversary of its date of grant, and 1/48th of the Shares subject to the First Option shall vest each month thereafter, provided that the Optionee continues to serve as a Director on such dates. (E) subject to Section 10 hereof, each Subsequent Option shall become exercisable as to 1/12 of the Shares subject to the Subsequent Option each month after the date of grant, provided that the Optionee continues to serve as a Director on such dates. (vi) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. -3- 5. Eligibility. Options may be granted only to Outside Directors. All ----------- Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares to --------------------- be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment. 8. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted ----------------------------------------------- hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. -4- Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Continuous Status as a Director. Subject to Section ---------------------------------------------- 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. In the event Optionee's status as a ---------------------- Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of an Optionee's death, the ----------------- Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. Non-Transferability of Options. The Option may not be sold, pledged, ------------------------------ assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or ------------------------------------------------------------------ Asset Sale. ---------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number -5- of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company -------------------- with or into another corporation or the sale of substantially all of the assets of the Company, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or option shall become fully exercisable, including as to Shares for which it would not otherwise be exercisable. Thereafter, the Option or option shall remain exercisable in accordance with Sections 8(b) through (d) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 11. Amendment and Termination of the Plan. ------------------------------------- -6- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for ------------------------ all purposes, be the date determined in accordance with Section 4 hereof. 13. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option ---------------- agreements in such form as the Board shall approve. 16. Stockholder Approval. The Plan shall be subject to approval by the -------------------- stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules. -7- EX-10.6 11 SERIES A PREFERRED STOCK PURCHASE AGREEMENT EXHIBIT 10.6 MULTIMEDIA COMMUNICATIONS, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT dated as of July 12, 1994 TABLE OF CONTENTS
Page ---- SECTION 1 - Authorization and Sale of Preferred Stock.................. 1 1.1 Authorization................................................ 1 1.2 Sale of Series A Preferred................................... 1 1.3 Sale of Additional Series A Preferred........................ 1 SECTION 2 - Closing Date; Delivery..................................... 1 2.1 First Closing Date........................................... 1 2.2 Delivery..................................................... 2 2.3 Subsequent Closings.......................................... 2 SECTION 3 - Representations and Warranties of the Company.............. 2 3.1 Organization and Standing; Articles and By-Laws.............. 2 3.2 Corporate Power.............................................. 2 3.3 Subsidiaries................................................. 3 3.4 Capitalization............................................... 3 3.5 Authorization................................................ 3 3.6 Title to Properties and Assets; Liens, etc. ................. 3 3.7 Financial Statements......................................... 3 3.8 Patents, Trademarks, etc. ................................... 4 3.9 Material Contracts and Commitments........................... 4 3.10 Compliance with Other Instruments, None Burdensome, etc. .... 4 3.12 Employees.................................................... 5 3.13 Employee Agreements.......................................... 5 3.14 Registration Rights.......................................... 6 3.15 Governmental Consent, etc. .................................. 6 3.16 Disclosure................................................... 6 3.17 Brokers or Finders........................................... 6 3.18 Qualified Small Business Stock............................... 6 3.19 Returns and Complaints....................................... 6 3.20 Agreements; Action........................................... 6 3.21 Related-Party Transactions................................... 7 3.22 Permits...................................................... 8 3.23 Environmental and Safety Laws................................ 8 3.24 Manufacturing and Marketing Rights........................... 8 3.25 Changes...................................................... 8 3.26 Employee Benefit Plans....................................... 9
-i- TABLE OF CONTENTS (continued)
Page ---- 3.27 Tax Returns, Payments and Elections........................................................................ 9 3.28 Insurance.................................................................................................. 9 3.29 Minute Books............................................................................................... 10 3.30 Labor Agreements and Actions............................................................................... 10 3.31 Real Property Holding Company.............................................................................. 10 SECTION 4 - Representations and Warranties of the Purchasers........................................................... 10 4.1 Investment Representations and Covenants of the Purchasers................................................. 10 4.2 No Public Market........................................................................................... 13 4.3 Receipt of Information..................................................................................... 13 4.4 Financial Statements....................................................................................... 13 SECTION 5 - Conditions to Closing of Purchasers....................................................................... 13 5.1 Representations and Warranties Correct..................................................................... 13 5.2 Covenants...................................................... ............................................ 13 5.3 Opinion of Company's Counsel............................................................................... 14 5.4 Compliance Certificate..................................................................................... 14 5.5 Blue Sky................................................................................................... 14 5.6 Board of Directors......................................................................................... 14 5.7 Restated Articles.......................................................................................... 14 5.8 Proprietary Information Agreements......................................................................... 14 5.9 Secretary's Certificate.................................................................................... 14 5.10 Stock Certificates......................................................................................... 14 5.11 No Material Adverse Change................................................................................. 14 5.12 Co-Sale Agreement.......................................................................................... 14 5.13 Voting Agreement........................................................................................... 14 5.14 Shareholder Rights Agreement............................................................................... 15 SECTION 6 - Conditions to Closing of Company......................................................................... 15 6.1 Representations........................................................................................... 15 6.2 Blue Sky.................................................................................................. 15 6.3 Restated Articles......................................................................................... 15
-ii- TABLE OF CONTENTS (continued)
Page ---- SECTION 7 - Miscellaneous...................................................................................... 15 7.1 Governing law......................................................................................... 15 7.2 Survival.............................................................................................. 15 7.3 Successors and Assigns................................................................................ 15 7.4 Entire Agreement; Amendment........................................................................... 15 7.5 Notices, etc.......................................................................................... 16 7.6 Delays or Omissions................................................................................... 16 7.7 California Corporate Securities Law................................................................... 16 7.8 Expenses.............................................................................................. 16 7.9 Counterparts.......................................................................................... 17 7.10 Severability......................................................................................... 17 7.11 Gender............................................................................................... 17
EXHIBITS A. Schedule of Purchasers B. Amended and Restated Articles of Incorporation C. Exceptions to Representations and Warranties of the Company D. Shareholder Rights Agreement E. Proprietary Information Agreement F. Form of Stock Repurchase Agreement G. Form of Opinion of Wilson, Sonsini, Goodrich & Rosati H. Form of Co-Sale Agreement I. Form of Voting Agreement -iii- MULTIMEDIA COMMUNICATIONS, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT This Agreement is made as of July 12, 1994, among Multimedia Communications, Inc., a California corporation (the "Company"), with its principal office at 710 Lakeway Drive, Suite 150, Sunnyvale, California 94086, and the persons and entities listed on the Schedule of Purchasers attached as Exhibit A hereto (the "Purchasers"). SECTION 1 Authorization and Sale of Preferred Stock ----------------------------------------- 1.1 Authorization. The Company has authorized the sale and issuance of up to ------------- 3,585,000 shares of its Series A Preferred Stock ("Series A Preferred"), having the rights, restrictions, privileges and preferences as set forth in the Company's Amended and Restated Articles of Incorporation in the form attached to this Agreement as Exhibit B (the "Restated Articles"). 1.2 Sale of Series A Preferred. Subject to the terms and conditions hereof, -------------------------- the Company will issue and sell to the Purchasers, and the Purchasers will buy from the Company, the number of shares (the "Shares") of Series A Preferred specified opposite each Purchaser's name on the Schedule of Purchasers, at a cash purchase price of $1.00 per share. The Company's agreements with each of the Purchasers are separate agreements, and the sales of the Series A Preferred to each of the Purchasers are separate sales. 1.3 Sale of Additional Series A Preferred. The Company shall have until July ------------------------------------- 30, 1994 to sell any shares of Series A Preferred not sold at the First Closing at the cash purchase price of $1.00 per share. Any such shares sold after the First Closing are referred to herein as "Additional Shares." The Additional Shares shall be considered "Shares" and the purchasers of such Additional Shares (the "Additional Purchasers") shall be considered "Purchasers" for purposes of this Agreement, and shall have the same rights and obligations as if they had purchased their shares pursuant to this Agreement at the First Closing. The maximum number of shares of Series A Preferred the Company may sell hereunder is 3,585,000. SECTION 2 Closing Date: Delivery ---------------------- 2.1 First Closing Date. The first closing of the purchase and sale of the ------------------ Series A Preferred hereunder (the "First Closing") shall be held at 3:00 p.m. on July 12, 1994 or on such later date or dates as the Company and the Purchasers may agree to (the date of such Closing being referred to as the "First Closing Date"). The place of the First Closing (including the place of delivery to the Purchasers by the Company of the certificates evidencing all shares of Series A Preferred being purchased and the place of payment to the Company by the Purchasers of the purchase price therefor) shall be at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304- 1050, or such other place as the Purchasers and the Company may mutually agree. The date of any closing of the transactions contemplated by this Agreement is sometimes also referred to herein as the "Closing Date". 2.2 Delivery. At the First Closing, the Company will deliver to each -------- Purchaser a certificate or certificates representing the number of Shares designated in column 2 of the Schedule of Purchasers to be purchased by each Purchaser, against payment of the purchase price therefor, by check or wire transfer payable to the Company, in the amount specified in column 1 of the Schedule of Purchasers. 2.3 Subsequent Closings. The purchase and sale of any Additional Shares shall ------------------- be held at a time and place to be agreed upon by the Company and the Additional Purchasers purchasing at such closing (a "Subsequent Closing"), but no later than July 30, 1994. At each Subsequent Closing, the Company shall deliver to each Additional Purchaser purchasing at such closing the certificates representing the Additional Shares which such Additional Purchaser is purchasing against delivery to the Company by such Additional Purchaser of the purchase price therefor by check or wire transfer payable to the Company, in the amount specified on the Schedule of Purchasers. The Company and each Additional Purchaser shall execute and deliver signature pages to this Agreement. SECTION 3 Representations and Warranties of the Company --------------------------------------------- Except as set forth on Exhibit C attached hereto, the Company hereby represents and warrants to each Purchaser as follows: 3.1 Organization and Standing: Articles and By-Laws. The Company is a ----------------------------------------------- corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not presently required. 3.2 Corporate Power. The Company will have at each Closing Date all requisite --------------- legal and corporate power to execute and deliver this Agreement and the Shareholder Rights Agreement attached hereto as Exhibit D (the "Shareholder Rights Agreement"), to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Series A Preferred and to carry out and perform its obligations under the terms of this Agreement and the Shareholder Rights Agreement. -2- 3.3 Subsidiaries. The Company has no subsidiaries or affiliated companies and ------------ does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.4 Capitalization. The authorized capital stock of the Company consists of -------------- 20,000,000 shares of Common Stock, of which 2,025,000 shares are issued and outstanding, and 3,585,000 shares of Series A Preferred, none of which has been or will be issued or outstanding prior to the First Closing. All such issued and outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. The Company has reserved (i) 3,585,000 shares of Series A Preferred for issuance hereunder (ii) sufficient shares of Common Stock for issuance upon conversion of the Shares and (iii) 2,475,000 shares of Common Stock for issuance to employees. The Series A Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Articles. Except for certain rights of first refusal set forth in the Shareholders Rights Agreement, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. All outstanding Common Stock was issued in compliance with all federal and state securities laws. Assuming the accuracy of each Purchaser's representations in Section 4 below, upon issuance the Shares will have been issued in compliance with all federal and state securities laws. 3.5 Authorization. All corporate action on the part of the Company, its ------------- directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Shareholder Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares (and the Common Stock issuable upon conversion of the Shares) and the performance of the Company's obligations hereunder and thereunder has been taken or will be taken prior to the First Closing. This Agreement and the Shareholder Rights Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances and the Common Stock issuable upon conversion of the Shares has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Restated Articles, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances. 3.6 Title to Properties and Assets; Liens, etc. The Company has good and ------------------------------------------ marketable title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor 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 Financial Statements. The Company has delivered to the Purchasers a copy -------------------- of the Company's unaudited financial statements for the year ended December 31, 1993 and unaudited -3- financial statements for the quarter ended April 30, 1994 (the "Financial Statements"). Such Financial Statements have been prepared in good faith. The Financial Statements present fairly the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, and reflect all material liabilities, contingent or otherwise, at the date thereof, subject where appropriate to normal year-end adjustments. 3.8 Patents. Trademarks. etc. The Company owns or has the right, or prior to ------------------------- the First Closing will own or have the right, to use, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to its business as now conducted or proposed to be conducted, and is not infringing upon or otherwise acting adversely to the right or claimed right of, to the best of its knowledge, any person under or with respect to any of the foregoing. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any written communications alleging that the Company has violated or, by conducting its business as proposed, would violate any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity. 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 the use of such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, the Shareholders Rights Agreement, the Voting 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 best of 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 of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 3.9 Material Contracts and Commitments. All the material contracts, ---------------------------------- agreements and instruments to which the Company is a party or by which it is bound which involve obligations of, or payments to, the Company in excess of $5,000, and all agreements between the Company and its officers, directors, employees and consultants (the "Material Agreements") are valid, binding and in full force and effect in all material respects, and are valid, binding and enforceable by the Company in accordance with their respective terms. The Company is not in breach of its obligations under the Material Agreements in accordance with the terms thereof. The Material Agreements are listed in Exhibit ------- C hereto. To the best of the Company's knowledge, no other party to any of the - - Material Agreements is in default thereunder. 3.10 Compliance with Other Instruments, None Burdensome, etc. The Company -------------------------------------------------------- is not in violation of any term of the Restated Articles of Incorporation or By- Laws, or in any material -4- respect of any term or provision of any material mortgage, indenture, contract, indebtedness, lease, agreement, instrument, judgment or decree. The Company, to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to the Company, which violation reasonably would be expected to have a material adverse effect on the Company's business. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Shares and the Common Stock issuable upon conversion of the Shares, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, or result in the creation of, any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company; and there is no such violation or default or event which, with the passage of time or giving of notice or both, would constitute a violation or default which materially and adversely affects the business of the Company or any of its properties or assets. 3.11 Litigation. etc. There are no actions, suits, proceedings or --------------- investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any basis therefor or written threat thereof). The foregoing includes, to the best of the Company's knowledge, actions pending or threatened in writing (or any basis therefor) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intents to initiate. 3.12 Employees. To the best of 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 relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. The Company does not have any collective bargaining agreements covering any of its employees. 3.13 Employee Agreements. Each director, consultant and person presently ------------------- employed by the Company has executed (or will execute by the First Closing Date) a Proprietary Information Agreement in the form of Exhibit E attached hereto, and each of Amos Wilnai and Alex Joffe has executed a Stock Repurchase Agreement with the Company in substantially the form of Exhibit F attached hereto. Such Proprietary Information Agreements and Stock Repurchase Agreements, when executed and delivered by the Company and such persons, shall constitute valid and binding obligations of the Company and, to the best of the Company's knowledge, such other persons. To the best of the Company's knowledge, neither the execution or delivery of such agreements, nor the carrying on of the Company's business as employees by such persons, nor the conduct of the Company's business as proposed, will 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 of such persons is now obligated. -5- 3.14 Registration Rights. Except as set forth in the Shareholder Rights ------------------- Agreement, the Company is not currently under any obligation to register under the Securities Act of 1933 any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.15 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 and the Shareholder Rights Agreement, or the offer, sale or issuance of the Series A Preferred (and the Common Stock issuable upon conversion of the Series A Preferred), or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Articles in the office of the Secretary of State of the State of California, and (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Series A Preferred (and the Common Stock issuable upon conversion of the Series A Preferred) under the California Corporate Securities law of 1968, as amended, and other applicable Blue Sky laws, which filing and qualification, if required, will be accomplished in a timely manner prior to or promptly upon completion of the Closing. 3.16 Disclosure. No statement by the Company contained in this Agreement ---------- and the exhibits attached hereto and any written statement or certificate furnished or to be furnished to the Purchasers pursuant hereto or in connection with the transactions contemplated hereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 3.17 Brokers or Finders. The Company has not incurred, and will not incur, ------------------ directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.18 Qualified Small Business Stock. To the best of the Company's ------------------------------ knowledge, the Shares will constitute "qualified small business stock" within the meaning of Section 1202 of the Internal Revenue Code of 1986, as amended (the "Code"), as of the date of issuance. 3.19 Returns and Complaints. The Company has received no customer ---------------------- complaints concerning its products and/or services, nor has it had any of its products returned by a purchaser thereof, other than minor, nonrecurring warranty problems. 3.20 Agreements; Action. ------------------ (a) Except for agreements explicitly contemplated hereby and by the Shareholder Rights Agreement, the Voting Agreement and the Co-Sale Agreement, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. -6- (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound which may involve indemnification by the Company with respect to infringements of proprietary rights. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $5,000 or, in the case of indebtedness and/or liabilities individually less than $5,000, in excess of $10,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Articles or Bylaws, which adversely affects its business as now conducted or as proposed to be conducted, its properties, or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company in a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 3.21 Related-Party Transactions. No employee, officer, or director of the -------------------------- Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No -7- member of the immediate family of any officer or director of the Company is directly or indirectly interested in any contract with the Company. 3.22 Permits. The Company has all franchises, permits, licenses, and any ------- similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default, in any material respect, under any of such franchises, permits, licenses, or other similar authority. 3.23 Environmental and Safety Laws. The Company is not in violation of any ----------------------------- applicable statute, law, or regulation relating to the environmental or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation. 3.24 Manufacturing and Marketing Rights. The Company has not granted ---------------------------------- rights to manufacture, produce, assemble, license, market, or sell its products to any other person, and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market, or sell its products. 3.25 Changes. Since April 30, 1994, there has not been: ------- (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business which have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and which is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted): (e) any change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; -8- (f) any material change in any compensation arrangement or agreement with any employee; (g) any resignation or termination of employment of any officer of the Company; and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer; (h) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (i) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (j) any declaration, setting aside or payment 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; (k) to the best of the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted); or (l) any agreement or commitment by the Company to do any of the things described in this Section 3.25. 3.26 Employee Benefit Plans. The Company does not have any Employee Benefit ---------------------- Plan as defined in the Employee Retirement Income Security Act of 1974. 3.27 Tax Returns, Payments and Elections. The Company has filed all tax ----------------------------------- returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Code, to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. 3.28 Insurance. The Company has in full force and effect fire and casualty --------- insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles), to allow -9- it to replace any of its properties that might be damaged or destroyed; and the Company has insurance against other hazards, risks and liabilities to persons and properties to the extent and in the manner customary for companies in similar businesses similarly situated. 3.29 Minute Books. The minute books of the Company provided to the ------------ Purchasers contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all respects. 3.30 Labor Agreements and Actions. The Company is not bound by or subject ---------------------------- to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer an employee of the Company is terminable at the will of the Company. 3.31 Real Property Holding Company. The Company is not a real property ----------------------------- holding company within the meaning of the Code Section 897. SECTION 4 Representations and Warranties of the Purchasers ------------------------------------------------ Each Purchaser hereby represents and warrants to the Company with respect to its purchase of the Shares as follows: 4.1 Investment Representations and Covenants of the Purchasers. ---------------------------------------------------------- (a) This Agreement is made by the Company with each Purchaser in reliance upon such Purchaser's representations and covenants made in this Section 4, which by its execution of this Agreement each Purchaser hereby confirms. Each Purchaser represents that the Shares to be received will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in or otherwise distributing the same. Each Purchaser further represents that it does not have any contract, undertaking, agreement or arrangement with any -10- person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares or any Common Stock acquired on conversion thereof. (b) Each Purchaser understands and acknowledges that the offering of the Shares pursuant to this Agreement will not, and any issuance of Common Stock on conversion thereof may not, be registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt pursuant to Section 4(2) of the Securities Act, and that the Company's reliance on such exemption is predicated on the Purchasers' representations set forth herein. (c) Each Purchaser covenants that in no event will it make any disposition of any of the Shares, or any Common Stock acquired upon the conversion thereof, except in accordance with Section 4 of the Shareholder Rights Agreement. (d) Each Purchaser represents that it is experienced in evaluating recently organized, high technology companies such as the Company, is able to fend for itself in transactions such as the one contemplated by this Agreement, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its prospective investment in the Company, and has the ability to bear the economic risks of the investment. (e) Each Purchaser acknowledges and understands that the Shares, and any Common Stock acquired upon the conversion thereof, must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available, and that, except as otherwise provided in the Shareholder Rights Agreement, the Company is under no obligation to register either the Shares or Common Stock. (f) Each Purchaser acknowledges that it has received and reviewed a copy of Rule 144 promulgated under the Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. Each Purchaser understands that before the Shares, or any Common Stock issued upon conversion thereof, may be sold under Rule 144, the following conditions must be fulfilled, except as otherwise described below: (i) certain public information about the Company must be available, (ii) the sale must occur at least two years after the later of the date the Shares were sold by the Company or the date they were sold by an affiliate of the Company, (iii) the sale must be made in a broker's transaction and (iv) the number of Shares sold must not exceed certain volume limitations. If, however, the sale occurs at least three years after the Shares were sold by the Company or an affiliate of the Company, and if the Purchaser is not an affiliate of the Company, the foregoing conditions will not apply. Each Purchaser understands that the current information referred to above is not now available and the Company has no present plans to make such information available. (g) Each Purchaser acknowledges that in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act or compliance with another exemption from registration will be required for any disposition of its stock. Each Purchaser understands that -11- although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (h) Each Purchaser covenants that, in the absence of an effective registration statement covering the stock in question, it will sell, transfer, or otherwise dispose of the Shares and any Common Stock issued on conversion thereof only in a manner consistent with its representations and covenants set forth in this Section 4. In connection therewith each Purchaser acknowledges that the Company shall make a notation on its stock books regarding the restrictions on transfer set forth in this Section 4 and shall transfer shares on the books of the Company only to the extent not inconsistent therewith. (i) Each Purchaser represents that one or more of the following criteria are applicable to such Purchaser: (1) The Purchaser is a director or executive officer of the Company; or (2) The Purchaser is a natural person who has a net worth or joint net worth with the Purchaser's spouse exceeding $1,000,000 at the time of purchase; or (3) The Purchaser is a natural person who had an individual income in excess of $200,000 in each of the two most recent years and who reasonably expects an income in excess of $200,000 in the current year; or (4) The Purchaser is either (i) a bank as defined in section 3(a)(2) of the Securities Act, whether acting in its individual capacity or fiduciary capacity as trustee, (ii) an insurance company as defined in section 2(13) of the Securities Act, (iii) an investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of such Act, (iv) a Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; or (5) The Purchaser is a private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; or (6) The Purchaser is a not-for-profit organization or other entity exempt from income tax under section 501(c)(3) of the Internal Revenue Code with total assets in excess of $5,000,000; or -12- (7) The Purchaser is a corporation, partnership or trust, and each and every equity owner of such entity certifies that it meets the qualifications set forth in (1), (2), (3), (4), (5) or (6) above. 4.2 No Public Market. Each Purchaser understands that no public market now ---------------- exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Shares. 4.3 Receipt of Information. Each Purchaser has received and reviewed this ---------------------- Agreement and all Exhibits thereto, and the Financial Statements; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials requested of, the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to verify the accuracy of the Financial Statements and to evaluate the suitability of an investment in the Series A Preferred; and, in evaluating the suitability of an investment in the Series A Preferred, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Purchasers to rely thereon. 4.4 Financial Statements. Each purchaser acknowledges that the Financial -------------------- Statements are not necessarily indicative of results to be expected for the present, or any future, fiscal period. SECTION 5 Conditions to Closing of Purchasers ----------------------------------- The Purchasers' obligations to purchase the Shares at the First Closing and any Subsequent Closing are, at the option of each Purchaser, subject to the fulfillment on or prior to the applicable Closing Date of the following conditions: 5.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the applicable Closing Date with the same force and effect as if they had been made on and as of said date. 5.2 Covenants. All covenants, agreements and conditions contained in this --------- Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects. -13- 5.3 Opinion of Company's Counsel. The Purchasers shall have received from ---------------------------- Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, an opinion addressed to them, dated the Closing Date, in substantially the form of Exhibit G. 5.4 Compliance Certificate. The Company shall have delivered to the ---------------------- Purchasers a certificate executed by the President of the Company, dated the Closing Date, and certifying to the fulfillment of the conditions specified in this Section 5, and that he has made, or caused to be made, such investigations as he deemed necessary in order to permit him to verify the accuracy of the information set forth in such certificate. 5.5 Blue Sky. The Company shall have obtained all necessary Blue Sky law -------- permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Series A Preferred and the Common Stock issuable upon conversion of the Series A Preferred. 5.6 Board of Directors. On or before the First Closing, the Bylaws of the ------------------ Company shall provide for a variable Board of Directors with a minimum of four (4) directors and a maximum of six (6) directors, with the exact number set at four (4). The Board of Directors shall at the First Closing consist of Geoffrey Y. Yang, Irwin Federman, Amos Wilnai and Andy Rappaport. 5.7 Restated Articles. The Restated Articles shall have been filed with the ----------------- Secretary of State of the State of California. 5.8 Proprietary Information Agreements. Each person presently employed by ---------------------------------- the Company shall have executed a Proprietary Information Agreement in the form of Exhibit E hereto. 5.9 Secretary's Certificate. The Company shall have delivered to the ----------------------- Purchaser's special counsel a certificate executed by the Secretary of the Company, dated as of the Closing, certifying the following matters: (i) Resolutions adopted by the Company's Board of Directors and Shareholders relating to the transactions contemplated by this Agreement; (ii) Bylaws of the Company; and (iii) incumbency of officers of the Company. 5.10 Stock Certificates. The Company shall have delivered to each Purchaser ------------------ a certificate for the number of shares of Series A Preferred set forth opposite such Purchaser's name on the Schedule of Purchasers. 5.11 No Material Adverse Change. There shall have been no material adverse -------------------------- change in the Company's business or financial condition. 5.12 Co-Sale Agreement. The Purchasers and each of Amos Wilnai and Alex ----------------- Joffe shall have entered into the Co-Sale Agreement in substantially the form attached hereto as Exhibit H. 5.13 Voting Agreement. The Purchasers and each of Amos Wilnai and Alex ---------------- Joffe shall have entered into a Voting Agreement in substantially the form attached hereto as Exhibit I. -14- 5.14 Shareholder Rights Agreement. The Purchasers, the Company and each of ---------------------------- Amos Wilnai and Alex Joffe shall have entered into the Shareholder Rights Agreement in substantially the form attached hereto as Exhibit D. SECTION 6 Conditions to Closing of Company -------------------------------- The Company's obligation to sell and issue the Series A Preferred at the Closing is, at the option of the Company, subject to the fulfillment of the following conditions: 6.1 Representations. The representations made by the Purchasers in Section 4 --------------- hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 6.2 Blue Sky. The Company shall have obtained all necessary Blue Sky Law -------- permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Series A Preferred and the Common Stock issuable upon conversion of the Series A Preferred. 6.3 Restated Articles. The Restated Articles shall have been filed with the ----------------- Secretary of State of the State of California. SECTION 7 Miscellaneous ------------- 7.1 Governing Law. This Agreement shall be governed in all respects by the ------------- laws of the State of California, without giving effect to the conflicts of laws principles thereof. 7.2 Survival. The representations, warranties, covenants, and agreements made -------- herein shall survive any investigation made by any Purchaser and the closing of the transactions contemplated hereby. 7.3 Successors and Assigns. Except as otherwise 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, provided, however, that the rights of a Purchaser to purchase Shares shall not be assignable without the written consent of the Company. 7.4 Entire Agreement; Amendment. This Agreement and the other documents --------------------------- delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged, or terminated other than by a written instrument signed by the party -15- against whom enforcement of any such amendment, waiver, discharge, or termination is sought; provided, however, that holders of a majority of the shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock and (whether or not converted) not resold to the public may waive or amend, on behalf of all Purchasers, any provisions hereof benefiting Purchasers in respect of the Shares. 7.5 Notices, etc. All notices and other communications required or permitted ------------ hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's address set forth in Exhibit A, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Purchasers. 7.6 Delays or Omissions. No delay or omission to exercise any right, power or ------------------- remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an 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. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder 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. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE ----------------------------------- THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 7.8 Expenses. The Company and the Purchasers shall each bear their own -------- expenses and legal fees with respect to this Agreement and the transactions contemplated hereby; except that, assuming a successful completion of the offering the Company will pay at the First Closing the -16- reasonable legal fees and reasonable expenses (up to a maximum of $10,000) upon receipt of a bill therefor, incurred by Brobeck, Phleger & Harrison, special counsel to the Purchasers. 7.9 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which may be executed by less than all of the Purchasers, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.10 Severability. In the event that any provision of this Agreement ------------ becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 7.11 Gender. The use of the neuter gender herein shall be deemed to ------ include the masculine and the feminine gender, if the context so requires. -17- The foregoing agreement is hereby executed as of the date first above written. "COMPANY" MULTIMEDIA COMMUNICATIONS, INC. a California corporation By: /s/ Amos Wilnai ------------------------------------ Amos Wilnai, President "PURCHASERS" INSTITUTIONAL VENTURE PARTNERS VI FIRST CLOSING By: Its Managing General Partner Institutional Venture Management VI By: /s/ Geoffrey Y. Yang ------------------------------------ Geoffrey Y. Yang INSTITUTIONAL VENTURE MANAGEMENT VI By: /s/ Geoffrey Y. Yang ------------------------------------ Geoffrey Y. Yang U.S. VENTURE PARTNERS IV, L.P. By: /s/ [SIGNATURE] ------------------------------------ Title: --------------------------------- SECOND VENTURES LIMITED PARTNERSHIP II By: /s/ [SIGNATURE] ------------------------------------ Title: --------------------------------- -18- U.S. V.P. ENTREPRENEUR PARTNERS II, L.P. By: /s/ [SIGNATURE] -------------------------------- Title: ----------------------------- CROSSCOMM CORPORATION By: -------------------------------- Title: ----------------------------- STANFORD UNIVERSITY By: /s/ HARRY A. TURNER -------------------------------- Title: Harry A. Turner, Assistant Secretary, The Board of Trustees of the Leland Stanford Junior University WS INVESTMENT COMPANY 94A By: /s/ LARRY W. SONSINI -------------------------------- Title: ----------------------------- /s/ ROBERT T. CLARKSON ----------------------------------- Robert T. Clarkson /s/ LARRY W. SONSINI ----------------------------------- Larry W. Sonsini -19- EXHIBIT A SCHEDULE OF PURCHASERS
Aggregate Number Name and Address of Purchaser Purchase Price of Shares - ------------------------------------------- -------------- ---------- Institutional Venture Partners VI $ 1,470,000 1,470,000 3000 Sand Hill Road Bldg. 2, Suite 290 Menlo Park, CA 94025 Institutional Venture Management VI 30,000 30,000 3000 Sand Hill Road Bldg. 2, Suite 290 Menlo Park, CA 94025 U.S. Venture Partners IV, L.P. 1,297,500 1,297,500 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Second Ventures Limited Partnership II 157,500 157,500 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 U.S. V.P. Entrepreneur Partners II, L.P. 45,000 45,000 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 CrossComm Corporation 500,000/1/ 500,000/1/ 450 Donald Lynch Blvd. Marlborough, MA 01752 Stanford University 50,000 50,000 Attention: Carol Gilmer 2770 Sand Hill Road Menlo Park, CA 94025 WS Investment Company 94A 22,500 22,500 c/o Robert T. Clarkson 650 Page Mill Road Palo Alto, CA 94304-1050
_________________________ /1/ CrossComm Corporations did not purchase these shares and, accordingly, the shares have not been sold.
Aggregate Number Name and Address of Purchaser Purchase Price of Shares - -------------------------------- -------------- --------- Robert T. Clarkson 6,250 6,250 650 Page Mill Road Palo Alto, CA 94304-1050 Larry W. Sonsini 6,250 6,250 650 Page Mill Road ---------- --------- Palo Alto, CA 94304-1050 Total $3,585,000 3,585,000 ========== =========
-2- EX-10.7 12 SERIES B PREFERRED STOCK PURCHASE AGREEMENT EXHIBIT 10.7 MMC NETWORKS, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT dated as of November 16, 1995 TABLE OF CONTENTS
Page ---- SECTION 1 - Authorization and Sale of Preferred Stock 1 1.1 Authorization................................................ 1 1.2 Sale of Series B Preferred................................... 1 1.3 Sale of Additional Series B Preferred........................ 1 SECTION 2 - Closing Date; Delivery 1 2.1 First Closing Date........................................... 1 2.2 Delivery..................................................... 2 2.3 Subsequent Closings.......................................... 2 SECTION 3 - Representations and Warranties of the Company 2 3.1 Organization and Standing; Articles and Bylaws............... 2 3.2 Corporate Power.............................................. 2 3.3 Subsidiaries................................................. 3 3.4 Capitalization............................................... 3 3.5 Authorization................................................ 3 3.6 Title to Properties and Assets; Liens, etc................... 3 3.7 Financial Statements......................................... 3 3.8 Patents, Trademarks, etc..................................... 4 3.9 Material Contracts and Commitments........................... 4 3.10 Compliance with Other Instruments, None Burdensome, etc...... 4 3.11 Litigation, etc.............................................. 5 3.12 Employees.................................................... 5 3.13 Employee Agreements.......................................... 5 3.14 Registration Rights.......................................... 5 3.15 Governmental Consent, etc.................................... 5 3.16 Disclosure................................................... 6 3.17 Brokers or Finders........................................... 6 3.18 Qualified Small Business Stock............................... 6 3.19 Returns and Complaints....................................... 6 3.20 Agreements; Action........................................... 6 3.21 Related-Party Transactions................................... 7 3.22 Permits...................................................... 7 3.23 Environmental and Safety Laws................................ 7 3.24 Manufacturing and Marketing Rights........................... 8 3.25 Changes...................................................... 8
-i- TABLE OF CONTENTS (continued)
Page ---- 3.26 Employee Benefit Plans....................................... 9 3.27 Tax Returns, Payments and Elections.......................... 9 3.28 Insurance.................................................... 9 3.29 Minute Books................................................. 9 3.30 Labor Agreements and Actions................................. 9 3.31 Real Property Holding Company................................ 10 SECTION 4 - Representations and Warranties of the Purchasers 10 4.1 Investment Representations and Covenants of the Purchasers... 10 4.2 No Public Market............................................. 12 4.3 Receipt of Information....................................... 12 4.4 Financial Statements......................................... 12 SECTION 5 - Conditions to Closing of Purchasers 12 5.1 Representations and Warranties Correct....................... 13 5.2 Covenants.................................................... 13 5.3 Opinion of Company's Counsel................................. 13 5.4 Compliance Certificate....................................... 13 5.5 Blue Sky..................................................... 13 5.6 Board of Directors........................................... 13 5.7 Restated Articles............................................ 13 5.8 Proprietary Information Agreements........................... 13 5.9 Secretary's Certificate...................................... 13 5.10 Stock Certificates........................................... 13 5.11 No Material Adverse Change................................... 14 5.12 Co-Sale Agreement............................................ 14 5.13 Voting Agreement............................................. 14 5.14 Shareholder Rights Agreement................................. 14 SECTION 6 - Conditions to Closing of Company 14 6.1 Representations.............................................. 14 6.2 Blue Sky..................................................... 14 6.3 Restated Articles............................................ 14
-ii- TABLE OF CONTENTS (continued)
Page ---- SECTION 7 - Miscellaneous................................................. 14 7.1 Governing Law.................................................. 14 7.2 Survival....................................................... 14 7.3 Successors and Assigns......................................... 14 7.4 Entire Agreement; Amendment.................................... 15 7.5 Notices, etc................................................... 15 7.6 Delays or Omissions............................................ 15 7.7 California Corporate Securities Law............................ 15 7.8 Expenses....................................................... 16 7.9 Counterparts................................................... 16 7.10 Severability................................................... 16 7.11 Gender......................................................... 16
EXHIBITS A. Schedule of Purchasers B. Amended and Restated Articles of Incorporation C. Exceptions to Representations and Warranties of the Company D. First Amended and Restated Shareholder Rights Agreement E. Proprietary Information Agreement F. Form of Opinion of Wilson, Sonsini, Goodrich & Rosati G. Form of First Amended and Restated Co-Sale Agreement H. Form of First Amended and Restated Voting Agreement -iii- MMC NETWORKS, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT This Agreement is made as of November 16, 1995, among MMC Networks, Inc., a California corporation (the "Company"), with its principal office at 2855 Kifer Road, Suite 200, Santa Clara, California 95051, and the persons and entities listed on the Schedule of Purchasers attached as Exhibit A hereto (the "Purchasers"). SECTION 1 Authorization and Sale of Preferred Stock ----------------------------------------- 1.1 Authorization. The Company has authorized the sale and issuance of up ------------- to 1,362,258 shares of its Series B Preferred Stock ("Series B Preferred"), having the rights, restrictions, privileges and preferences as set forth in the Company's Amended and Restated Articles of Incorporation in the form attached to this Agreement as Exhibit B (the "Restated Articles"). 1.2 Sale of Series B Preferred. Subject to the terms and conditions -------------------------- hereof, the Company will issue and sell to the Purchasers, and the Purchasers will buy from the Company, the number of shares (the "Shares") of Series B Preferred specified opposite each Purchaser's name on the Schedule of Purchasers, at a cash purchase price of $5.30 per share. The Company's agreements with each of the Purchasers are separate agreements, and the sales of the Series B Preferred to each of the Purchasers are separate sales. 1.3 Sale of Additional Series B Preferred. The Company shall have until ------------------------------------- November 30, 1995, to sell any shares of Series B Preferred not sold at the First Closing at the cash purchase price of $5.30 per share. Any such shares sold after the First Closing are referred to herein as "Additional Shares." The Additional Shares shall be considered "Shares" and the purchasers of such Additional Shares (the "Additional Purchasers") shall be considered "Purchasers" for purposes of this Agreement, and shall have the same rights and obligations as if they had purchased their shares pursuant to this Agreement at the First Closing. The maximum number of shares of Series B Preferred the Company may sell hereunder is 1,362,258. SECTION 2 Closing Date; Delivery ---------------------- 2.1 First Closing Date. The first closing of the purchase and sale of the ------------------ Series B Preferred hereunder (the "First Closing") shall be held at 3:00 p.m. on November 16, 1995, or on such later date or dates as the Company and the Purchasers may agree to (the date of such Closing being referred to as the "First Closing Date"). The place of the First Closing (including the place of delivery to the Purchasers by the Company of the certificates evidencing all shares of Series B Preferred being purchased and the place of payment to the Company by the Purchasers of the purchase price therefor) shall be at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, or such other place as the Purchasers and the Company may mutually agree. The date of any closing of the transactions contemplated by this Agreement is sometimes also referred to herein as the "Closing Date." 2.2 Delivery. At the First Closing, the Company will deliver to each -------- Purchaser a certificate or certificates representing the number of Shares designated in column 3 of the Schedule of Purchasers to be purchased by each Purchaser, against payment of the purchase price therefor, by check or wire transfer payable to the Company, in the amount specified in column 2 of the Schedule of Purchasers. 2.3 Subsequent Closings. The purchase and sale of any Additional Shares ------------------- shall be held at a time and place to be agreed upon by the Company and the Additional Purchasers purchasing at such closing (a "Subsequent Closing"), but no later than November 30, 1995. At each Subsequent Closing, the Company shall deliver to each Additional Purchaser purchasing at such closing the certificates representing the Additional Shares that such Additional Purchaser is purchasing against delivery to the Company by such Additional Purchaser of the purchase price therefor by check or wire transfer payable to the Company, in the amount specified on the Schedule of Purchasers. The Company and each Additional Purchaser shall execute and deliver signature pages to this Agreement. SECTION 3 Representations and Warranties of the Company --------------------------------------------- Except as set forth on Exhibit C attached hereto, the Company hereby represents and warrants to each Purchaser as follows: 3.1 Organization and Standing; Articles and Bylaws. The Company is a ---------------------------------------------- corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not presently required. 3.2 Corporate Power. The Company will have at each Closing Date all --------------- requisite legal and corporate power to execute and deliver this Agreement and the First Amended and Restated Shareholder Rights Agreement attached hereto as Exhibit D (the "Shareholder Rights Agreement"), the First Amended and Restated Co-Sale Agreement attached hereto as Exhibit G (the "Co-Sale Agreement") and the First Amended and Restated Voting Agreement attached hereto as Exhibit H (the "Voting Agreement"), to sell and issue the Shares hereunder, to issue the Common Stock issuable upon conversion of the Series B Preferred and to carry out and perform its obligations under the terms of this Agreement and the Shareholder Rights Agreement. -2- 3.3 Subsidiaries. The Company has no subsidiaries or affiliated companies ------------ and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.4 Capitalization. The authorized capital stock of the Company consists -------------- of 20,000,000 shares of Common Stock, of which 3,454,950 shares are issued and outstanding, 3,126,000 shares of Series A Preferred, of which 3,085,000 shares are issued and outstanding and 1,362,258 shares of Series B Preferred, none of which has been or will be issued or outstanding prior to the First Closing. All such issued and outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. The Company has reserved (i) 1,362,258 shares of Series B Preferred for issuance hereunder, (ii) sufficient shares of Common Stock for issuance upon conversion of the Shares, (iii) sufficient shares of Common Stock for issuance upon conversion of the Series A Preferred and (iv) 608,937 shares of Common Stock for issuance to employees. The Series B Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Articles. There are warrants outstanding to purchase 41,000 shares of Series A Preferred. Except as set forth above and in the Shareholder Rights Agreement, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. All outstanding Common Stock was issued in compliance with all federal and state securities laws. Assuming the accuracy of each Purchaser's representations in Section 4 below, upon issuance the Shares will have been issued in compliance with all federal and state securities laws. 3.5 Authorization. All corporate action on the part of the Company, its ------------- directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Shareholder Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares (and the Common Stock issuable upon conversion of the Shares) and the performance of the Company's obligations hereunder and thereunder has been taken or will be taken prior to the First Closing. This Agreement and the Shareholder Rights Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances, and the Common Stock issuable upon conversion of the Shares has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Restated Articles, will be validly issued, fully paid and nonassessable, and free of any liens or encumbrances. 3.6 Title to Properties and Assets; Liens, etc. The Company has good and ------------------------------------------ marketable title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor 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 Financial Statements. The Company has delivered to the Purchasers a -------------------- copy of the Company's audited financial statements for the year ended December 31, 1994 and unaudited financial -3- statements for the nine months ended September 30, 1995 (the "Financial Statements"). Such Financial Statements have been prepared in good faith and present fairly the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, and reflect all material liabilities, contingent or otherwise, at the date thereof, subject where appropriate to normal year-end adjustments. 3.8 Patents, Trademarks, etc. The Company owns or has the right, or prior ------------------------- to the First Closing will own or have the right, to use, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to its business as now conducted or proposed to be conducted, and is not infringing upon or otherwise acting adversely to the right or claimed right of, to the best of its knowledge, any person under or with respect to any of the foregoing. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any written communications alleging that the Company has violated or, by conducting its business as proposed, would violate any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity. 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 the use of such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, the Shareholder Rights Agreement, the Voting 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 best of 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 of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 3.9 Material Contracts and Commitments. All the material contracts, ---------------------------------- agreements and instruments to which the Company is a party or by which it is bound which involve obligations of, or payments to, the Company in excess of $5,000, and all agreements between the Company and its officers, directors, employees and consultants (the "Material Agreements") are valid, binding and in full force and effect in all material respects, and are valid, binding and enforceable by the Company in accordance with their respective terms. The Company is not in breach of its obligations under the Material Agreements in accordance with the terms thereof. The Material Agreements are listed in Exhibit C hereto. To the best of the Company's knowledge, no other party to any - --------- of the Material Agreements is in default thereunder. 3.10 Compliance with Other Instruments, None Burdensome, etc. The Company -------------------------------------------------------- is not in violation of any term of the Restated Articles of Incorporation or By- Laws, or in any material respect of any term or provision of any material mortgage, indenture, contract, indebtedness, lease, agree ment, instrument, judgment or decree. The Company, to the best of its knowledge, is not in violation of any -4- order, statute, rule or regulation applicable to the Company, which violation reasonably would be expected to have a material adverse effect on the Company's business. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Shares and the Common Stock issuable upon conversion of the Shares, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, or result in the creation of, any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company; and there is no such violation or default or event which, with the passage of time or giving of notice or both, would constitute a violation or default which materially and adversely affects the business of the Company or any of its properties or assets. 3.11 Litigation, etc. There are no actions, suits, proceedings or ---------------- investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any basis therefor or written threat thereof). The foregoing includes, to the best of the Company's knowledge, actions pending or threatened in writing (or any basis therefor) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intents to initiate. 3.12 Employees. To the best of 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 relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. The Company does not have any collective bargaining agreements covering any of its employees. 3.13 Employee Agreements. Each director, consultant and person presently ------------------- employed by the Company has executed (or will execute by the First Closing Date) a Proprietary Information Agreement in the form of Exhibit E attached hereto. Such Proprietary Information Agreements, when executed and delivered by the Company and such persons, shall constitute valid and binding obligations of the Company and, to the best of the Company's knowledge, such other persons. To the best of the Company's knowledge, neither the execution or delivery of such agreements, nor the carrying on of the Company's business as employees by such persons, nor the conduct of the Company's business as proposed, will 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 of such persons is now obligated. 3.14 Registration Rights. Except as set forth in the Shareholder Rights ------------------- Agreement, the Company is not currently under any obligation to register under the Securities Act of 1933 any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.15 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 and the Shareholder Rights Agreement, or the offer, sale or issuance of the Series B Preferred (and the Common Stock issuable upon conversion of the Series B Preferred), or the consummation of any other transaction contemplated -5- hereby, except (a) filing of the Restated Articles in the office of the Secretary of State of the State of California, and (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Series B Preferred (and the Common Stock issuable upon conversion of the Series B Preferred) under the California Corporate Securities Law of 1968, as amended, and other applicable Blue Sky laws, which filing and qualification, if required, will be accomplished in a timely manner prior to or promptly upon completion of the Closing. 3.16 Disclosure. No statement by the Company contained in this Agreement ---------- and the exhibits attached hereto and any written statement or certificate furnished or to be furnished to the Purchasers pursuant hereto or in connection with the transactions contemplated hereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 3.17 Brokers or Finders. The Company has not incurred, and will not incur, ------------------ directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.18 Qualified Small Business Stock. To the best of the Company's ------------------------------ knowledge, the Shares will constitute "qualified small business stock" within the meaning of Section 1202 of the Internal Revenue Code of 1986, as amended (the "Code"), as of the date of issuance. 3.19 Returns and Complaints. The Company has received no customer ---------------------- complaints concerning its products and/or services, nor has it had any of its products returned by a purchaser thereof, other than minor, nonrecurring warranty problems. 3.20 Agreements; Action. ------------------ (a) Except for agreements explicitly contemplated hereby and by the Shareholder Rights Agreement, the Voting Agreement and the First Amended and Restated Co-Sale Agreement between the Company and certain investors (the "Co- Sale Agreement"), there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound which may involve indemnification by the Company with respect to infringements of proprietary rights. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $5,000 or, in the case of indebtedness and/or liabilities individually less than $5,000, in excess of $10,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or -6- (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Articles or Bylaws, which adversely affects its business as now conducted or as proposed to be conducted, its properties, or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company in a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 3.21 Related-Party Transactions. No employee, officer, or director of the -------------------------- Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any contract with the Company. 3.22 Permits. The Company has all franchises, permits, licenses, and any ------- similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default, in any material respect, under any of such franchises, permits, licenses, or other similar authority. 3.23 Environmental and Safety Laws. The Company is not in violation of any ----------------------------- applicable statute, law, or regulation relating to the environmental or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation. -7- 3.24 Manufacturing and Marketing Rights. The Company has not granted ---------------------------------- rights to manufacture, produce, assemble, license, market, or sell its products to any other person, and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market, or sell its products. 3.25 Changes. Since September 30, 1995 there has not been: ------- (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business which have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and which is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee; (g) any resignation or termination of employment of any officer of the Company; and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer; (h) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (i) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (j) any declaration, setting aside or payment 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; -8- (k) to the best of the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted); or (l) any agreement or commitment by the Company to do any of the things described in this Section 3.25. 3.26 Employee Benefit Plans. The Company does not have any Employee ---------------------- Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 3.27 Tax Returns, Payments and Elections. The Company has filed all tax ----------------------------------- returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Code, to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. 3.28 Insurance. The Company has in full force and effect fire and casualty --------- insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles), to allow it to replace any of its properties that might be damaged or destroyed; and the Company has insurance against other hazards, risks and liabilities to persons and properties to the extent and in the manner customary for companies in similar businesses similarly situated. 3.29 Minute Books. The minute books of the Company provided to the ------------ Purchasers contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all respects. 3.30 Labor Agreements and Actions. The Company is not bound by or subject ---------------------------- to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. -9- 3.31 Real Property Holding Company. The Company is not a real property ----------------------------- holding company within the meaning of the Code Section 897. SECTION 4 Representations and Warranties of the Purchasers ------------------------------------------------ Each Purchaser hereby represents and warrants to the Company with respect to its purchase of the Shares as follows: 4.1 Investment Representations and Covenants of the Purchasers. ---------------------------------------------------------- (a) This Agreement is made by the Company with each Purchaser in reliance upon such Purchaser's representations and covenants made in this Section 4, which by its execution of this Agreement each Purchaser hereby confirms. Each Purchaser represents that the Shares to be received will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting any participation in or otherwise distributing the same. Each Purchaser further represents that it 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 the Shares or any Common Stock acquired on conversion thereof. (b) Each Purchaser understands and acknowledges that the offering of the Shares pursuant to this Agreement will not, and any issuance of Common Stock on conversion thereof may not, be registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt pursuant to Section 4(2) of the Securities Act, and that the Company's reliance on such exemption is predicated on the Purchasers' representations set forth herein. (c) Each Purchaser covenants that in no event will it make any disposition of any of the Shares, or any Common Stock acquired upon the conversion thereof, except in accordance with Section 4 of the Shareholder Rights Agreement. (d) Each Purchaser represents that it is experienced in evaluating recently organized, high technology companies such as the Company, is able to fend for itself in transactions such as the one contemplated by this Agreement, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its prospective investment in the Company, and has the ability to bear the economic risks of the investment. (e) Each Purchaser acknowledges and understands that the Shares, and any Common Stock acquired upon the conversion thereof, must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available, and that, except as otherwise provided in the Shareholder Rights Agreement, the Company is under no obligation to register either the Shares or Common Stock. -10- (f) Each Purchaser acknowledges that it is familiar with Rule 144 promulgated under the Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. Each Purchaser understands that before the Shares, or any Common Stock issued upon conversion thereof, may be sold under Rule 144, the following conditions must be fulfilled, except as otherwise described below: (i) certain public information about the Company must be available, (ii) the sale must occur at least two years after the later of the date the Shares were sold by the Company or the date they were sold by an affiliate of the Company, (iii) the sale must be made in a broker's transaction and (iv) the number of Shares sold must not exceed certain volume limitations. If, however, the sale occurs at least three years after the Shares were sold by the Company or an affiliate of the Company, and if the Purchaser is not an affiliate of the Company, the foregoing conditions will not apply. Each Purchaser understands that the current information referred to above is not now available and the Company has no present plans to make such information available. (g) Each Purchaser acknowledges that in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act or compliance with another exemption from registration will be required for any disposition of its stock. Each Purchaser understands that although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (h) Each Purchaser covenants that, in the absence of an effective registration statement covering the stock in question, it will sell, transfer, or otherwise dispose of the Shares and any Common Stock issued on conversion thereof only in a manner consistent with its representations and covenants set forth in this Section 4. In connection therewith each Purchaser acknowledges that the Company shall make a notation on its stock books regarding the restrictions on transfer set forth in this Section 4 and shall transfer shares on the books of the Company only to the extent not inconsistent therewith. (i) Each Purchaser represents that one or more of the following criteria are applicable to such Purchaser: (1) The Purchaser is a director or executive officer of the Company; or (2) The Purchaser is a natural person who has a net worth or joint net worth with the Purchaser's spouse exceeding $1,000,000 at the time of purchase; or (3) The Purchaser is a natural person who had an individual income in excess of $200,000 in each of the two most recent years and who reasonably expects an income in excess of $200,000 in the current year; or (4) The Purchaser is either (i) a bank as defined in section 3(a)(2) of the Securities Act, whether acting in its individual capacity or fiduciary capacity as trustee, (ii) an insurance company as defined in section 2(13) of the Securities Act, (iii) an investment company registered under -11- the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of such Act, (iv) a Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; or (5) The Purchaser is a private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; or (6) The Purchaser is any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the Shares with total assets in excess of $5,000,000; or (7) The Purchaser is a corporation, partnership or trust, and each and every equity owner of such entity certifies that it meets the qualifications set forth in (1), (2), (3), (4), (5) or (6) above. 4.2 No Public Market. Each Purchaser understands that no public market ---------------- now exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Shares. 4.3 Receipt of Information. Each Purchaser has received and reviewed this ---------------------- Agreement and all Exhibits thereto, and the Financial Statements; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials requested of, the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to verify the accuracy of the Financial Statements and to evaluate the suitability of an investment in the Series B Preferred; and, in evaluating the suitability of an investment in the Series B Preferred, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 of this Agreement or the right of the Purchasers to rely thereon. 4.4 Financial Statements. Each Purchaser acknowledges that the Financial -------------------- Statements are not necessarily indicative of results to be expected for the present, or any future, fiscal period. SECTION 5 Conditions to Closing of Purchasers ----------------------------------- The Purchasers' obligations to purchase the Shares at the First Closing and any Subsequent Closing are, at the option of each Purchaser, subject to the fulfillment on or prior to the applicable Closing Date of the following conditions: -12- 5.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the applicable Closing Date with the same force and effect as if they had been made on and as of said date. 5.2 Covenants. All covenants, agreements and conditions contained in this --------- Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects. 5.3 Opinion of Company's Counsel. The Purchasers shall have received from ---------------------------- Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, an opinion addressed to them, dated the Closing Date, in substantially the form of Exhibit F. 5.4 Compliance Certificate. The Company shall have delivered to the ---------------------- Purchasers a certificate executed by the President of the Company, dated the Closing Date, and certifying to the fulfillment of the conditions specified in this Section 5, and that he has made, or caused to be made, such investigations as he deemed necessary in order to permit him to verify the accuracy of the information set forth in such certificate. 5.5 Blue Sky. The Company shall have obtained all necessary Blue Sky law -------- permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Series B Preferred and the Common Stock issuable upon conversion of the Series B Preferred. 5.6 Board of Directors. On or before the First Closing, the Bylaws of the ------------------ Company shall provide for a variable Board of Directors with a minimum of four (4) directors and a maximum of six (6) directors, with the exact number set at four (5). The Board of Directors shall at the First Closing consist of P.K. Dubey, Irwin Federman, Andy Rappaport, Amos Wilnai, and Geoffrey Y. Yang. 5.7 Restated Articles. The Restated Articles shall have been filed with ----------------- the Secretary of State of the State of California. 5.8 Proprietary Information Agreements. Each person presently employed by ---------------------------------- the Company shall have executed a Proprietary Information Agreement in the form of Exhibit E hereto. 5.9 Secretary's Certificate. The Company shall have delivered to the ----------------------- Purchaser's special counsel a certificate executed by the Secretary of the Company, dated as of the Closing, certifying the following matters: (i) Resolutions adopted by the Company's Board of Directors and Shareholders relating to the transactions contemplated by this Agreement; (ii) Bylaws of the Company; and (iii) incumbency of officers of the Company. 5.10 Stock Certificates. The Company shall have delivered to each ------------------ Purchaser a certificate for the number of shares of Series B Preferred set forth opposite such Purchaser's name on the Schedule of Purchasers. -13- 5.11 No Material Adverse Change. There shall have been no material adverse -------------------------- change in the Company's business or financial condition. 5.12 Co-Sale Agreement. The Purchasers and each of Amos Wilnai and Alex ----------------- Joffe shall have entered into the Co-Sale Agreement in substantially the form attached hereto as Exhibit G. 5.13 Voting Agreement. The Purchasers and each of Amos Wilnai and Alex ---------------- Joffe shall have entered into the Voting Agreement in substantially the form attached hereto as Exhibit H. 5.14 Shareholder Rights Agreement. The Purchasers, the Company and each of ---------------------------- Amos Wilnai and Alex Joffe shall have entered into the Shareholder Rights Agreement in substantially the form attached hereto as Exhibit D. SECTION 6 Conditions to Closing of Company -------------------------------- The Company's obligation to sell and issue the Series B Preferred at the Closing is, at the option of the Company, subject to the fulfillment of the following conditions: 6.1 Representations. The representations made by the Purchasers in --------------- Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 6.2 Blue Sky. The Company shall have obtained all necessary Blue Sky Law -------- permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Series B Preferred and the Common Stock issuable upon conversion of the Series B Preferred. 6.3 Restated Articles. The Restated Articles shall have been filed with ----------------- the Secretary of State of the State of California. SECTION 7 Miscellaneous ------------- 7.1 Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of California, without giving effect to the conflicts of laws principles thereof. 7.2 Survival. The representations, warranties, covenants, and agreements -------- made herein shall survive any investigation made by any Purchaser and the closing of the transactions contemplated hereby. 7.3 Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators -14- of the parties hereto, provided, however, that the rights of a Purchaser to purchase Shares shall not be assignable without the written consent of the Company. 7.4 Entire Agreement; Amendment. This Agreement and the other documents --------------------------- delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged, or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge, or termination is sought; provided, however, that holders of a majority of the shares of Common Stock issued or issuable upon conversion of the Series B Preferred Stock and (whether or not converted) not resold to the public may waive or amend, on behalf of all Purchasers, any provisions hereof benefiting Purchasers in respect of the Shares. 7.5 Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's address set forth in Exhibit A, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Purchasers. 7.6 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an 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. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder 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. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ----------------------------------- ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. -15 7.8 Expenses. The Company and the Purchasers shall each bear their own -------- expenses and legal fees with respect to this Agreement and the transactions contemplated hereby; except that, assuming a successful completion of the offering the Company will pay at the First Closing the reasonable legal fees (up to a maximum of $7,500) and reasonable expenses upon receipt of a bill therefor of special counsel to the Purchasers. 7.9 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which may be executed by less than all of the Purchasers, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.10 Severability. In the event that any provision of this Agreement ------------ becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 7.11 Gender. The use of the neuter gender herein shall be deemed to ------ include the feminine and the masculine gender, if the context so requires. -16- The foregoing agreement is hereby executed as of the date first above written. "COMPANY" MMC NETWORKS, INC., a California corporation By: /s/ P. K. Dubey --------------------------------------------- P. K. Dubey, President "PURCHASERS" KLEINER PERKINS CAUFIELD & BYERS VII By: KPCB VII Associates, its General Partner By: /s/ [SIGNATURE] --------------------------------------------- Title: General Partner ------------------------------------------ KPCB VII FOUNDERS FUND By: KPCB VII Associates, its General Partner By: /s/ [SIGNATURE] --------------------------------------------- Title: General Partner ------------------------------------------ KPCB INFORMATION SCIENCES ZAIBATSU FUNDS II By: KPCB VII Associates, its General Partner By: /s/ [SIGNATURE] --------------------------------------------- Title: General Partner ------------------------------------------ -17- JAPAN ASSOCIATED FINANCE CO., LTD. By: /s/ Masaki Yoshida --------------------------------------------- Name: Masaki Yoshida Title: President JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP By: /s/ Masaki Yoshida --------------------------------------------- Name: Masaki Yoshida Title: President Japan Associated Finance Co., Ltd. Its Executive Partner U.S. INFORMATION TECHNOLOGY INVESTMENT ENTERPRISE PARTNERSHIP By: /s/ Masaki Yoshida --------------------------------------------- Name: Masaki Yoshida Title: President Japan Associated Finance Co., Ltd. Its Executive Partner INSTITUTIONAL VENTURE PARTNERS VI, L.P. By Its General Partner Institutional Venture Management VI By: /s/ Geoffrey Y. Yang --------------------------------------------- Geoffrey Y. Yang, General Partner INSTITUTIONAL VENTURE MANAGEMENT VI, L.P. By: /s/ Geoffrey Y. Yang --------------------------------------------- Geoffrey Y. Yang, General Partner -18- IVP FOUNDERS FUND I, L.P. By Its General Partner Institutional Venture Management VI By: /s/ Geoffrey Y. Yang --------------------------------------------- Geoffrey Y. Yang, General Partner U.S. VENTURE PARTNERS IV, L.P. By Its General Partner Presidio Management Group IV, L.P. By: /s/ Michael P. Maher --------------------------------------------- General Partner USVP ENTREPRENEUR PARTNERS II, L.P. A Delaware Limited Partnership By Its General Partner Presidio Management Group IV, L.P. By: /s/ Michael P. Maher --------------------------------------------- General Partner SECOND VENTURES II, L.P. By Its General Partner Presidio Management Group IV, L.P. By: /s/ Michael P. Maher --------------------------------------------- General Partner STANFORD UNIVERSITY By: /s/ Carol Gilmer --------------------------------------------- Title: Assistant Secretary, The Board of Trustees of the Leland Stanford Junior University -19- WS INVESTMENT COMPANY 95B By: /s/ Robert T. Clarkson --------------------------------------------- Title: Partner ------------------------------------------ /s/ Robert T. Clarkson ------------------------------------------------ Robert T. Clarkson /s/ Larry W. Sonsini ------------------------------------------------ Larry W. Sonsini /s/ John Marren ------------------------------------------------ John Marren /s/ G. Arjavalingam ------------------------------------------------ G. Arjavalingam /s/ Timothy M. Haley ------------------------------------------------ Timothy M. Haley /s/ Neal Douglas ------------------------------------------------ Neal Douglas -20- EXHIBIT A SCHEDULE OF PURCHASERS
Aggregate Number Name and Address of Purchaser Purchase Price of Shares - ------------------------------------ -------------- --------- Kleiner Perkins Caufield & Byers VII 2,110,587.20 398,224 2750 Sand Hill Road Menlo Park, CA 94025 KPCB VII Founders Fund 229,410.50 43,285 2750 Sand Hill Road Menlo Park, CA 94025 KPCB Information Sciences 60,001.30 11,321 Zaibatsu Fund II 2750 Sand Hill Road Menlo Park, CA 94025 Japan Associated Finance Co., Ltd. 55,999.80 10,566 Toshiba Bldg. 10F 1-1-1, Shibaura, Minato-Ku Tokyo, Japan 105 JAFCO G-5 Investment Enterprise 223,999.20 42,264 Partnership Toshiba Bldg. 10F 1-1-1, Shibaura, Minato-Ku Tokyo, Japan 105 U.S. Information Technology Investment 1,119,996.00 211,320 Enterprise Partnership Toshiba Bldg. 10F 1-1-1, Shibaura, Minato-Ku Tokyo, Japan 105 Institutional Venture Partners VI, L.P. 1,504,002.20 283,774 3000 Sand Hill Road Bldg. 2, Suite 290 Menlo Park, CA 94025 Institutional Venture Management VI, 32,001.40 6,038 L.P. 3000 Sand Hill Road Bldg. 2, Suite 290 Menlo Park, CA 94025
Aggregate Number Name and Address of Purchaser Purchase Price of Shares - ------------------------------------ -------------- --------- IVP Founders Fund I, L.P. 63,997.50 12,075 3000 Sand Hill Road Bldg. 2, Suite 290 Menlo Park, CA 94025 U.S. Venture Partners IV, L.P. 1,383,999.60 261,132 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Second Ventures II, L.P. 167,999.40 31,698 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 USVP Entrepreneur Partners II, L.P. 48,002.10 9,057 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Stanford University 49,994.90 9,433 Attention: Carol Gilmer 2770 Sand Hill Road Menlo Park, CA 94025 WS Investment Company 95B 35,997.60 6,792 c/o Robert T. Clarkson 650 Page Mill Road Palo Alto, CA 94304-1050 Robert T. Clarkson 11,999.20 2,264 650 Page Mill Road Palo Alto, CA 94304-1050 Larry W. Sonsini 11,999.20 2,264 650 Page Mill Road Palo Alto, CA 94304-1050 John Marren 24,994.80 4,716 Alex. Brown & Sons Incorporated 101 California St., 46th Floor San Francisco, CA 94111
-2-
Aggregate Number Name and Address of Purchaser Purchase Price of Shares - ------------------------------------ -------------- --------- G. Arjavalingam 24,994.80 4,716 Needham & Company, Inc. 445 Park Avenue New York, NY 10022 Timothy M. Haley 9,995.80 1,886 Haley Associates 526 Ramona St. Palo Alto, CA 94301 Neal M. Douglas 49,994.90 9,433 AT&T Ventures Bldg. 4, Suite 235 3000 Sand Hill Road Menlo Park, CA 94025 Total $7,219,967.40 $1,362,258 ============= ==========
-3- EX-10.8 13 AMENDED AND RESTATED SHAREHOLDER RIGHTS AGREEMENT EXHIBIT 10.8 FIRST AMENDED AND RESTATED SHAREHOLDER RIGHTS AGREEMENT This First Amended and Restated Shareholder Rights Agreement (the "Agreement") is made as of this 16th day of November 1995 by and among MMC Networks, Inc., a California corporation (the "Company"), the purchasers of Series A Preferred Stock of the Company pursuant to that certain Series A Preferred Stock Purchase Agreement dated July 12, 1994 (the "Series A Agreement") between the Company and such purchasers (the "Series A Purchasers"), the purchasers of the Series B Preferred Stock of the Company pursuant to that certain Series B Preferred Stock Purchase Agreement dated of even date herewith (the "Series B Agreement") between the Company and such purchasers (the "Series B Purchasers") (the Series A Purchasers and the Series B Purchasers being collectively referred to herein as the "Purchasers") and Amos Wilnai, Alex Joffe and P.K. Dubey (the "Founders") and Dominion Fund III, a California Limited Partnership ("Dominion"). Recitals -------- A. Pursuant to the Series A Agreement, the Series A Purchasers have purchased shares of Series A Preferred Stock of the Company (the "Series A Preferred") and pursuant to the Series B Agreement, the Series B Purchasers have purchased shares of Series B Preferred Stock of the Company (the "Series B Preferred") (the Series A Preferred and Series B Preferred are hereinafter collectively referred to as the "Preferred Stock"). In connection with the Series A Agreement, the Series A Purchasers, the Founders and the Company entered into a Shareholder Rights Agreement dated July 12, 1994 (the "Prior Shareholder Agreement") setting forth their agreement and understandings with respect to certain rights and privileges accompanying the shares of the Series A Preferred, and to which Prior Shareholder Rights Agreement Dominion was subsequently added. B. The Series A Purchasers, the Founders, the Company and Dominion desire to amend and restate the Prior Shareholder Agreement to contain the rights contained herein. NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the Purchasers and the Company agree as follows: Agreement --------- 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any ---------- successor agency. "Demand Registrable Securities" shall mean (i) shares of the Company's ----------------------------- Common Stock issued or issuable upon the conversion of the Series A Preferred or Series B Preferred; (ii) any Common Stock of the Company or other securities issued or issuable in respect of shares of the Series A Preferred or Series B Preferred; (iii) shares of the Company's Common Stock or other securities issued or issuable upon any conversion of the Series A Preferred or Series B Preferred upon any stock split, stock dividend, recapitalization, or similar event; provided, however, that any shares described ----------------- in clauses (i)-(iii) above which have been resold to the public shall cease to be Registrable Securities upon such resale. "Holder" shall mean Dominion, each Purchaser, Founder and any transferee of ------ Registrable Securities who, pursuant to Section 15 below, is entitled to registration rights hereunder. "Restricted Securities" shall mean the securities of the Company required --------------------- to bear the legend set forth in Section 3 hereof (or any similar legend). "Registrable Securities" shall mean (i) shares of the Company's Common ---------------------- Stock issued or issuable upon the conversion of the Series A Preferred or Series B Preferred; (ii) any Common Stock of the Company or other securities issued or issuable in respect of shares of the Series A Preferred or Series B Preferred; (iii) an aggregate of 3,225,000 shares of Common Stock held by the Founders or issuable upon exercise of stock options held by them; and (iv) shares of the Company's Common Stock or other securities issued or issuable upon any conversion of the Series A Preferred or Series B Preferred or in respect of the shares described in clause (iii) upon any stock split, stock dividend, recapitalization, or similar event; provided, however, that any shares described -------- ------- in clauses (i)-(iv) above which have been resold to the public shall cease to be Registrable Securities upon such resale. The terms "register," "registered" and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in --------------------- complying with Sections 5, 6 and 9 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, reasonable fees and disbursements of one counsel to the Holders, and the expense of any special audits incident to or required by any such registration. "Securities Act" shall mean the Securities Act of 1933, as amended. -------------- "Selling Expenses" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the securities registered by the Holders. 2. Restrictions on Transferability. The Restricted Securities shall not ------------------------------- be transferable except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Each Holder of Restricted Securities will cause any proposed transferee of the Restricted Securities held by such Holder to agree to take and hold such Restricted Securities subject to the provisions and upon the conditions specified in this Agreement. 3. Restrictive Legend. Each certificate representing (i) the Series A ------------------ Preferred or Series B Preferred, (ii) shares of the Company's Common Stock issued upon conversion of the Series A Preferred or Series B Preferred, (iii) the Common Stock issued to the Founders and (iv) any other securities issued in respect of the Series A Preferred, Series B Preferred or Common Stock issued upon conversion of the -2- Series A Preferred, Series B Preferred and Common Stock issued to the Founders upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 4 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. 4. Notice of Proposed Transfers. The Holder of each certificate ---------------------------- representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4. Prior to any proposed transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Holder thereof shall give written notice to the Company of such Holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall, if the Company so requests, be accompanied (except in transactions in compliance with Rule 144) by either (i) an unqualified written opinion of legal counsel who shall be reasonably satisfactory to the Company, addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "No Action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the Holder to the Company; provided, however, that no opinion or No Action letter need be obtained -------- ------- with respect to a transfer to (A) a partner, active or retired, of a Holder of Restricted Securities, (B) the estate of any such partner, (C) an "affiliate" of a Holder of Restricted Securities as that term is defined in Rule 405 promulgated by the Commission under the Securities Act, or (D) the spouse, children, grandchildren or spouse of such children or grandchildren of any Holder or to trusts for the benefit of any Holder or such persons, if the transferee agrees to be subject to the terms hereof. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act. -3- 5. Requested Registration. ---------------------- (a) Request for Registration. If at any time after two years from the date ------------------------ of this Agreement, the Company shall receive from any Holder or group of Holders holding at least 50% of the Demand Registrable Securities a written request that the Company effect any registration, qualification or compliance with respect to at least 1,000,000 shares of Demand Registrable Securities, or such lesser number of shares of Demand Registrable Securities if the aggregate proceeds of such offering (after deduction for Selling Expenses) exceed $5,000,000, the Company will: (x) promptly give written notice of the proposed registration, qualification or compliance to all other Holders holding Demand Registrable Securities; and (y) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Demand Registrable Securities as are specified in such request, together with all or such portion of the Demand Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within 15 days after receipt of such written notice from the Company; Provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 5: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) After the Company has effected two such registrations pursuant to this Section 5(a), such registrations have been declared or ordered effective and the securities offered pursuant to such registration have been sold; or (C) Within six months following the effective date of a registration statement previously filed by the Company. Subject to the foregoing clauses (A), (B) and (C), the Company shall file a registration statement covering the Demand Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of any Holder or Holders. If, however, the Company shall furnish to the Holder or Holders requesting a registration statement pursuant to this Section 5 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 shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the -4- Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Holder or Holders requesting such registration; provided, however, that the Company may not utilize this right more than once in any twelve-month period. (b) Underwriting. If the Holders intend to distribute the Demand ------------ Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 5(a) and the Company shall include such information in the written notice referred to in Section 5(a)(x). The right of any Holder to registration pursuant to Section 5 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Demand Registrable Securities in the underwriting to the extent requested (unless otherwise mutually agreed by a majority in interest of the Holders) to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Holders. Notwithstanding any other provision of this Section 5, if the managing underwriter advises the Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then, subject to the provisions of Section 5(a), the Company shall so advise all Holders and the number of shares of Demand Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders requesting inclusion in the registration in proportion, as nearly as practicable, to the respective amounts of Demand Registrable Securities held by such Holders at the time of filing the registration statement, provided however, that the number of shares of Demand Registrable Securities held by Holders who initiated the registration under subsection (a) above to be included in such Underwriting shall not be reduced unless all other Demand Registrable Securities are first entirely excluded from the Underwriting. No Demand Registrable Securities excluded from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. If any Holder of Demand Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the other Holders. The Demand Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that if by the withdrawal of such Demand Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Demand Registrable Securities in the registration the right to include additional Demand Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 5(b). If the registration does not become effective due to the withdrawal of Demand Registrable Securities, then either (1) the Holders requesting registration shall reimburse the Company for expenses incurred in complying with the request or (2) the aborted registration shall be treated as effected for purposes of Section 5(a)(B). -5- 6. Company Registration. -------------------- (a) Notice of Registration. If the Company shall determine to ---------------------- register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than (i) a registration relating solely to employee benefit plans or (ii) a registration relating solely to a Commission Rule 145 transaction: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after receipt of such written notice from the Company, by any Holder or Holders, provided that the Company may limit, to the ------------- extent so advised by the underwriters, the amount of Registrable Securities to be included in the registration by the Holders, by (1) up to 100% of the Registrable Securities sought to be included in the case of the initial public offering of the Company and (2) up to 70% of the Registrable Securities sought to be included in the case of any subsequent public offering. (b) In all registered public offerings, whether underwritten or not, the amount of Registrable Securities of Holders which are included in such registration, in accordance with the limitations set forth in Section 6(a)(ii) above, shall be allocated to the Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities which would be held by each of such Holders assuming conversion of all outstanding Series A Preferred and Series B Preferred as of the date of the notice given pursuant to this Section 6. 7. Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to Section 5(a), Section 6 and Section 9 shall be borne by the Company. All Selling Expenses relating to securities registered by the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 8. Registration Procedures. In the case of each registration, ----------------------- qualification or compliance effected by the Company pursuant to this Agreement the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Keep such registration, qualification or compliance effective for a period of 120 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; (c) 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 -6- 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; (d) 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; (e) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, include an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which securities of the same class issued by the Company are then listed; (g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and (h) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to Section 5 herein, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to Section 5 herein, 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. 9. Registration on Form S-3. In addition to the rights set forth in ------------------------- Section 5, if the Holders holding a majority of the Demand Registrable Securities request that the Company file a registration statement on Form S-3 (or any successor thereto) for a public offering of shares of Demand Registrable Securities the reasonably anticipated aggregate price to the public of which would exceed $2,000,000, and the Company is a registrant entitled to use Form S- 3 to register securities for such an offering, the Company shall use its best efforts to cause such shares to be registered for the offering on such form (or any successor thereto). A Holder or group of Holders is entitled to an unlimited number of Form S-3 -7- registrations; provided, however, that the Company shall be required to file no more than one (1) such registration statement during any 12-month period. 10. Termination of Registration Rights. The registration rights granted ---------------------------------- pursuant to this Agreement shall terminate (i) as to all Holders on the fifth anniversary of the closing of the Company's initial public offering and (ii) as to any Holder, at such time after the Company's initial public offering as the Registrable Securities held by such Holder represents 1% or less of the outstanding Common Stock of the Company or such Holder is able to sell all Registrable Securities held by it pursuant to Rule 144(k) promulgated under the Securities Act. 11. Lockup Agreement. In consideration for the Company agreeing to its ---------------- obligations under this Agreement each Holder of Registrable Securities and each transferee pursuant to Section 15 hereof agrees, in connection with the first registration of the Company's securities, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as the Company or the underwriters may specify. Each Holder agrees that the Company may instruct its transfer agent to place stop transfer notations in its records to enforce the provisions of this Section 11. 12. Indemnification. --------------- (a) The Company will indemnify each Holder, each of its officers, directors and partners and such Holder's legal counsel and independent accountants, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners and such Holder's legal counsel and independent accountants, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished -8- to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and its legal counsel and independent accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, legal counsel, independent accountants, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the gross proceeds before expenses and commissions to each such Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 12 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; provided, however, that the 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 under the California Rules of Professional Conduct as a result of conflicting interests between such Indemnified Party and any other party represented by such counsel in such proceeding; and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent, but only to the extent, that the Indemnifying Party's ability to defend against such claim or litigation is impaired as a result of such failure to give notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. -9- 13. Information by Holder. The Holder or Holders of Registrable ---------------------- Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 14. Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) Use its best efforts to then file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); (c) Furnish to Holders of Registrable Securities forthwith upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder of Registrable Securities may reasonably request in availing itself of any rule or regulation of the Commission allowing such Holder to sell any such securities without registration. 15. Transfer of Registration Rights. The right to cause the Company to ------------------------------- register securities granted hereunder may be assigned to a transferee or assignee who acquires at least fifteen percent (15%) of the then outstanding shares of Series A Preferred or Series B Preferred (or Common Stock issued on conversion of Series A Preferred) (adjusted for stock splits, reverse stock splits or similar events after the date hereof) provided that the Company is given written notice of such assignment prior to such assignment. In addition, rights to cause the Company to register securities may be freely assigned (a) to any constituent partner or retired partner of a Holder (or Common Stock issued on conversion of Series A Preferred) (adjusted for stock splits, reverse stock splits or similar events after the date hereof), where such Holder is a partnership, (b) to any affiliate (as that term is defined in Rule 405 promulgated by the Commission under the Securities Act), (c) to any officer, director or principal shareholder thereof, where such Holder is a corporation or (d) to the spouse, children, grandchildren or spouse of such children or grandchildren of any Holder or to trusts for the benefit of any Holder or such persons where the Holder is a natural person. 16. Subsequent Grant of Registration Rights. The Company shall not grant --------------------------------------- rights to have securities other than the Registrable Securities registered under the Securities Act that are superior to the -10- registration rights granted herein without the consent of the holders of a majority of the shares of Series A Preferred and Series B Preferred (or Common Stock issued upon conversion thereof). 17. Company Covenants. The Company hereby covenants and agrees as ----------------- follows: 17.1 Annual Financial Information. The Company will furnish to each ---------------------------- Purchaser for so long as such Purchaser is a holder of any shares of Series A Preferred or Series B Preferred purchased by such person pursuant to this Agreement (or Common Stock issued upon conversion of the Series A Preferred or Series B Preferred), as soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of national standing selected by the Company. 17.2 Monthly Financial Information and Financial Plan. The Company ------------------------------------------------ will furnish the following reports to each Purchaser for so long as such Purchaser is a holder of at least 10% of the outstanding shares of Series A Preferred or Series B Preferred (or Common Stock issued upon conversion of Series A Preferred or Series B Preferred or a combination of such Series A Preferred, Series B Preferred and Common Stock) (adjusted for stock splits, reverse stock splits or similar events after the date hereof): (a) As soon as practicable after the end of each month, and in any event within 30 days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such month, and cash flow statements and consolidated statements of income for each month and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied, all in reasonable detail and signed, subject to changes resulting from year-end audit adjustments, by the principal financial or accounting officer of the Company, together with a comparison of such statements to the Company's operating plan then in effect and approved by its Board of Directors. (b) As soon as available (but in any event within 10 days after the commencement of its fiscal year), a summary of the financial plan of the Company for each fiscal year, including (but not limited to) a cash flow projection and operating budget, calculated monthly, as contained in its operating plan approved by the Company's Board of Directors. 17.3 Assignment of Rights to Financial Information. The rights to --------------------------------------------- receive information pursuant to Section 17.1 may be assigned or otherwise conveyed by any Purchaser or subsequent transferee to any transferee of shares of Series A Preferred or Series B Preferred (or Common Stock issued upon conversion thereof). The rights specified in Section 17.2 may be assigned or otherwise conveyed by a Purchaser or subsequent transferee only to a transferee who acquires at least 10% of the outstanding shares of Series A Preferred or Series B Preferred (or Common Stock issued upon conversion of Series A Preferred or Series B Preferred or a combination of such Series A Preferred, -11- Series B Preferred and Common Stock) (adjusted for stock splits, reverse stock splits or similar events after the date hereof). 17.4 Proprietary Information Agreement. The Company will require each --------------------------------- person employed by the Company, whether at present or in the future, to execute a Proprietary Information Agreement in a form approved by the Company's Board of Directors as a condition of such employment. 17.5 Confidentiality Agreement. Each Purchaser and any successor or ------------------------- assign of such Purchaser, who receives from the Company or its agents, directly or indirectly, any information which the Company has not made generally available to the public, pursuant to the preparation and execution of this Agreement or disclosure in connection therewith or pursuant to the provisions of this Section 17, acknowledges and agrees that such information is confidential and for its use only in connection with evaluating its investment in the Company, and further agrees that it will not disseminate such information to any person other than its accountant, investment advisor or attorney and that such dissemination shall be only for purposes of evaluating its investment. 17.6 Key Person Insurance. The Company shall use its best efforts to -------------------- obtain term life insurance policies on the lives of Amos Wilnai and Alex Joffe in the amounts of $1,000,000 each with proceeds payable to the Company. 17.7 Qualified Small Business Reporting. The Company will use ---------------------------------- reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. 17.8 Termination of Covenants. Notwithstanding anything to the ------------------------ contrary set forth herein, the covenants set forth in this Section 17 (except for those set forth in Sections 17.5 and 17.7 which shall survive) shall terminate and be of no further force or effect after the date upon which the first registration statement filed by the Company under the Securities Act in connection with an underwritten public offering of its securities first becomes effective. 18. Rights of First Refusal. The Company hereby grants to each Purchaser, ----------------------- each Founder and Dominion the right of first refusal to purchase, pro rata, all (or any part) of "New Securities" (as defined in this Section 18) that the Company may, from time to time propose to sell and issue. Such pro rata share, for purposes of this right of first refusal, is the ratio of (X) the number of shares of Common Stock then owned by such Purchaser, Founder or Dominion or issuable upon the conversion of the Series A Preferred or Series B Preferred then owned by such Purchaser, Founder or Dominion (including shares issuable upon exercise of options or warrants held by such Purchaser, Founder or Dominion), to (Y) the total number of shares of Common Stock then outstanding, after giving effect to the conversion of all outstanding convertible securities (including the Series A Preferred Stock and Series B Preferred) and the exercise of all outstanding options and Warrants. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any Common Stock and Preferred Stock ---------------- of the Company whether or not authorized on the date hereof, and rights, options, or warrants to purchase -12- Common Stock or Preferred Stock and securities of any type whatsoever that are, or may become, convertible into Common Stock or Preferred Stock; provided, however, that "New Securities" does not include the following: (i) shares of Common Stock, or options to purchase shares of Common Stock, issued or granted to officers, directors and employees of, or consultants to, the Company pursuant to a stock grant, employee restricted stock purchase agreement, option plan or purchase plan or other stock incentive program (collectively, the "Plans") or issuance unanimously approved by the Board of Directors; (ii) shares of Common Stock issuable upon conversion of the Series A Preferred or Series B Preferred (including any Series B Preferred issued after the date hereof at Subsequent Closings under the Purchase Agreement); (iii) securities of the Company offered to the public pursuant to a registration statement filed under the Securities Act; (iv) securities of the Company issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns more than fifty percent (50%) of the voting power of such other corporation; (v) securities of the Company issued in connection with equipment lease financing transactions or bank financing transactions the principal purpose of which is not to raise equity funding; (vi) securities issued to corporate partners or in connection with other strategic alliances if the Board of Directors unanimously agrees that such transaction should be excluded from operation of this Section 18; and (vii) shares of Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, or recapitalization by the Company. (b) In the event that Company proposes to undertake an issuance of New Securities, it shall give each Purchaser, Dominion and the Founders written notice of its intention, describing the type of New Securities, the price, and the general terms upon which the Company proposes to issue the same. Each Purchaser, Dominion and each Founder shall have twenty (20) business days after receipt of such notice to agree to purchase its pro rata share of such New Securities at the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. If any Purchaser, Dominion or the Founder fails to agree to purchase its full pro rata share within such twenty (20) business day period, the Company will give the Purchasers, Dominion and the Founders who did so agree (the "Electing Holders") notice of the number of shares which were not subscribed for. Such notice may be by telephone if followed by written confirmation within two days. The Electing Holders shall have ten (10) business days from the date of -13- such notice to agree to purchase pro rata all of the New Securities not purchased by such non-purchasing Purchasers, Founders and Dominion. (c) In the event that Purchasers Dominion, and the Founders fail to exercise in full the right of first refusal within the twenty (20) business plus ten (10) business day period specified above, the Company shall have one hundred twenty (120) days thereafter to sell (or enter into an agreement pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) the New Securities respecting which the rights of the Purchasers, Dominion and the Founders were not exercised at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within such one hundred twenty (120) day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of such agreement) the Company shall not thereafter issue or sell any New Securities, without first offering such New Securities to the Purchasers, Dominion and the Founders in the manner provided above. (d) The right of first refusal granted under this Section 18 shall expire upon the earlier of (i) five years from the date hereof, or (ii) the first sale of Common Stock to the public that is effected pursuant to a registration statement filed with, and declared effective by, the Commission under the Securities Act. (e) This right of first refusal is nonassignable except to any transferee to whom registration rights may be transferred pursuant to Section 15 of this Agreement. 19. Governing Law. This Agreement and the legal relations between the ------------- parties arising hereunder shall be governed by and interpreted in accordance with the laws of the State of California. The parties hereto agree to submit to the jurisdiction of the federal and state courts of the State of California with respect to the breach or interpretation of this Agreement or the enforcement of any and all rights, duties, liabilities, obligations, powers, and other relations between the parties arising under this Agreement. 20. Entire Agreement. This Agreement constitutes the full and entire ---------------- understanding and agreement between the parties regarding rights to registration. 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. 21. Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Purchaser, to such Purchaser's address set forth on Exhibit A to the Purchase Agreement, or at such other address as such Purchaser shall have furnished to the Company in writing, (b) if to any other holder of any Registrable Securities, to such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such securities who has so furnished an address to the Company, (c) if to the Company, to its address set forth on the signature page of this Agreement to the -14- attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Holders, or (d) if to a Founder, to the address set forth on the signature page of this Agreement, or at such other address as a Founder shall have furnished to the Holders. 22. 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. 23. Amendment. Any provision of this Agreement may be amended, waived or --------- modified upon the written consent of the (i) Company and (ii) holders of a majority of the sum of (A) the shares of Series A Preferred and Series B Preferred (or Common Stock issued upon conversion thereof) and (B) the outstanding shares of Common Stock held by the Founders (excluding for all purposes in such computation any Common Stock resold to the public), provided -------- that any such amendment, waiver or modification applies by its terms to each holder. Any Purchaser or Founder may waive any of his or her rights or the Company's obligations hereunder without obtaining the consent of any other person. 24. Waiver of Prior Shareholder Agreement. The Prior Shareholder ------------------------------------- Agreement is hereby terminated and the Series A Purchasers, Founders and Dominion irrevocably waive all of their rights under the Prior Shareholder Agreement (including, but not limited to, the Rights of First Refusal contained in Section 18 thereof) in exchange for the rights contained herein. 25. Severability. In the event that any provision of this Agreement ------------ becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided, that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. -15- IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated Shareholder Rights Agreement as of the date set forth above. "COMPANY" MMC NETWORKS, INC. 2855 Kifer Road Santa Clara, CA 95051 /s/ P.K. DUBEY By: ____________________________ P.K. Dubey President /s/ AMOS WILNAI ________________________________ Amos Wilnai 2855 Kifer Road Santa Clara, CA 95051 /s/ ALEX JOFFE ________________________________ Alex Joffe 2855 Kifer Road Santa Clara, CA 95051 DOMINION FUND III 44 Montgomery Street Suite 4200 San Francisco, CA 94104 By: Dominion Partners III /s/ [Signature] By: ____________________________ Title: General Partner _________________________ -16- "PURCHASERS" KLEINER PERKINS CAUFIELD & BYERS VII By: KPCB VII Associates, its General Partner By: /s/ [signature] - ------------------------------ Title: General Partner ----------------------- KPCB VII FOUNDERS FUND By: KPCB VII Associates, its General Partner By: /s/ [signature] - ------------------------------ Title: General Partner ----------------------- KPCB INFORMATION SCIENCES ZAIBATSU FUNDS II By: KPCB VII Associates, its General Partner By: /s/ [signature] - ------------------------------ Title: General Partner ----------------------- JAPAN ASSOCIATED FINANCE CO., LTD. By: /s/ MASAKI YOSHIDA - ------------------------------ Name: Masaki Yoshida Title: President -17- JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP By: /s/ MASAKI YOSHIDA - ------------------------------ Name: Masaki Yoshida Title: President Japan Associated Finance Co., Ltd. Its Executive Partner U.S. INFORMATION TECHNOLOGY INVESTMENT ENTERPRISE PARTNERSHIP By: /s/ MASAKI YOSHIDA - ------------------------------ Name: Masaki Yoshida Title: President Japan Associated Finance Co., Ltd. Its Executive Partner INSTITUTIONAL VENTURE PARTNERS VI, L.P. By Its General Partner Institutional Venture Management VI By: /s/ GEOFFREY Y. YANG - --------------------------------- Geoffrey Y. Yang, General Partner INSTITUTIONAL VENTURE MANAGEMENT VI, L.P. By: /s/ GEOFFREY Y. YANG - --------------------------------- Geoffrey Y. Yang, General Partner IVP FOUNDERS FUND I, L.P. By Its General Partner Institutional Venture Management VI By: /s/ GEOFFREY Y. YANG - --------------------------------- Geoffrey Y. Yang, General Partner -18- U.S. VENTURE PARTNERS IV, L.P. By Presidio Management Group IV, L.P., Its General Partner By: /s/ MICHAEL P. MAHER - --------------------------------- Michael P. Maher Attorney-in-Fact USVP ENTREPRENEUR PARTNERS II, L.P. A Delaware Limited Partnership By Presidio Management Group IV, L.P. Its General Partner By: /s/ MICHAEL P. MAHER - --------------------------------- Michael P. Maher Attorney-in-Fact SECOND VENTURES II, L.P. By Presidio Management Group IV, L.P. Its General Partner By: /s/ MICHAEL P. MAHER - --------------------------------- Michael P. Maher Attorney-in-Fact STANFORD UNIVERSITY By: /s/ CAROL GILMER - ---------------------------------- Carol Gilmer Title: Assistant Secretary, The Board of Trustees of the Leland Stanford Junior University WS INVESTMENT COMPANY 95B By: /s/ ROBERT T. CLARKSON - ---------------------------------- Robert T. Clarkson Title: Partner /s/ ROBERT T. CLARKSON - ---------------------------------- Robert T. Clarkson -19- /s/ LARRY W. SONSINI - ---------------------------------- Larry W. Sonsini /s/ JOHN MARREN - ---------------------------------- John Marren /s/ G. ARJAVALINGAM - ---------------------------------- G. Arjavalingam /s/ TIMOTHY M. HALEY - ---------------------------------- Timothy M. Haley /s/ NEAL DOUGLAS - ---------------------------------- Neal Douglas -20- EX-10.9 14 SUBLEASE DATED JUNE 14, 1996 EXHIBIT 10.9 SUBLEASE This "Sublease" is made this fourteenth day of June, 1996 by and between Olivetti Advanced Technology Center Inc. a Delaware corporation, ("Olivetti", including successors and assigns as "Subleasor") and MMC Networks Inc., a California corporation ("MMC", including successors and assigns as "Subleasee"). Olivetti as "Tenant", is leasing from Herman Christensen, Jr. And Raymond P. Christensen, jointly as "Landlord", ( the Master Lessor") those certain premises located at 1130 East Arques Ave., Sunnyvale, California (the "Premises") consisting of approximately 35,552 square feet pursuant to a lease dated December 22, 1994 (the "Master Lease"). The Master Lease is attached to this Sublease as Attachment 1. Olivetti leases to MMC and MMC leases from Olivetti the Premises depicted on Exhibit A to the Master Lease on the terms and conditions set forth below . 1. INCORPORATION OF MASTER LEASE PROVISIONS. This Sublease is subject to all of the terms and conditions of the Master Lease. MMC hereby accepts, assumes and agrees to perform all the obligations of Olivetti as Tenant under the Master Lease and all of the terms and conditions of the Master Lease are incorporated into this Sublease as terms and conditions (with each reference to Landlord and Tenant deemed to refer to Olivetti and MMC respectively), excepting only Sections 3, 4(a), 6, 7, 23, 29, 31, 33, 38, 40, 44(b), 47, 48 of the Master Lease and Addendum One to the Master Lease. In the event of any conflict or inconsistency between the incorporated terms of the Master Lease and the terms of the Sublease, the terms of the Sublease will prevail as between MMC and Olivetti. MMC will not cause or permit any act or omission which violates any term or condition of the Master Lease. Olivetti will use all reasonable efforts to cause Master Leasor to perform its obligations under the Master Lease. In the event of the termination for any reason of Olivetti's interest as Tenant under the Master Lease, then this Sublease will terminate at the same time without any liability of Olivetti to MMC, unless the termination results from a default of Olivetti under the Master Lease which was not caused by MMC. 2. TERM. The term of this Sublease will be from September 1, 1996 (the "Commencement Date") through the balance of the term of the Master Lease (estimated to be March 31, 1999). If delivery of the Premises is delayed beyond September 1, 1996 as the result of major physical damage to the Premises caused by Olivetti or forces beyond Olivetti's reasonable control, them Olivetti will not be liable for any damage caused thereby, nor will this Sublease be void or voidable nor will the term hereof be extended by such delay; provided, however, that the Commencement Date will be deferred until the physical damage is repaired sufficiently to allow MMC to occupy the Premises. Notwithstanding the foregoing, if it is reasonably foreseeable that the Commencement Date will be delayed beyond October 1, 1996, then MMC can elect to cancel this Sublease on written notice to Olivetti within thirty days after notice of the nature of the damage and delay. In such event the parties will have no further obligations under this Sublease, except with respect to indemnification for third party claims for which each would have otherwise been responsible. MMC acknowledges that it will not be entitled to exercise either option to extend the Master Lease. After sublease execution, MMC will have reasonable access to the Premises on not less that twenty-four hours notice to Olivetti for the purpose of space planning, architectural design and engineering. Additionally, after August 18, 1996, (i) MMC may begin moving its furniture and equipment and begin installing telephone and network cabling or other preparatory measures in all parts of the Premises not then occupied by Olivetti or ATMI (see Item 9 Below) if Olivetti's and ATMI's use of the Premises is not disturbed, and (ii) MMC can elect to occupy the Premises (other than the ATMI Spaces defined below) if Olivetti has vacated the Premises. MMC will indemnify Olivetti from all loss, liability and expense, including attorneys' and experts' fees and costs, occasioned by such early access. Moreover, MMC's occupancy shall be subject to all the terms and conditions of this Sublease except Base and Additional Rent prior to the Commencement Date. Except as provided in the Master Lease in connection with damage and destruction (Section 22), condemnation (Section 23) and assignment (Section 24), Olivetti will not agree to any voluntary early termination of the Master Lease with Master Lessor unless MMC is permitted to continue to occupy the Premises on the same terms and conditions as this Sublease; provided that MMC does not default on its obligations under this Sublease in any material way. 3. BASE RENT. MMC will pay Forty-two Thousand Six Hundred Sixty-Two Dollars and forty cents ($42,662.40) per month to Olivetti as base rent without offset or deduction on the first day of each calendar month of the term of this Sublease, without prior written notice or demand, from the Commencement Date to the end of the term. The first month's base rent will be paid to Olivetti upon the execution of this Sublease. Rent for any partial month will be prorated on the basis of a thirty (30) day month. If MMC receives notice from Master Lessor that Olivetti is in default for failure to pay Rent and if Olivetti does not cure the default, then MMC, upon notice to Olivetti, may pay the actual Rent due and offset such sum against the Base Rent otherwise payable to Olivetti, so long as Olivetti's nonpayment was not caused by MMC's failure to pay Rent to Olivetti. 4. SECURITY DEPOSIT. Upon the satisfaction or expiration of MMC's environmental contingency described in Item 10 below, MMC will deposit with Olivetti the sum of Forty-Two Thousand Six Hundred Sixty-Two Dollars and Forty cents ($42,662.40) as a non-interest bearing security deposit for MMC's performance under this Sublease. In the event MMC has performed all of the terms and conditions of this Sublease throughout the term, the security deposit will be returned to MMC upon termination of the Sublease and MMC's vacation of the Premises after first deducting any sums owing to Olivetti pursuant to this Sublease. In the event MMC breaches this Sublease, Olivetti can elect to use or retain some or all of this security deposit to compensate for any loss, expense or risk associated with the breach, all without seeking judicial relief. In the event of such recourse to the security deposit, Olivetti is entitled to require MMC to replenish the security deposit funds on ten days written notice. In no event will MMC be entitled to have access to or acquire any portion of Olivetti's deposit with the Master Lessor. 5. CONDITION OF PREMISES AND TENANT IMPROVEMENTS. Olivetti will deliver the Premises to MMC "as is" in broom clean condition. MMC accepts the Premises "as is". To Olivetti's knowledge, the roof, HVAC, plumbing and electrical systems are in good working order and there are no Hazardous Materials on the Premises as of the date of this Sublease. Repairs required prior to its vacation of the Premises will remain Olivetti's responsibility until the Commencement Date, unless the repair is caused by MMC or its agents. MMC shall surrender the Premises in the same condition as received on the Commencement Date, excepting normal wear and tear and damage resulting from factors beyond MMC's reasonable control, such as war and earthquake, unless such damage is covered by insurance or is the result of MMC's default, negligence or willful misconduct. In the event MMC elects to perform tenant improvement work at the beginning of the Sublease term, then the provisions of Section 47 of the Master Lease will govern as though incorporated into this Sublease, substituting Olivetti for Landlord and MMC for Tenant, subject to the following modifications: (i) the fourth and eighth sentences of the fourth paragraph are deleted and "five business days" is replaced with "ten business days" in the first sentence of the fourth paragraph; (ii) the sixth paragraph is deleted; and (iii) the eighth paragraph is replaced with the following new eighth paragraph - "MMC will bear and timely pay all Tenant Improvement Costs and provide Olivetti with a complete set of as-built drawings of the tenant improvements upon completion". See also Attachment 2 which depicts these changes in red line fashion. 6. OTHER MASTER LEASE INCORPORATIONS. The provisions of Sections 13, 29, 31, 40 and 44(b) are also incorporated by reference into this Sublease substituting only MMC for Tenant and leaving the reference to Landlord unchanged, it being understood that the Master Lessor will arrange the insurance described in Section 13, is the owner and borrower described in Section 29, 31, and 40 and will arrange for the care of the Outside Area described in Section 44(b). Section 38 of the Master Lease is also incorporated by reference into this Sublease, substituting Olivetti for Landlord and MMC for Tenant, except that the reference to "Holcomb Realty" is replaced with "Cooper/Brady". Finally, Paragraph 5 of Addendum One to the Master Lease is incorporated by reference into this Sublease, substituting Olivetti for Landlord and MMC for tenant. 7. NOTICES. All notices and demands of any kind required to be given by Olivetti or MMC hereunder will be in writing and effective thirty-six hours after depositing in the United States mail, postage prepaid and addressed to Olivetti or MMC, as the case may be, at the address set forth below their respective signatures or at such other address as they may designate from time to time. 8. MISCELLANEOUS. Olivetti is responsible for the payment of the brokerage commission on this transaction to Cooper/Brady Corporate Real Estate Services per existing contract. The effectiveness of this Sublease is contingent on MMC's timely payment of the security deposit referred to in Item 4 above, the satisfaction or expiration of the contingencies described in Item 10 below, and the written approval of the Master Lessor pursuant to the Master Lease. MMC can elect to condition Master Lessor's approval on the following: (i) that MMC will not be required to remove any improvements or alterations made by MMC at the beginning of this Sublease and approved by Master Lessor and Olivetti; and (ii) that Master Lessor confirms that Olivetti is in goodstanding under the Master Lease at the time of Master Lessor's approval. MMC acknowledges that Master Lessor may elect to recapture the Premises pursuant to the Master Lease rather than consent to this Sublease. In such event, or if a contingency referred to above or in Item 10 below is unsatisfied, then neither party will have any further liability to the other except for unsatisfied, then neither party will have any further liability to the other except for the return of the security deposit and the indemnification undertakings described in Item 2 above (in connection with early access). In the event Olivetti and MMC agree to the transfer of certain personal property on the Premises, then the transfer will be memorialized through a bill of sale in the form attached as Attachment 3. This Sublease shall be binding on and inure to the benefit of the lawful heirs, successors and assigns of Olivetti and MMC. Olivetti will not elect to cancel this Sublease in connection with any future request by MMC for consent to an assignment or sublease to a third party although Master Lessor reserves the right to do so. 9. PRIOR SUBLEASE. This Sublease is currently subject to the provisions of a Sublease agreement dated April 1, 1995 between Olivetti and Advanced Telecommunications Modules, Inc. ("ATMI", including successors and assigns) by which approximately 3000 rentable square feet of the Premises have been subleased (the "ATMI Space"). Olivetti and ATMI have agreed to terminate such prior sublease and ATMI has agreed to vacate the ATMI Space by September 1, 1996, although ATMI may incur delays in relocating to new space in another building. This prior sublease is attached as Attachment 4. If ATMI does not timely vacate the Premises and in no event vacate later than September 30, 1996, then (i) Olivetti shall promptly bring an unlawful detainer (or other appropriate) action to cause ATMI to vacate the Premises and shall diligently pursue such action to conclusion: (ii) Base Rent will be reduced to $28,441.60 (twenty-eight thousand four hundred forty-one dollars and sixty cents) from October 1 until ATMI vacates the Premises: and (iii) Base Rent will be reduced to $33,062.40 (thirty- three thousand sixty-two dollars and forty cents) for the month of September if ATMI fails to vacate by September 1. The lower rent for the month of September will also apply if ATMI fails to confirm with Olivetti by June 30, 1996 that ATMI expects to vacate the Premises by September 1, 1996. 10. ENVIRONMENTAL AND ADA CONTINGENCIES. MMC can elect to cause a phase I environmental survey to be performed immediately on the Premises at its expense as well as further study the compliance of the Premises with the American with disabilities Act ("ADA"). Olivetti believes that the Premises are currently in compliance with the ADA based on its own tenant improvement work performed with the previous eighteen months. Olivetti will share this information with MMC and its agents. If MMC reasonably objects to the environmental condition of the Premises based on such report or reasonably concludes that the Premises are not in substantial compliance with the ADA and so notifies Olivetti within fifteen days after the date of this Sublease, then neither party will have any further liability to the other under this Sublease except as set forth in Item 3 above. SUBLESSEE: MMC Networks, Inc. SUBLESSOR: Olivetti Advanced Technology Center, Inc. /s/ Amos Wilnai /s/ Ennio Ponzetto By:________________________________ By:_________________________________ Amos Wilnai Ennio Ponzetto Name:______________________________ Name:_______________________________ 2855 Kifer Rd. 1134 E. Arques Ave. Address:___________________________ Address:____________________________ Santa Clara, CA 95051 Sunnyvale, CA 94086 ___________________________ ____________________________ Attachments: 1 - Master Lease 2 - Marked Changes to Section 47 3 - Form of Bill of Sale 4 - Prior Sublease ATTACHMENT 1 -- MASTER LEASE (attach copy of Master Lease) ATTACHMENT 2 - MARKED CHANGES TO SECTION 47 47. TENANT IMPROVEMENTS: Tenant shall select and retain an architect or facilities planner who shall prepare "tenant improvement" drawings and specifications for interior revisions to the premises which are accepted by Tenant in "AS IS" condition, subject to the provisions of Addendum 1, Paragraph 1. "Tenant Improvements" as stated in the Lease shall be general in nature and shall include only those improvements within the Premises which are depicted on the Final Plans and Specifications or described herein below. The Tenant Improvements may include, but are not limited to: (a) Partitioning, doors, floor coverings, finishes, ceilings, wall coverings, and painting, millwork and similar items. (b) Electrical wiring, lighting fixtures, outlets and switches, and other electrical work. (c) Duct work, terminal boxes, defusers and accessories required for the completion of the heating, ventilation and air conditioning systems serving the Premises, including the cost of meter and key control for after-hour air conditioning. (d) Any additional Tenant requirements including, but not limited to odor control, special heating, ventilation, and air conditioning, noise or vibration control or other special system. (e) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories serving the Premises. (f) All plumbing, fixtures, pipes, and accessories serving the Premises. (g) Changes to handicapped parking or ramps. Landlord shall provide in writing, not later than ten (10) business days after request therefor, approval or disapproval of preliminary and Final Plans and Specifications. Landlord and Tenant shall indicate their approval of the Final Plans and Specifications by initialing them. Upon completion of the Final Plans and Specifications and approval thereof by Landlord and Tenant, Tenant will obtain general contractor bids and furnish a cost breakdown to Landlord. Any such revisions shall be subject to Landlord's approval, and the amended Final Plans and Specifications, as approved by Landlord and Tenant, shall thereafter be deemed to be the Final Plans and specifications for the Tenant Improvements. The amended Final Plans and Specifications shall be approved by Landlord in writing, not later than five (5) business days after Tenant's request therefor. Tenant shall thereafter submit such amended Final Plans and Specifications to general contractors selected by Tenant and approved by Landlord for re-bidding, and shall furnish a cost breakdown to Landlord. When the Final Plans and Specifications (as amended, if required above) have been approved by Landlord and Tenant, Tenant shall submit such Final Plans and Specifications to all governmental authorities having rights of approval over the Tenant Improvement work and shall apply for all governmental approvals and building permits. Subject to its obligations, Tenant shall thereafter commence and proceed to have completed construction of the Tenant Improvements in a good and workmanlike manner by a general contractor approved by Landlord. The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all costs and expenses associated with the design, preparation, approval and construction of the Tenant Improvements, including, but not limited, to the following: (a) All costs of preliminary and final architectural and engineering plans and specifications for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; (b) All costs of obtaining building permits and other necessary authorizations from local governmental authorities; (c) All costs of interior design and finish schedule plans and specifications including as-build drawings; (d) All direct and indirect costs of procuring, constructing and installing the Tenant Improvements in the Premises; (e) Utility connection fees. In no event shall the Tenant Improvements Cost include any costs of procuring, constructing or installing in the Premises any of Tenant's personal property or trade fixtures. ATTACHMENT 3 - FORM OF BILL OF SALE For good and valuable consideration, the undersigned "Seller" transfers all of its right, title and interest in the personal property identified on the attached list free of all liens and encumbrances to the undersigned "Buyer". Buyer accepts the personal property "as is" and "where is". Seller also transfers to Buyer any of its assignable warranties from third parties on the personal property. THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED, ASSOCIATED WITH THE PERSONAL PROPERTY AND SELLER EXPRESSLY DISCLAIMS ANY OTHER WARRANTIES, INCLUDING THE WARRANTIES OF MERCHANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE. Buyer accepts the transfer of personal property on these terms and acknowledges that the consideration paid to Seller reflects a reasonable allocation of such risks. BUYER: MMC Networks, Inc. SELLER: Olivetti Advanced Technology Center, Inc. /s/ Ennio Ponzetto By:_____________________________ By:_____________________________ Ennio Ponzetto Name:___________________________ Name:___________________________ 1134 E. Arques Ave. Address:________________________ Address:________________________ Sunnyvale, CA 94086 ________________________________ ________________________________ ATTACHMENT 4 - PRIOR SUBLEASE (attach prior Sublease with ATMI) ATTACHMENT 4 - PRIOR SUBLEASE SUBLEASE AGREEMENT ------------------ THIS SUBLEASE AGREEMENT (the "Sublease") is entered into effective as of April 1, 1995, between Olivetti Advanced Technology Center, Inc. ("Sublessor"), and Advanced Telecommunications Modules, Inc. ("Sublessee"). WHEREAS, Herman Christensen, Jr. and Raymond P. Christensen, jointly, ("Lessor"), as lessor, and Sublessor, as lessee, executed a lease dated December 22, 1994, with respect to 35,552 square feet of certain real property premises located at 1130/1134 E. Arques Ave., Sunnyvale, California 94086, ( the Leased Space"). Said lease will be hereinafter referred to as the "Master Lease", a copy of which is attached hereto as Exhibit "A". NOW, THEREFORE, the parties agree as follows: 1. For and in consideration of the payment of the rental and the performance of the covenants and agreements hereinafter set forth, Sublessor leases to Sublessee and Sublessee leases from Sublessor premises of approximately 3,000 rentable square feet located in the North-East corner of the Leased Space (such space shall hereinafter be referred to as the Demised Premises). The Demised Premises are designated on the diagram attached hereto as Exhibit "B". 2. The term of this sublease agreement shall be for a period of 48 months commencing on April 1, 1995, and termination on March 31, 1999. 3. Sublessee covenants and agrees to pay to Sublessor for the use and occupancy of the Lease Premises during the term hereof, the monthly rental of Two Thousand Five Hundred Five Dollars and no cents ($2,505). In addition, Sublessee shall pay Sublessor, as additional rent, all operating expenses or other charges assessed against Sublessor by Lessor pursuant to the Master Lease attributable to the proportionate share of the Leased Space comprising the Demised Premises. Sublessor and Sublessee hereby agree that such proportionate share is 8.44% of the Leased Space. The monthly rental shall be paid in advance on the first day of each calendar month. Rent for the period April 1 through April 30 is due upon execution of this sublease. 3.1 In addition, Sublease agrees to pay Sublessor a proportionate share of water, sewer, refuse, gas, heat, light, power, telephone service, janitorial service, security service, and all other materials and services supplied to the Leased Space that are paid by Sublessor. Sublessee shall reimburse to sublessor its proportionate share of any insurance premiums Lessor requires Sublessor to maintain as to the Leased Space. Any costs directly attributable to Sublessee or specific requests made by Sublessee shall be passed through for reimbursement to Sublessor to the extent such costs cannot be invoiced directly by the vender to the Sublessee. 4. Landlord has provided to Sublessor an allowance for the planning and construction of Tenant Improvements in the amount of Ten Dollars per square foot for which the proportionate share of $30,000 is allocated to the Sublessee and included in the monthly rent. Any Tenant Improvement costs associated with the fitting-up of Sublessee's space in excess of such allowance are reimbursable to Sublessor within 30 days after presentation of the cost break-down for the Sublessee's area, Exhibit "C". 5. Upon execution of this Sublease, Sublessee shall deposit with Sublessor $2,505 to be held by Sublessor as security for the performance of the obligations of the Sublessee hereunder. 6. There exists at the Demised Premises certain office furniture and/or fixture's and/or trade fixtures that are owned by Sublessor and that are also described in Exhibit "D" to this Sublease (collectively the "Furniture and Fixtures"). As additional consideration hereunder, Sublessee is hereby granted a license to use said Furniture and Fixtures so long as Sublessee is not in default hereunder, which license is further conditioned on Sublessee at its sole cost and expense, maintaining said Furniture and Fixtures in good condition and repair, free of liens, at the Demised Premises throughout the Term and returning the same to Sublessor at the end of the Term in good condition and repair, free of liens, and as it existed on the commencement date of the Term, normal wear and tear excepted. Sublessee accepts said Furniture and fixtures "AS IS" and "WITH ALL FAULTS" and Sublessor shall have no liability with respect to the condition, design or any other aspect of same; Sublessee hereby assumes all risk associated therewith. 7. Except as modified above, the terms, conditions and covenants of the Lease between Sublessor and Landlord are hereby incorporated and shall bind Sublessee as Tenant and Sublessor as Landlord. 8. Sublessor shall be responsible for and shall bear all expenses for obtaining the consent of Landlord (including Landlord's expense) to this sublease, and this sublease shall not be effective until such consent is obtained, and Sublessee shall sign any documents reasonable requested by Landlord as a condition to giving such consent. 9. This sublease and all its provisions shall be binding upon the heirs, administrators, executors, successors, and assigns of the parties hereto. 10. This Sublease include the attached Exhibits A through D as Follows: Exhibit A Master Lease Exhibit B Schedule of Tenant Improvement Costs Exhibit C Floor Plan Exhibit D Furniture and Fixtures IN WITNESS WHEREOF, the undersigned have executed this Sublease on May 8 1995. - -----------, OLIVETTI ADVANCED TECHNOLOGY ADVANCED TELECOMMUNICATIONS MODULES, CENTER, INC. a Delaware INC. a Delaware corporation cooperation /s/ [SIGNATURE] /s/ P.A. Shearn By:_____________________________ By:_____________________________ P.A. Shearn ________________________________ ________________________________ (print name) (print name) Treasurer/Controller President & CEO Title:____________________________ Title:____________________________ LEASE AGREEMENT This Lease Agreement is made and entered into by and between HERMAN CHRISTENSEN, JR. and RAYMOND F. CHRISTENSEN, jointly, the Landlord, and OLIVETTI ADVANCED TECHNOLOGY CENTER, INC. a Delaware Corporation, Tenant as of this 22nd ---- day of December, 1994. 1. DEMISE: In consideration of the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the "Premises"), upon the agreements, terms and conditions of this Lease for the Term hereinafter stated. 2. PREMISES: The Premises demised by this Lease are approximately 35,552 square feet of space in the building at 1130 East Arques Avenue, Sunnyvale, California as shown on attached Exhibit A being in "as is" condition together --------- with the outside areas to the extent set forth in paragraph 44 below and parking set forth in paragraph 45 below. No easement for light or air is incorporated in the Premises. The Premises demised by this Lease shall also include the Tenant Improvements on the terms and conditions set forth. 3. TERM: The term of this Lease (the "Term") shall be for the period of 48 months commencing on April 1, 1995. Early possession of the Premises for the purpose of constructing tenant improvements shall be on February 1, 1995, and subject to Addendum One. 4. RENT: (a) Base Rent. Tenant shall pay to Landlord, in advance on the first day of --------- each calendar month, without further notice or demand and without offset or deduction, the monthly installments of rent specified below: Full Calendar Months Base Rental/Month/NNN 1-48 $29,685.92 Upon execution of this Lease, Tenant shall pay to Landlord base rental and additional rent for the period April 1 through April 30, 1995 and the Security Deposit hereafter set forth. (b) Additional Rent. In addition to the Base Rent, Tenant shall pay to --------------- Landlord, in accordance with this Paragraph 4, Tenant's proportionate share of the following items related to the Building, the Property, and/or the Outside Areas (as defined in Paragraph 4 (b) (3)) (the "Additional Rent"). (1) Taxes and Assessments. All real estate taxes and assessments --------------------- applicable to the Term. Real estate taxes and assessments shall include any form of assessment, license, fee, tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is (i) determined by the area of the Premises, the Building or the Property, or any part thereof or the Rent and other sums payable 1 hereunder by Tenant, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of Rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Premises, the Building or the Property, or any part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises, the Building or the Property; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises, the Building or the Property, whether or not now customary or within the contemplation of the parties; or (v) surcharge against the parking area. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to Proposition 13 or any other cause are to be included within the definition of real property taxes for purposes of this Lease. (2) Insurance. All insurance premiums, including premiums for "all --------- risk", fire and extended coverage (including earthquake endorsements) insurance for the Building, public liability insurance, other insurance as Landlord deems necessary, and any deductibles paid under policies of any such insurance. (3) Outside Areas Expenses. All costs to operate, manage, maintain, ---------------------- repair, supervise, insure (including provision of public liability insurance) and administer the areas outside of the Building ("Outside Areas"), including but not limited to watering, fertilizing, landscaping, tree work, spraying, window washing of exterior window surfaces, plant and tree replacement, lighting, building alarm system, repair of paving and sidewalks, striping, clean-up and sweeping. (4) Parking Charges. Any parking charges or other costs levied, assessed --------------- or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any governmental authority or insurer in connection with the use or occupancy of the Building, the Outside Areas and/or the Property. (5) Maintenance and Repair of Building. All costs to maintain, repair, ---------------------------------- and replace the building, including structural portions of the roof, the roof coverings, the foundations, the floor slab, the load bearing walls, and the exterior walls (including the painting thereof) of the Building, and all costs to maintain, repair and replace all utility and plumbing systems, fixtures and equipment located outside the Building. Notwithstanding said provisions, the cost of any improvement or replacement to the building under this sub-paragraph, which exceeds $25,000.00 in cost and which has a useful life of more than 5 years, shall be amortized on a straight-line basis together with interest thereon at the rate of 8-1/2% per annum, and only the amortized portion of such cost and interest shall be included in costs recoverable by Landlord. Also notwithstanding anything to the contrary, Landlord shall not recover any costs in excess of $5,000.00 per repair or replacement incurred in maintaining, repairing or replacing the exterior load bearing walls, foundation, and structural components of the roof. The portion of any such costs up to $5,000.00 per repair or replacement, shall be passed through to Tenant. (6) Management and Administration. All costs for management and ----------------------------- administration of the Building and the Property, including a property management fee, accounting, auditing, billing, postage, employee 2 benefits, payroll taxes, etc. All such expenses shall be reasonable and in accordance with good management practices and shall not exceed 2% of annual Base Rent. (c) Allocation of Costs. ------------------- (1) If said real estate taxes and assessments are assessed against the entire building and building site, each of greater extent than the "Premises", the taxes and assessments allocated to the leased premises shall be pro-rated on a square footage or other equitable basis, as calculated by Landlord, such as the tax assessor's relative valuations. If the assessed value of the Landlords premises is increased by the inclusion therein of a value placed upon the personal property or improvements of the Tenant, and if the Landlord pays the taxes based on such increased assessment, the Tenant shall, upon demand, repay to the Landlord the portion of such taxes resulting from such increase in assessment. In the event the Premises and any improvements installed therein by Tenant or Landlord are valued by the assessor disproportionately higher or lower than those of other Tenants in the building or parcel, Tenant's share of the property taxes shall be readjusted upwards or downwards accordingly, and Tenant agrees to such readjusted share. Such determination shall be made by Landlord from the respective valuations assigned in the assessor's work sheet or such other information as may be reasonably available. Landlord's reasonable determination thereof, in good faith, shall be conclusive. Increase in real estate taxes due to reappraisal because of transfer of Landlord's interest to a third party, shall not be charged to Tenant under this sub-paragraph (c)(1). (2) Insurance, Outside Areas Expenses, Parking Charges, Maintenance and repair of building, and management and administration expense shall be charged to Tenant in proportion to that portion of the total rentable building area on the site rented by Tenant hereunder. Until further buildings on the site are completed, Tenant's share shall be calculated as 35,552 square feet/163,706 square feet or 21.72%. (d) Payment of Additional Rent. -------------------------- (1) Upon execution of this Lease, Landlord shall submit to Tenant an estimate of monthly Additional Rent for the period between April 1, 1995 and the following December 31 and Tenant shall pay such estimated Additional Rent in advance on a monthly basis concurrently with the payment of the Base Rent. Tenant shall continue to make said monthly payments until notified by Landlord of a change therein. By March 1 of each calendar year, Landlord shall endeavor to provide to Tenant a statement showing the actual Additional Rent due to Landlord for the prior calendar year, prorated from the Commencement Date during the first year. If the total of the monthly payments of Additional Rent that Tenant has made for the prior calendar year (or portion thereof during which this Lease was in effect) is less than the actual Additional Rent chargeable to Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within thirty (30) days after receipt of such statement from Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be promptly refunded to Tenant no later than April 15. (2) The actual Additional Rent for the prior calendar year shall be used for purposes of calculating Tenant's monthly payment of estimated Additional Rent for the current year, subject to adjustment as provided above, except that in any year in which resurfacing of the parking area or material roof repairs are planned, Landlord may include the estimated cost of such work in the estimated monthly Additional Rent. Landlord shall make final determination of Additional Rent for the year in which this Lease 3 terminates as soon as possible after termination. Tenant shall remain liable for payment of any amount due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment, even though the Term has expired and Tenant has vacated the Premises. Failure of Landlord to submit statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided. Tenant shall have the right to review and audit Landlord's records relating to Additional Rent at Tenant's expense, at Landlord's business office, provided Tenant has given Landlord reasonable prior notice. (e) General Payment Terms. The Base Rent, Additional Rent and all other --------------------- sums payable by Tenant to Landlord hereunder are referred to as the "Rent". All Rent shall be paid without deduction, offset or abatement in lawful money of the United States of America. Rent for any partial month during the Term shall be prorated for the portion thereof falling due within the Term. 5. LATE CHARGE: Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within ten (10) days after their due date, then Tenant shall pay to Landlord a late charge equal to six percent (6%) of such overdue amount, plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment. Landlord's acceptance of such late charges shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease. Initials: Landlord _________ Tenant _________ 6. SECURITY DEPOSIT: Concurrently with Tenant's execution of the Lease, Tenant shall deposit with Landlord the Security Deposit in the amount of $29,550. as security for the full and faithful performance of each and every term, covenant and condition of this Lease. Landlord may use, apply or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to remedy Tenant's default in the payment of any Rent, (b) to repair damage to the Premises caused by Tenant, (c) to clean the Premises upon termination of this Lease, (d) to reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's default, or (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Should Tenant faithfully and fully comply with all of the terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option of Landlord, to the last assignee of Tenant's interest in this Lease. Landlord shall deposit said Security Deposit in a savings account in a bank or savings and loan institution, and Tenant will be entitled to interest thereon at the rate paid by the savings institution, payable to Tenant at the termination of the lease. If Landlord so uses or applies all or any portion of said deposit, within ten (10) days after written demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and Tenant's failure to do so shall be a default under this Lease. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit to Landlord's successor in 4 interest, and thereafter Landlord shall have no further liability to Tenant with respect to such Security Deposit. 7. POSSESSION: (a) Tenant's Right of Possession. Tenant shall be entitled to occupancy of ---------------------------- the Premises for fixturation commencing at the Early Occupancy Period (See Addendum One). (b) Delay in Delivering Possession. If Landlord cannot deliver possession ------------------------------ of the Premises to Tenant at the commencement of the Term, this Lease shall not be void or voidable, nor shall Landlord, or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent until Landlord delivers possession of the Premises to Tenant. The expiration date of the Term shall be extended by the same number of days that Tenant's possession of the Premises is delayed. Tenant shall receive one day of occupancy free of Base Rent for each day Early Occupancy is delayed beyond February 15, 1995. If early occupancy is delayed beyond April 30, 1995, Tenant may terminate this lease. 8. USE OF PREMISES: (a) Permitted Uses. The Premises shall be used only for general office, -------------- engineering, research and development, service and repair, and storage of computer hardware and software products and components, to the extent permitted by governmental regulations. No printed circuit board manufacture or wafer fabrication shall be permitted, or any activities involving toxic substances, except that Tenant shall be permitted to use customary office products and cleansers and minor quantities of cleaners and solvents in connection with its business, but subject to as to such cleaners and solvents, the prior written consent of Landlord, which shall not be unreasonably withheld. (b) Compliance with Governmental Regulations. Tenant shall, at Tenant's ---------------------------------------- expense, faithfully observe and comply with all Municipal, State and Federal statutes, rules, regulations, ordinances, requirements, and orders, now in force or which may hereafter be in force pertaining to the Premises or Tenant's use thereof, including without limitation, any statutes, rules, regulations, ordinances, requirements, or orders requiring installation of fire sprinkler systems and removal of asbestos placed on the Premises by Tenant, whether substantial in cost or otherwise, and all recorded covenants, conditions and restrictions affecting the Property ("Private Restrictions") now in force or which may hereafter be in force; provided that no such future Private Restrictions shall materially affect Tenant's use and enjoyment of the Premises or Property and provided, however, that Tenant shall not be required to make structural changes to the Premises or Building not related to Tenant's specific use of the Premises unless the requirement for such changes is imposed as a result of any improvements or additions made or proposed to be made at Tenant's request. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such rule, regulation, ordinance, statute or Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant. 9. ACCEPTANCE OF PREMISES: By execution hereof, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or warranty by Landlord as to the condition, or use or occupancy which may be made thereof. Any exceptions to the foregoing must 5 be by written agreement executed by Landlord and Tenant, and specifically set forth in Addendum One. 10. SURRENDER: Tenant agrees that on the termination of this Lease, Tenant shall surrender the premises in the same condition as herein agreed they have been received, damage caused by war, earthquake and ordinary wear and tear excepted but with carpets vacuumed and other floors "broom clean". At the time of termination of this lease, Landlord may require any or all of the alterations or additions installed by Tenant or by Landlord for the benefit of Tenant at Tenant's request to be removed and the premises restored to their original condition, whether or not said alterations or additions have become part of the premises under paragraph 11 hereof. Notwithstanding the foregoing, Tenant shall not be required to remove the Tenant Improvements made at the commencement of the Term, and subsequent alterations and improvements unless (I) Tenant has not requested Landlord's consent to them (whether or not such consent is required) or, (II) Tenant has requested such consent and Landlord has notified Tenant, at the time of Tenant's request for consent that such removal will be required. Upon surrender of the premises, either at the expiration of the term or otherwise, Lessee agrees to remove all personal property and rubbish from the premises; but if not so removed by Tenant, Landlord may have the same removed at Tenant's expense. All property of Tenant not so removed, unless such non-removal is consented to by Landlord, shall be deemed abandoned by Tenant, provided that in such event Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. If the Premises are not surrendered at the end of the term or sooner termination of this lease, Tenant hereby indemnifies Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. In the event of surrender of this lease, Landlord shall have the option of terminating all existing sub-leases or of assigning said sub-leases to Landlord. 11. ALTERATIONS AND ADDITIONS: (a) Except for non-structural interior alterations and additions costing less than $15,000.00 per alteration or addition, Tenant shall not make, or permit to be made, any alteration or addition to the Premises, or any part thereof, without the prior written consent of Landlord, such consent not to be unreasonably withheld. Landlord's failure to disapprove proposed alterations or additions within 10 working days after Landlord's receipt of the request for approval, shall be deemed approval. Normal repair and maintenance work shall not be deemed to be an alteration or addition to the Premises. (b) Any alteration or addition to the Premises (including those in subparagraph (a)) shall be at Tenant's sole cost and expense, in compliance with all applicable laws and requirements requested by Landlord, and in accordance with plans and specifications submitted in writing to Landlord and approved as to alterations and additions costing over $15,000.00. (c) All additions, alterations or improvements, including, but not limited to, heating, lighting, electrical, air conditioning, fire extinguishers, lighting fixtures, ballasts, light globes, and tubes, hot water heaters, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and carpeting installations made by Tenant, together with all property that has become an integral part of the Building, shall at once be and become the property of Landlord, and shall not be deemed trade fixtures, but any or all are subject to removal pursuant to paragraph 10 hereof. Notwithstanding the foregoing, the following Tenant improvements, if paid for by Tenant and not included in the Tenant Improvement Allowance, namely 6 telecommunication and computer-related equipment, including specialized flooring, cabling, air conditioning equipment (for the sole purpose of cooling said computers), may be removed by Tenant so long as Tenant repairs any damage caused by such removal. (d) Tenant agrees not to proceed to make such alterations or additions, notwithstanding consent from Landlord to do so, until five (5) days after Tenant's receipt of such consent 12. MAINTENANCE OF PREMISES: (a) Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole --------------------- expense, (1) keep and maintain in good order, condition, and repair, and to repair and to replace the Premise, and every part thereof, including glass, windows, window frames, skylights, door closers, locks, storefronts, interior and exterior doors and door frames, and the interior of the Premises, (excepting only those portions of the Building to be maintained by Landlord, as provided in Paragraph 12(c) below), (2) keep and maintain in good order and condition, repair, and replace all utility and plumbing systems, fixtures and equipment, including without limitation, electricity, gas, HVAC, water, and sewer, located in or on the Premises, and furnish all expendables, including fluorescent tubes, ballasts, light bulbs, paper goods and soaps, used in the Premises, (3) repair all damage to the Building or the Outside Areas caused by the negligence or willful misconduct of Tenant or its agents, employees, contractors or invitees or other persons, including vandals. Tenant shall not do anything to cause any damage, deterioration or unsightliness to the Building and the Outside Areas. Tenant also agrees to maintain and pay for a bi-monthly service contract which meets the manufacturer's recommendations of the air conditioning and heating systems installed in the leased premises. Landlord reserves the right to approve the contractor conducting the bi-monthly service and the Landlord shall receive from Tenant copies of the inspection and service reports. Landlord also reserves the right to hire a licensed HVAC contractor to inspect annually the heating and air conditioning system. If this contractor finds deficiencies in the condition of this system, Tenant agrees to make all repairs and corrections within a reasonable period of time at Tenant's expense, and after 30 days notice pay the cost of the inspections by Landlord's contractor. If no deficiencies are found, Landlord shall pay for the cost of the inspections. (b) Landlord's Right to Maintain and Repair at Tenant's Expense. ----------------------------------------------------------- Notwithstanding the foregoing, Landlord shall have the right, but not the obligation, at Tenant's expense, to enter the Premises and perform Tenant's maintenance, repair and replacement work. Within thirty (30) days after invoice therefor from Landlord, Tenant shall pay all reasonable costs and expenses incurred by Landlord in connection with such maintenance, repair and replacement work. Landlord shall have the right to perform Tenant's maintenance, repair and replacement work only if Tenant fails to take appropriate remedial action within ten (10) days after receiving written notice from Landlord specifying the nature of Tenant's failure to comply with Paragraph 12(a) of the Lease. Notwithstanding the foregoing, if Tenant's failure to maintain, repair or replace as required by Paragraph 12(a) of the Lease creates an immediate danger of material further damage to the Premises, Landlord shall not be required to give the notice to Tenant set forth in the previous sentence. (c) Maintenance by Landlord. Subject to the provisions of Paragraphs 12(a), ----------------------- 22 and 23, and further subject to Tenant's obligation under Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for Tenant's Proportionate Share of the cost and expense of the following items, Landlord agrees to repair and maintain the following items: the structural 7 portions of the roof and the roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages structural portions of the roof or the roof coverings), the foundation, the floor slab, the load bearing walls, and the exterior walls (excluding any glass therein but including the painting thereof) of the Building; the utility and plumbing Systems, (including fountain and sewer lines), fixtures and equipment located outside the Building; and the parking areas, landscaping, sprinkler systems, alarm system, sidewalks, driveways, curbs, and lighting systems in the Outside Areas. Landlord shall not be required to repair or maintain conditions due to any act, negligence or omission of Tenant or its agents, contractors, employees or invitees. Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair. (d) Tenant's Waiver of Rights. Tenant hereby expressly waives all rights to ------------------------- make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932 (1), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Term. 13. LANDLORD'S INSURANCE: Landlord shall purchase and keep in force fire, extended coverage and "all risk" insurance covering the Building, and earthquake coverage at the option of the Landlord. Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises of any insurer necessary for the maintenance of reasonable fire and public liability insurance, covering Building and appurtenances. Landlord, at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the Premises are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease. The premium for such Loss of Rents insurance shall be Additional Rent as set forth in Paragraph 4(b) (2). 14. TENANT'S INSURANCE: (a) Public Liability Insurance. Tenant shall, at Tenant's expense secure -------------------------- and keep in force a "broad form" public liability insurance and property damage policy covering the Premises and the Outside Areas, insuring Tenant, and naming Landlord and its lenders as additional insureds, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all Outside Areas. The minimum limit of coverage of such policy shall be in the amount of not less than One Million Dollars ($1,000,000.) for injury or death of one person in any one accident or occurrence and in the amount of not less than One Million Dollars ($1,000,000.) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least One Million Dollars ($1,000,000.). The limit of any insurance shall not limit the liability of Tenant hereunder. No policy shall be cancelable or subject to reduction of coverage, without at least thirty (30) days prior written notice to Landlord, and loss payable clauses shall be subject to Landlord's approval. Such policies of insurance shall be issued as primary policies and not contributing with or in excess of coverage that Landlord may carry, by an insurance company authorized to do business in the State of California for the issuance of such type of insurance coverage and rated A:XIII or better in Best's Key Rating Guide. A copy of said policy or a certificate ----------------------- evidencing to 8 Landlord's reasonable satisfaction that such insurance is in effect shall be delivered to Landlord upon commencement of the Term, and thereafter whenever said policies are renewed or modified, and also whenever Landlord shall reasonable request. (b) Personal Property Insurance. Tenant shall maintain in full force and --------------------------- effect on all outs fixtures and equipment on the Premises, a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of the full replacement cost thereon During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures and equipment so insured. Landlord shall have no interest in the insurance upon Tenant's equipment and fixtures and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions. Tenant shall furnish Landlord with a certificate evidencing to Landlord's reasonable satisfaction that such insurance is currently in effect, and whenever required, shall satisfy Landlord that such policy is in full force and effect. 15. INDEMNIFICATION: (a) Of Landlord. Tenant shall indemnify and hold harmless Landlord and ------------ agents, employees, partners, shareholders, directors, invitees, and independent contractors (collectively "Agents") of Landlord against and from any and all claims; liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from (1) Tenant's use of the Premises or from any activity done, permitted or suffered by Tenant, its agents, employees or independent contractors in and about the Premises, the Building or the Property; and (2) any act, neglect, fault, willful misconduct or omission of Tenant, or Tenant's Agents and invitees or from any breach or default in the terms of this Lease by Tenant, and (3) any action or proceeding brought on account of any matter in items (1) or (2). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material part of the consideration to Landlord, Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises from any cause whatsoever (except that which is caused by the sole active negligence or willful misconduct by Landlord or its Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease), if such failure has persisted for an unreasonable period of time after written notice of such failure), and Tenant hereby waives all claims in respect thereof against Landlord. The obligations of Tenant under this Paragraph 15 shall survive any termination of this Lease. (b) No Impairment of Insurance. The foregoing indemnity shall not relieve -------------------------- any insurance carrier of its obligations under any policies required to be carried by either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity. 16. SUBROGATION: Landlord and Tenant hereby mutually waive any claim against the other during the Term for any injury to person or loss or damage to any of their property located on or about the Premises, the Building or the Property that is caused by or results from perils covered by insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such injury, loss or damage, whether or not due to the negligence of the other party or its agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these 9 mutual waivers. Nothing in this Paragraph 16 shall relieve a party of liability to the other for failure to carry insurance required by this Lease. 17. ABANDONMENT: Tenant shall not abandon the Premises at any time during the Term. In the event of abandonment, the rights and remedies of Tenant and Landlord shall be determined in accordance with the applicable California statutes in effect at the time of abandonment. 16. FREE FROM LIENS: Tenant shall keep the Premises and the Property free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. 19. ADVERTISEMENTS AND SIGNS: Tenant shall not place or permit to be placed in, upon, or about the Premises or the Property any signs, advertisements or notices without obtaining Landlord's prior written consent or without complying with applicable law, and will not conduct, or permit to be conducted, any sale by auction on the Premises or otherwise on the Property. Tenant shall remove any sign, advertisement or notice placed on the Premises by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises or the Property caused thereby, all at Tenant's expense. If any signs are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage of injury to the Premises at Tenant's sole cost and expense. Landlord hereby consents to Tenant's installing, at its expense, such signs located either on the Building, in front of the Building (on Arques Avenue), or on both, provided that such signs shall be in keeping both in number and size as those currently identifying Diamond Computer Systems. The special designs for the signs shall be submitted to and must receive prior written approval of Landlord. 20. UTILITIES. Tenant shall pay for all water, sewer, gas, heat, light, power, telephone service and all other materials and services supplied to the Premises. If Tenant fails to pay for any of the foregoing when due, Landlord may pay the same and add such amount to the Rent. It is further understood that certain utility services, including water, and sewer are not separately metered to the Premises, but also serve other adjoining premises. Landlord and Tenant agree that Landlord shall submit at regular billing intervals, when utility bills are received, an allocation of the monthly charges applicable to each user by area occupied by each. Said allocated charges shall constitute additional rent. Landlord and Tenant agree that such allocation shall cease as to any service for which Landlord shall arrange for a separate meter for the Premises. The allocated costs shall also include the expense of maintenance, repair and replacement of equipment providing distribution of said utility services, which shall be charged on the same area basis. 21. ENTRY BY LANDLORD. Tenant shall permit Landlord and its Agents to enter into and upon the Premises at all reasonable times, upon reasonable notice of no less than twenty four (24) hours, (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to alter, improve, maintain and repair the Premises as required or permitted of Landlord under the terms hereof, without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual damages resulting from the negligence or willful misconduct of Landlord or its agents); and Tenant shall permit Landlord to post notices of non-responsibility and ordinary "for sale" or "for lease" signs, provided that Landlord may post such "for lease" signs and exhibit the Premises to prospective tenants only during the six (6) months prior to termination of this Lease. No such entry shall be construed to be a forcible or 10 unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. 22. DESTRUCTION AND DAMAGE: (a) If the Building is damaged by fire or other perils covered by extended coverage insurance, Landlord shall, at Landlord's option: (1) Subject to the provisions of Paragraph 5 of Addendum One hereof in the event of total destruction (which shall mean destruction or damage in excess of twenty-five percent (25%) of the full insurable value thereof) of the Building, elect either to commence promptly to repair and restore the Building and prosecute the same diligently to completion, in which event this lease shall remain in full force and effect; or not to repair or restore the Building, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the occurrence of such destruction. If Landlord elects not to restore the Building, this Lease shall be deemed to have terminated as of the date of such total destruction. (2) In the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof) or the Building for which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore such partial destruction and, if the damage thereto is such that the Building may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within one hundred eighty (180) days from the date of such destruction, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than one hundred eighty (180) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, or not to repair or restore, in which event the Lease shall terminate. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the destruction occurs. If Landlord elects not to restore the Building, this Lease shall be deemed to have terminated as of the date of such partial destruction. (3) Notwithstanding anything to the contrary contained in this Paragraph 22, in the event of damage to the Building or the Premises occurring during the last twelve (12) months of the Term, Landlord may elect to terminate this Lease by written notice of such election given to Tenant within thirty (30) days after the damage occurs. (b) Subject to the provisions of Paragraph 5 of Addendum One hereon, if the Building is damaged by any peril not covered by extended coverage insurance, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Building and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Building, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the occurrence of such damage. If Landlord elects not to restore the Building, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred. 11 (c) In the event of repair and restoration as herein provided, the monthly installments of Base Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration, unless the damage was caused by the negligent or willful acts of omissions of Tenant, in which event there shall be abatement of Base Rent only to the extant of rental abatement insurance proceeds received by Landlord. Tenant shall not be entitled to any compensation or damages for loss of use of the whole or any part of the Premises and/or any inconvenience or annoyance occasioned by such damage, repair or restoration. (d) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall repair or restore only those portions of the Building and Premises which were originally provided at Landlord's expense, substantially to their condition existing immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair and restore, at Tenant's expense, Tenant's fixtures, improvements, alterations and additions in and to the Premises or Building which were not provided at Landlord's expense. (e) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 22 shall govern exclusively in case of such destruction. 23. CONDEMNATION: If twenty-five percent (25%) or more of the Building or the parking area for the Premises is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "Condemnation"), Landlord or Tenant may, at its option, terminate this Lease as of the date title vests in the condemning party. If the Building after any Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. If either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. Tenant shall not because of such taking assert any claim against Landlord. Landlord shall be entitled to receive the proceeds of all Condemnation awards, (except separate awards for trade fixtures and relocation expense), and Tenant hereby assigns to Landlord all of its interest in such awards. If less than twenty-five percent (25) of the Building or the parking area is taken, Landlord at its option may terminate this Lease. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially their same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent corresponding to the time during which, and to the portion of the floor area of the Building (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such Condemnation and restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease in the event of a partial taking of the Premises, and any other applicable law now or hereafter enacted, are hereby waived by Landlord and Tenant. 24. ASSIGNMENT AND SUBLETTING 12 (a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest herein, sublet the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees, agents and invitees of Tenant excepted) to occupy or use the Premises, or-any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be withheld unreasonably. When Tenant requests Landlord's consent to such assignment or subletting, it shall notify Landlord in writing of the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide current financial statements for the proposed assignee or subtenant prepared in accordance with generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the proposed sublet or assignment agreement, including all material terms and conditions thereof. Landlord shall have the option, to be exercised within thirty (30) days of receipt of the foregoing, to (1) cancel this Lease as of the commencement date stated in the proposed sublease or assignment, (2) acquire from Tenant the interest, or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease, on the same terms and conditions as stated in the proposed sublet or assignment agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or sublease, providing that such consent shall not be unreasonably withheld. (b) Without otherwise limiting the criteria upon which Landlord may withhold its consent, Landlord may take into account the reputation and credit worthiness of the proposed assignee or subtenant, the character of the business proposed to be conducted in the Premises or portion thereof sought to be subleased, and the potential impact of the proposed assignment or sublease on the economic value of the Premises. In any event, Landlord may withhold its consent to any assignment or sublease, if (1) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 8(a) or (b) above or with any other lease which restricts the use to which any space in the Building may be put, or (2) the proposed assignment or sublease requires unreasonable alterations, improvements or additions to the Premises or portions thereof. (c) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, 50% of the difference, if any, between (1) the Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, and (2) the rent and any additional rent paid by the assignee or sublessee to Tenant, after deducting the costs incurred by Tenant in connection with any such assignment or sublease. The assignment or sublease agreement, as the case may be, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment subletting, occupation or use, and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease. (d) Tenant shall pay Landlord's reasonable fees, not to exceed Five Hundred Dollars ($500.00) per transaction, incurred in connection 13 with Landlord's review and processing of documents regarding any proposed assignment or sublease. (e) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 24 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or, use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof. (f) Notwithstanding anything to the contrary herein, Landlord's consent shall not be required for any transfer, assignment or subletting of the Premises (or any portion thereof) to any entity which controls, is controlled by, or is under common control with Tenant; to any entity which results from a merger of or consolidation with Tenant; to any entity which acquires substantially all of the assets of Tenant, as a going concern, with respect to the business that is being conducted in the Premises; or to entity engaged in a bona fide joint venture with Tenant. 25. TENANT'S DEFAULT: The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("Default"): (a) The abandonment of the Premises by Tenant; (b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of 10 calendar days after the same is due; (c) A general assignment by Tenant for the benefit of creditors; (d) The filing of a voluntary petition in bankruptcy by Tenant, the filing of a voluntary petition for an arrangement, the filing of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by Tenant's creditors, said involuntary petition remaining undischarged for a period of sixty (60) days; (e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof; (f) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraph 30 or 31 or 40. (g) An assignment or sublease, or attempted assignment or sublease, of this Lease or the Premises by Tenant contrary to the provision of Paragraph 24, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto; (h) Failure of Tenant to restore the Security Deposit to the amount and within the time period provided in Paragraph 6 above; 14 (i) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in other Paragraphs or this Paragraph 25, which shall be governed by such other Paragraphs), which failure continues for ten (10) calendar days after written notice thereof from Landlord to Tenant provided that, if Tenant has exercised ------------- reasonable diligence to cure such failure and such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph unless Tenant fails thereafter diligently and continuously to prosecute the cure to completion; and (j) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "Chronic delinquency" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within (5) calendar days after written notice thereof for any three (3) months (consecutive or non-consecutive) during any twelve (12) month period. In the event of a Chronic Delinquency, in addition to Landlord's other remedies for Default provided in this Lease, at Landlord's option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in advance. Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(b), (i) or (j) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. 26. LANDLORD'S REMEDIES (a) Termination. In the event of any Default by Tenant, then in addition ----------- to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (1) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation, any costs or expenses reasonably and necessarily incurred by Landlord (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus 15 (5) such reasonable attorneys fees incurred by Landlord as a result of a Default, and costs in the event suit is tiled by Landlord to enforce such remedy; and plus (6) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) above, the "worth at the time of award" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (3) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption of relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default or Tenant hereunder. (b) Continuation of Lease. In the event of any Default by Tenant, then in --------------------- addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations). (c) Re-entry. In the event of any Default by Tenant, Landlord shall also -------- have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) Reletting. In the event of the abandonment of the Premises by Tenant or --------- in the event that Landlord shall elect to re-enter as provided in Paragraph 26(b) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 26(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (1) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (2) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the payment of any reasonable costs of such reletting; (4) to the payment of the costs of any reasonable alterations and repairs to the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses reasonably and necessarily incurred by Landlord in such reletting or 16 in making such alterations and repairs not covered by the rentals received from such reletting. (e) Termination. No re-entry or taking of possession of the Premises by ----------- Landlord pursuant to this Paragraph 26 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the- termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (f) Cumulative Remedies. The remedies herein provided are not exclusive ------------------- and Landlord shall have any and all other remedies provided herein or by law or in equity. (g) No Surrender. No act or conduct of Landlord, whether consisting of ------------ the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger takes place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within (5) days after such surrender. 27. ATTORNEY'S FEES: In the event any legal action or proceeding, including arbitration and declaratory relief, is commenced for the purpose of enforcing any rights or remedies pursuant to this Lease, the prevailing party shall be entitled to recover from the non-prevailing party reasonable attorneys' fees, as well as costs or suit, in said action or proceeding, whether or not such action is prosecuted to judgment. 28. TAXES: Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against personal property and trade or business fixtures of Tenant. If any alteration, addition or improvement installed by Tenant pursuant to Paragraph 11, or any personal property, trade fixture or other property of Tenant, is assessed and taxed with the Property, Tenant shall pay such taxes to Landlord within fifteen (15) days after delivery to Tenant of a statement therefor. 29. EFFECT OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the owner for the time being of the Property containing the Building, so that, in the event of any sale of the Property or the Building, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder accruing from and after the transfer, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of the Property or the Building has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder, provided that new landlord has signed an agreement to assume and perform the obligations of the Landlord under the terms of this lease. 30. TENANT'S ESTOPPEL CERTIFICATE From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant entered into occupancy of the Premises; (c) the 17 amount of Rent and the date to which such Rent has been paid; (d) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or, if assigned, modified, supplemented or amended, specifying the date and terms of any agreement so affecting this Lease); (e) that this Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises (or specifying such other agreements, if any): (f) that all obligations under this Lease to be performed by Landlord as of the date of such certificate have been satisfied (or specifying those as to which Tenant claims that Landlord has yet to perform); (g) that all required contributions by Landlord to Tenant on account of Tenant's improvements have been received )or stating exceptions thereto); (h) to the best of Tenant's knowledge that on such date there exist no defenses or offsets that Tenant has against the enforcement of this Lease by Landlord (or stating exceptions thereto; (i} that no Rent or other sum payable by Tenant hereunder has been paid more than one (1) month in advance (or stating exceptions thereto); (j) that security has been deposited with Landlord, stating the amount thereof; and (k) any other matters evidencing the status of this Lease that may be required either by a lender making a loan to Landlord to be secured by a deed of trust covering the Premises or by a purchaser of the Premises. Any such certificate delivered pursuant to this Paragraph 30 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee. 31. SUBORDINATION: Landlord shall have the right to cause this Lease to be and remain subject and subordinate to any and all mortgages, deeds of trust ("Encumbrances") that are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of the foreclosure of any such ------------- mortgage or deed of trust, so long as Tenant is not in default, the holder thereof ("Holder") shall agree to recognize Tenant's rights under this Lease as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute, acknowledge and deliver any and all reasonable documents required by Landlord or the Holder to effectuate such subordination. If Tenant fails to do so, such failure shall constitute a Default by Tenant under this Lease. Notwithstanding anything to the contrary set forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any person or entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 32. ENVIRONMENTAL COVENANTS: (a) As used herein, the term "Hazardous Material" shall mean any substance or material which has been determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety or property, including all of those materials and substances designated as hazardous or toxic by the city in which the Premises are located, the U.S. Environmental Protection Agency, the Consumer Product 18 Safety Commissions, the Food and Drug Administration, the California Water Resources Control Board, the Regional Water Quality Control Board, San Francisco Bay Region, the California Air Resources Board, CAL/OSHA Standards Board, Division of Occupational Safety and Health, the California Department of Food and Agriculture, the California Department of Health Services, and any federal agencies that have overlapping jurisdiction with such California agencies, or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment. Without limiting the generality of the foregoing, the term "Hazardous Material" shall include all of those materials and substances defined as "hazardous materials" or "hazardous waste" in Sections 66680 through 66685 of Title 22 of the California Administrative Code, Division 4, Chapter 30, as the same products, fractions, constituents and sub- constituents of petroleum or petroleum-related substances, asbestos, and any other materials requiring remediation now or in the future under federal, state or local statutes, ordinances, regulations or policies. (b) Tenant represents, warrants and covenants (i) that it will use and store in, on or about the Premises, only those Hazardous Materials that are necessary for Tenant to conduct its business activities on the Premises, (ii) that, with respect to any such Hazardous Materials, Tenant shall comply with all applicable federal, state and local laws, rules, regulations, policies and authorities relating to the storage, use, disposal or cleanup of Hazardous Materials, including, but not limited to, the obtaining of proper permits, and (iii) that it will not dispose of any Hazardous Materials in, on or about the Premises under any circumstances. (c) Tenant shall immediately notify Landlord of any inquiry, test, investigation or enforcement proceeding by or against Tenant, Landlord or the Premises concerning a Hazardous Material. Tenant acknowledges that Landlord, as the owner of the Premises, shall have the right to negotiate, defend, approve and appeal, any action taken or order issued with regard to a Hazardous Material by an applicable governmental authority. Landlord shall immediately notify Tenant of any inquiry, test, investigation or enforcement proceeding against the Premises concerning a Hazardous Material on the Premises. Tenant shall pay Landlord's cost of negotiating, defending or appealing any action or order issued with regard to Hazardous Material by an applicable governmental authority if Tenant caused, permitted or suffered such Hazardous Material to come onto the Premises. Landlord agrees to indemnify, defend and hold Tenant harmless from and against the cost and expense of any remediation or cleanup work required by any governmental agency to be performed on the Premises as a result of any Hazardous Materials existing on the Premises on the date of this Lease. (d) If Tenant's storage, use or disposal of any Hazardous Material in, on or adjacent to the Premises results in any contamination of the Premises, the soil or surface of groundwater (1) requiring remediation under federal, state or local statutes, ordinances, regulations, or policies, or (2) at levels which are unacceptable to Landlord, in Landlord's reasonable judgment, Tenant agrees to clean up said contamination. Tenant further agrees to indemnify, defend and hold Landlord harmless from and against any claims, liabilities, suits, causes of action, costs, expenses or fees, including reasonable attorneys' fees and costs, arising out of or in connection with any remediation, cleanup work, inquiry or enforcement proceeding in connection therewith, and any Hazardous Materials currently or hereafter used, stored or disposed of by Tenant or its agents, employees, contractors or invitees in, on or adjacent to the Premises. (e) Notwithstanding any other right of entry granted to Landlord under this Lease, Landlord shall have the right upon reasonable 19 prior written notice (except in an emergency or in a situation where there is a danger of immediate further contamination, in which case no prior notice will be required) to enter the Premises or to have consultants enter the Premises throughout the term of this Lease for the purpose of (1) determining whether the Premises are in conformity with federal, state and local statues, regulations, ordinances, and policies including those pertaining to the environmental condition of the Premises, (2) conducting an environmental audit or investigation of the Premises for purposes of sale, transfer, conveyance or financing, (3) determining whether Tenant has complied with this Paragraph 32, and (4) determining the corrective measures, if any, required of Tenant to ensure the safe use, storage and disposal of Hazardous Materials, or to remove Hazardous Materials (except to the extent used, stored or disposed of by Tenant or its agents, employees, contractors or invitees in compliance with applicable law). Tenant agrees to provide access and reasonable assistance for such inspections. Such inspections may include, but are not limited to, entering the Premises or adjacent property with drill rigs or other machinery for the purpose of obtaining laboratory samples. Landlord shall not be limited in the number of such inspections during the term of this Lease. To the extent such inspection disclose the presence of Hazardous Materials used, stored or disposed of other than in accordance with subparagraph (b) (ii) above, Tenant shall reimburse Landlord for the reasonable cost of such inspections within ten (10) days of receipt of a written statement thereof. If such consultants determine that the Premises are contaminated with Hazardous Materials used, stored or disposed of by Tenant or its agents, employees, contractors or invitees, Tenant shall, in a timely manner, at its expense, remove such Hazardous Materials or otherwise comply with the recommendations of such consultants to the reasonable satisfaction of Landlord and any applicable governmental agencies. The right granted to Landlord herein to inspect the Premises shall not create a duty on Landlord's part to inspect the Premises, or liability of Landlord for Tenant's use, storage or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. Landlord shall be liable for the gross negligence or willful misconduct of Landlord or its agents, employees or consultants in conducting the aforementioned inspections. (f) Tenant shall surrender that Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste and Hazardous Materials used, stored or disposed of by Tenant or its agents, employees, contractors or invitees, and in a condition which complies with all governmental statutes, ordinances, regulations and policies, recommendations of consultants hired by Landlord, and such other reasonable requirements as may be imposed by Landlord. (g) Tenant's obligations under this Paragraph 32 shall survive termination of this Lease, and Tenant waives the Statute of Limitations, as to Landlord, applicable to any action brought hereunder. (h) Landlord hereby discloses to Tenant that the Premises and the Property are in an area in which contamination of soils or groundwater by Hazardous Materials exist. If Tenant desires more definite information regarding the existence or possible existence of contamination by Hazardous Materials of soils or groundwater of or beneath the Premises, the Property, or other real property in the general area of the Property, then Tenant shall investigate such matters. 33. NOTICES: All notices and demands which may or are to be required or permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or overnight courier, addressed to the addressee at the address for such addressee as specified herein, or to such 20 other place as such party may from time to time designate in a notice to the other party given as provided herein. Notice shall be deemed given upon the earlier of actual receipt or the date on which delivery was attempted if Tenant refuses to receive. 34. WAIVER: The waiver of any breach of any term, covenant or condition of this Lease shall-not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord on any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease. 35. HOLDING OVER: Any holding over after the expiration of the Term, without the express written consent of Landlord, shah constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate of one hundred twenty percent (120%) of the Base Rent last due in this Lease, plus Additional Rent, and shall otherwise be on the terms and conditions herein specified; so far as applicable. 36. SUCCESSORS AND ASSIGNS: The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several. 37. TIME: Time is of the essence of this Lease and each and every term, condition and provision herein. 36. BROKERS: Landlord represents and warrants to Tenant that neither it nor its officers or agents not anyone acting on its behalf has dealt with any real estate broker except Holcomb Realty and Tenant represents to Landlord that Cooper/Brady is its sole real estate broker in such negotiations, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorney's fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party. 39. RULES AND REGULATIONS: Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from time to time for the orderly and proper operating of the Building and parking and other common areas. Such rules may include but shall not be limited to the following: (a) restriction of employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage and disposal of Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe and abide by any of said rules and regulations. 40. MORTGAGEE PROTECTION: (a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing ------------------------ for the Premises or any portion thereof, Landlord's lender shall request reasonable modifications to this Lease as a condition to such 21 financing, Tenant shall not unreasonably withhold, delay or defer its consent to such modifications, provided such modifications do not adversely affect Tenant's rights or increase Tenants obligations under this Lease. (b) RIGHTS TO CURE. Tenant agrees to give to any trust deed or mortgage -------------- holder ("Holder"), by registered mail, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that prior ------------- to such notice Tenant has been notified, in writing, (by way of notice of assignment of rents and leases, or otherwise) of the address of such Holder Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional twenty (20) days after expiration of such period, or after receipt of such notice from Tenant (if such notice to the Holder is required by this Paragraph 42(b), whichever shall last occur, within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such twenty (20) days, any Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated. 41. ENTIRE AGREEMENT: This Lease, including the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect. 42. CONSTRUCTION: This Lease shall be construed and interpreted in accordance with the laws of the State of California. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. 43. REPRESENTATIONS AND WARRANTIES OF TENANT: Tenant hereby makes the following representations and warranties, each of which is material and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease. (a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms. (b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any creditors, (3) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (4) suffered the attachment or other judicial seizure of all or 22 substantially all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6) made an offer of settlement, extension or composition to its creditors generally. Landlord and Tenant have executed and delivered this Lease as of the date first hereinabove set forth. 44. OUTSIDE AREAS. (a) Subject to the terms and conditions of this lease and such rules and regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees, guests and customers shall have the nonexclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the building in which the premises are located, which areas and facilities are referred to herein at "Outside Area", This right shall terminate upon the termination of this lease. Landlord reserves the right from time to time to make changes in the he shape, size, location, amount and extent of "Outside Area:, and in painting of exterior walls, Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the "Outside Area", and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the building. The rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant and Tenant shall abide by them and cooperate in their observance. Such rules and regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Tenant agrees to require its employees, executives, invitees, guests and customers to abide by such rules and regulations including parking regulations. (b) Landlord shall operate, manage and maintain the "Outside Area", and landscaping and the surface of the exterior walls. The manner in which the "Outside Area" shall be maintained and the expenditures for such maintenance shall be at the discretion of Lessor. (c) No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the leased premises outside of the building constructed thereon, except with the prior written consent of the Landlord. No waste materials or refuse shall be dumped upon or permitted to remain unreasonable upon any part of the leased premises outside of building proper, unless approved by Landlord. (d) Tenant shall not use solid hard tires on any fork lifts or dollies on paved parking, truck loading or driveway areas, and in the event Tenant violates this provision, Tenant shall be responsible for the cost of resurfacing the entire area. 45. PARKING. Motor vehicle parking shall be non-exclusive, subject to reallocation by Landlord from time to time. Landlord reserves the right to designate from time to time the parking spaces for vehicles of Tenant and its guests and invitees. Said spaces shall total 137, less the number eliminated by revisions to existing handicap parking. The current designation of 137 spaces is shown on attached Exhibit B. Tenant agrees that Landlord shall have no responsibility for policing these parking spaces or seeing that they are used exclusively by Tenant's employees, guests, or invitees. Tenant shall not at any time park or permit the parking of Tenant's trucks or other vehicles, or the trucks or other vehicles of others in driveways or adjacent to loading areas as to interfere in any way with the use of such areas, nor shall Tenant at any time park or permit the parking of Tenant vehicles or trucks, or the vehicles or trucks of Tenant's suppliers or invitees 23 in any portion of the "Parking Area" not designated by Landlord for such use by Tenant. Tenant shall not park or permit to be parked inoperative vehicles or equipment on any portion of the "Outside Area" and agrees that no vehicle will be parked on the "Outside Area" for longer than eighteen (18) hours in any twenty-four (24) hour period. 46. CALCULATION OF AREA: The square footage of the leased premises (approximately 35,552 square feet as set forth in Paragraph 2) has been calculated in this manner: the area of the leased building, measured from the outer extent (drip line) of metal and built-up roofed areas, or the outer walls. The Premises shall be deemed for all purposes and agreed to consist of 35,552 square feet. 47. TENANT IMPROVEMENTS: Tenant shall select and retain an architect or facilities planner who shall prepare "tenant improvement" drawings and specifications for interior revisions to the premises which are accepted by Tenant in "AS IS" condition, subject to the provisions of Addendum 1, Paragraph 1 "Tenant Improvements" as stated in the Lease shall be general in nature and shall include only those improvements within the Premises which are depicted on the Final Plans and Specifications or described herein below. The Tenant Improvements may include, but are not limited to: (a) Partitioning, doors, floor coverings, finishes, ceilings, wall coverings and painting, millwork and similar items. (b) Electrical wiring, lighting fixtures, outlets and switches, and other electrical work. (c) Duct work, terminal boxes, defusers and accessories required for the completion of the heating, ventilation and air conditioning systems serving the Premises, including the cost of meter and key control for after-hour air conditioning. (d) Any additional Tenant requirements including, but not limited to odor control, special heating, ventilation and air conditioning, noise or vibration control or other special system. (e) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories serving the Premises. (f) All plumbing, fixtures, pipes, and accessories serving the Premises. (g) Changes to handicapped parking or ramps. Landlord shall provide in writing, not later than five (5) business days after request therefor, approval or disapproval of preliminary and Final Plans and Specifications. Landlord and Tenant shall indicate their approval of the Final Plans and Specifications by initialing them. Upon completion of the Final Plans and Specifications and approval thereof by Landlord and Tenant, Tenant will obtain general contractor bids and furnish a cost breakdown to Landlord. In the event the estimated Tenant Improvements Cost, based on such bids and the reasonably anticipated costs of other items constituting the Tenant Improvement Cost, exceeds the sum of the Tenant Improvements 24 Allowance plus any amounts which Tenant desires to pay as an Excess Tenant Improvements Costs, the Final Plans and Specifications may be revised, at Tenant's cost and expense. Any such revisions shall be subject to Landlord's approval, and the amended Final Plans and Specifications, as approved by Landlord and Tenant, shall thereafter be deemed to be the Final Plans and specifications for the Tenant Improvements. The amended Final Plans and Specifications shall be approved by Landlord in writing, not later than five (5) business days after Tenant's request therefor. Tenant shall thereafter submit such amended Final Plans and Specifications to general contractors selected by Tenant and approved by Landlord for re-bidding, and shall furnish a cost breakdown to Landlord If the estimated Tenant Improvements Cost, as determined by the bids based on the amended Final Plans and Specifications and the reasonably anticipated costs or other items constituting the Tenant Improvements Cost, result in an Excess Tenant Improvements Cost, then Tenant may make further revisions as required to delete such items from the Final Plans and Specifications in order to eliminate any Excess Tenant Improvements Cost or, if Tenant does not elect to make further revisions, Tenant shall pay such Excess Tenant Improvements Cost as and when required below. When the Final Plans and Specifications (as amended, if required above) have been approved by Landlord and Tenant, Tenant shall submit such Final Plans and Specifications to all governmental authorities having rights of approval over the Tenant Improvement work and shall apply for all governmental approvals and building permits. Subject to its obligations, Tenant shall thereafter commence and proceed to have completed construction of the Tenant Improvements in a good and workmanlike manner by a general contractor approved by Landlord. Landlord shall provide an allowance for the planning and construction of Tenant Improvements in the amount of Ten Dollars per square foot ($355,520). In addition, Landlord shall provide $25,000. to be matched by equal amounts from the above Ten Dollar per square foot tenant improvement allowance to correct non-conformities with current codes as required by governmental authorities. This total amount ($380,520.) shall be known as the Tenant Improvement Allowance and shall be the maximum contribution by Landlord for Tenant Improvement Costs including correcting any non-conformities to codes or any other deficiencies. Should the Tenant contribute funds to reduce Landlord's contribution to the Tenant Improvement Allowance and/or should the actual cost of planning and constructing those Tenant Improvements depicted on the Final Plans and Specifications be less than the Tenant Improvement Allowance, the Tenant Improvement Allowance shall be reduced to an amount equal to said actual contribution by Landlord and the base monthly rent shall be reduced by $.02585 for each $1.00 less than $355,520. contributed by Landlord as part of the Tenant Improvement Allowance. Any reduction in the aforesaid $25,000. to be contributed by Landlord to correct code non-conformities shall not reduce the base monthly rent. A memorandum to this Lease shall be executed by Landlord and Tenant setting forth the amount by which Base Rent has been decreased. The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all costs and expenses associated with the design, preparation, approval and construction of the Tenant Improvements, including, but not limited, to the following: (a) All costs of preliminary and final architectural and engineering plans and specifications for the Tenant Improvements, and engineering costs associated with completion of the State of California energy utilization calculations under Title 24 legislation; 25 (b) All costs of obtaining building permits and other necessary authorizations from local governmental authorities; (c) All costs of interior design and finish schedule plans and specifications including as-build drawings; (d) All direct-and indirect costs of procuring, constructing and installing the Tenant Improvements in the Premises; (e) Utility connection fees. In no event shall the Tenant Improvements Cost include any costs of procuring, constructing or installing in the Premises any of Tenant's personal property or trade fixtures. Landlord shall reimburse Tenant for Tenant Improvement Costs (up to the sum of the Tenant Improvement Allowance) within 10 days after presentation of invoices therefor and proof that such invoices have been paid by Tenant. Tenant shall be entitled to submit paid invoices to Landlord from time to time but not more frequently than once every (30 days) during construction. Tenant also shall give Landlord a full and complete set of "As Built" Drawings of the tenant improvements within thirty days of tenant improvement completion and occupancy by Tenant. 48. OPTION TO EXTEND: Landlord grants to Tenant two options to extend the term of this lease for a period of three years each subject to all terms and conditions herein contained except this paragraph, paragraph 47 - Tenant Improvements, and monthly rental which shall be determined as set forth below. In order to exercise this option, Tenant must have performed all the covenants and obligations of Tenant herein and at least six months before the ending date of the initial term of this lease or of the first extended term of three years, must have delivered to Landlord written notice of the exercise of this option. As of the date of exercise by Tenant of its option to extend, the monthly base rental for the Extended Term of three years shall be subject to negotiation between the Landlord and Tenant. Not later than five (5) full calendar months prior to the expiration date of the Initial Term, or of the extended term as the case may be, Landlord and Tenant shall meet and endeavor to agree between themselves as to the fair market base monthly rental of the premises, as of the commencement of the Extended Term. If the parties are able to agree on such fair market base monthly rental, said base monthly rent shall be the rental for the premises during the Extended Term. In the event the parties fail to agree upon said amounts for the Extended Term, at least four (4) full calendar months prior to commencement thereof, the base monthly rental for the Extended Term, shall be determined by appraisal in the manner hereafter set forth. In the event it becomes necessary under this subparagraph to determine the fair market base monthly rental of the premises by appraisal, Landlord and Tenant, no later than three (3) full calendar months prior to commencement of the Extended Term, each shall appoint an experienced real estate appraiser with at least five (5) years experience in the leasing of industrial office property in the general vicinity of the premises. The two appraisers so selected shall each determine the fair market base monthly rental for the premises taking into account the value of the property and comparable prevailing rentals including escalations for a three (3)year term in that area. Such appraisers shall, within twenty (20) business days after their appointment, complete their appraisals and submit their appraisal reports to Landlord and Tenant. If the fair market monthly base rental of the premises established in the two (2) appraisals varies by ten percent (10%) or less of the 26 higher rental, the average of the two shall be controlling. If said fair market monthly base rental varies by more than ten percent (10%) of the higher rental, said appraisers, within ten (10) days after the submission of the last appraisal, shall appoint a third appraiser who shall also meet the qualifications set forth above. Such third appraiser shall, within twenty (20) business days after his appointment, determine by appraisal the fair market monthly base rental of the-premises, taking into account the same factors referred to above, and submit his appraisal report to Landlord and Tenant. The fair market monthly base rental determined by the third appraiser for the premises shall be controlling, unless it is less than that set forth in the lower appraisal previously obtained, in which case the value set forth in said lower appraisal shall be controlling, or unless it is greater than that set forth in the higher appraisal previously obtained, in which case the base rental set forth in said higher appraisal shall be controlling. If either Landlord or Tenant fails to appoint an appraiser or if an appraiser appointed by either of them fails, after his appointment, to submit his appraisal within the required period in accordance with the foregoing, the appraisal submitted by the other appraiser shall be controlling. The term "fair market monthly base rental" used for all purposes of this paragraph, shall include escalation over the three year term. The cost of all appraisals under this subparagraph shall be borne equally by Landlord and Tenant. Upon determination of the fair market base monthly rental by appraisal, the parties hereto shall immediately execute an addendum to this Lease stating the fair market base monthly rental so determined. In the event of exercise of the option to extend, the security deposit shall continue to be held under the provisions of the lease, to be returned to Tenant to the extent therein set forth, within 30 days after the termination of the extension period and vacation of the premises by Tenant. It is agreed that this Option to Extend is personal to Tenant, and has been granted because of specific use of the premises by Tenant and agreements in the lease concerning Tenant's improvements. In the event this lease is assigned or sublet to any third party or entity other than to successor tenant as defined by paragraph 24 (f), this Option to Extend shall be null and void. Landlord and Tenant have executed and delivered this Lease as of the date first hereinabove set forth. LANDLORD TENANT Herman Christensen, Jr. and Olivetti Advanced Technology Raymond P. Christensen Center, Inc. /s/ Herman Christensen, Jr. /s/ J.P. Belshaw ___________________________ By ______________________ Herman Christensen, Jr. /s/ Raymond P. Christensen __________________________ Printed Raymond P. Christensen J.P. Belshaw Name: _____________________ Treasurer/Controller Title: ______________________ 801 American St. San Carlos, CA 94070 By: ________________________ Printed Name:______________________ Title: ______________________ 27 ADDENDUM ONE TO LEASE AGREEMENT dated by and between HERMAN CHRISTENSEN, JR. and RAYMOND P. CHRISTENSEN as Landlord, and OLIIVETTI ADVANCED TECHNOLOGY CENTER, INC., as Tenant MODIFICATIONS, ADDITIONS AND AMENDMENTS TO LEASE The provisions of this Addendum One shall modify, amend and be in addition to the provisions of the Lease. Where the provisions of this Addendum One are inconsistent with the provisions of the Lease, the provisions of this Addendum One shall govern. 1. Tenant has inspected the premises and accepts the premises in "As Is" condition with the following exceptions: 1) The roof shall be inspected by a reputable roofing contractor selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld. Repairs recommended by this inspection to place the roof in good condition prior to the lease commencement date shall be accomplished with the cost to be borne by Landlord. 2) The HVAC equipment on the roof shall be inspected by a reputable HVAC contractor selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld. Repairs or replacements recommended by this inspection to place this equipment in good condition prior to the lease commencement date shall be accomplished with the cost to be borne by Landlord. 2. Tenant may for the purpose of installing Tenant Improvements, occupy the Premises prior to the Commencement date of the Lease (Early Occupancy) on February 1, 1995. If Tenant Improvements are completed prior to the Lease Commencement date, Tenant may occupy the premises and carry on its business. Said Early Occupancy shall be under all terms and provisions of this lease except that no Base rent and Additional Rent shall be payable for this period. Prior to February 1, 1995, subject to the approval of Diamond Computer Systems, Tenant shall have reasonable access to the Premises for the purpose of architectural and engineering planning. 3. Landlord warrants and represents to Tenant that to the best of Landlord's knowledge on the date this Lease is executed there is no asbestos on the Premises. Tenant shall not bring nor permit asbestos to be brought onto the Premises. 4. In the event Tenant wishes to install additional air conditioning or other equipment on the roof, Tenant shall furnish an engineer's report certifying that the structural integrity of the roof and roof covering will not be adversely affected by the proposed addition. 5. Notwithstanding the provisions of Paragraph 22 of the Lease to the contrary, in the event Landlord elects to repair or restore the Premises and such repair or restoration is reasonably estimated by Landlord to require more than one hundred eighty (180) days from the date of destruction, Landlord shall notify Tenant and Tenant shall have ten (10) days after receipt of such notice to elect to terminate the Lease by giving written notice of such election to Landlord. If Tenant so elects to terminate the Lease, such termination shall be effective as of (i) if Tenant is in possession of the Premises following such damage or destruction, the date Tenant surrenders possession of the Premises to Landlord following Tenant's election to terminate the Lease or (ii) if Tenant is unable to occupy the Premises following such damage and destruction, the date on which the damage or destruction occurred. [MAP APPEARS HERE] EXHIBIT A BLDG. "B" (NORTH WING) [MAP APPEARS HERE] EXHIBIT B (ARQUES) [MAP APPEARS HERE] EXHIBIT C 1130 East Arques Sunnyvale, CA EX-10.10 15 DEVELOPMENT, LICENSE AND PURCHASE AGREEMENT EXHIBIT 10.10 DEVELOPMENT, LICENSE AND PURCHASE AGREEMENT THIS DEVELOPMENT, LICENSE AND PURCHASE AGREEMENT, including the attached Exhibits ("Agreement"), effective as of the 19th day of December, 1994 ("Effective Date"), is hereby made by and between Cisco Systems, Inc., a California corporation, having principal offices at 170 West Tasman Drive, San Jose, California 95134-1706 ("Cisco"), and Multimedia Communications, Inc., a California corporation, having a place of business at 2855 Kifer Road, Santa Clara, California, 95051 ("MMC"). RECITALS WHEREAS, the parties desire that MMC support Cisco in its design of the Cisco Chip Set pursuant to the Statement of Work; and WHEREAS, Cisco desires that MMC grant certain licenses to Cisco, as specified below, to enable Cisco to develop the Cisco Chip Set. NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows: 1. DEFINITIONS 1.1 "Application Development Software System" means MMC's software known --------------------------------------- as the Application Development Software System, as further described in Exhibit ------- C. Item 3. - --------- 1.2 "Cisco Chip Set" means the companion chip set to be developed by -------------- Cisco, which interfaces with the MMC Chip Set, pursuant to the MMC Chip Set license granted by MMC to Cisco hereunder. 1.3 "Deliverables" means the items to be delivered by MMC hereunder ------------ pursuant to the milestone schedule as specified in the Statement of Work. 1.4 "MMC Chip Design" means MMC's design of the MMC Chip Set, as more --------------- fully described in Exhibit B 1.5 "MMC Chip Set" means the ATM switch chip set which meets the ------------ Specifications set forth in Exhibit B, designed and developed by MMC. 1.6 "MC Source Code" means the high-level description of the MMC Chip Set -------------- in Verilog format. 1.7 "Proprietary Rights" means all worldwide ideas, know-how, trade ------------------ secrets, inventions, technology, designs, copyrights, patents, trade names, trademarks, audio visual rights and all other intellectual property rights including without limitation all moral rights therein and thereto and all applications and registrations with respect thereto. 1.8 "Specifications" means the functional, technical and other -------------- specifications for the MMC Chip Set set forth in Exhibit B. which may be ----------- modified from time to time by prior written mutual agreement of the parties. 1.9 "Statement of Work" means that document specifying the milestone ----------------- schedule for the development work to be undertaken under this Agreement, as set forth in Exhibit A, which may be modified from time to time by prior mutual --------- written agreement of the parties. 1 1.10 "Switch Design and Software" means MMC's Electrical board-level Design -------------------------- of the Switch and the Basic Switch Driver Software, as further described in Exhibit C, Item 2. - ----------------- 2. DEVELOPMENT 2.1 Development. On the terms and conditions set forth in this Agreement, ----------- MMC agrees to deliver to Cisco the Deliverables in a professional and competent manner according to the Specifications and schedule and milestones set forth in the Statement of Work. 2.2 Project Managers. Each party will appoint a single project manager ---------------- ("Project Manager") and provide written notification to the other party of the name of the Project Manager within five (5) days of the Effective Date. The Project Managers will act as a liaison with the other party with respect to the design and development of the MMC Chip Set. In the event that either party appoints a new Project Manager, such party will promptly notify the other. 2.3 Modifications. During the development specified in Section 2.1 above, ------------- the parties agree to reasonably modify the Statement of Work at the request of either party, provided that the modifications do not materially increase either party's obligations under this Agreement. If the modifications would materially increase any such obligations, MMC and Cisco shall use their respective good faith efforts to agree on terms under which such changes shall be incorporated into the Statement of Work and this Agreement. Changes to the Statement of Work will be made only upon written agreement, including electronic mail, of each party's Project Manager. 2.4 Cisco's Obligations. ------------------- (a) Cisco will provide certain materials, proprietary information and technology ("Cisco Materials") to MMC for MMC's use in the development contemplated hereunder as identified in Exhibit D. Cisco hereby grants MMC a --------- nonexclusive, nontransferable license to use the Cisco Materials solely for use in fulfilling MMC's obligations under the development to be performed hereunder. Unless otherwise agreed, upon request by Cisco (and at Cisco's expense and direction) MMC will return all Cisco Materials to Cisco. (b) Cisco agrees to perform the tasks specified in Exhibit D to facilitate --------- MMC's performance of its development obligations hereunder. 2.5 Delivery and Acceptance. ----------------------- (a) Upon completion of a milestone called for under the Statement of Work, MMC will deliver to Cisco the Deliverables for such milestone identified in the Statement of Work, which will include MMC Source Code. (b) Cisco shall promptly review, test and evaluate each Deliverable in accordance with the requirements and acceptance criteria for such Deliverable contained in the Statement of Work. Cisco shall provide MMC with a written acceptance of a Deliverable, or a written statement of defects to be corrected. MMC shall promptly correct such defects, if any, and return the Deliverable to Cisco for retesting, review and reevaluation. The foregoing procedure shall he repeated until acceptance of each Deliverable by Cisco; provided, that if such Deliverable is not accepted within forty-five (45) days of the original applicable milestone schedule date for its delivery, Cisco will have the right to immediately terminate this Agreement notwithstanding anything to the contrary in Section 10 (Term and Termination). In no event shall Cisco's right to terminate this Agreement prior to Acceptance include future rights to manufacture described in Section 4.5. 2.6 Advance Payment. In consideration for MMC's support in the development --------------- of the Cisco Chip Set hereunder, Cisco agrees to pay to MMC an advance against the Unit Price (defined below) due hereunder equal to the amount of (*), due and payable in accordance with the following schedule: 50% at contract signing, and; remaining balance at Cisco Acceptance of the samples (see 2.5 (b). __________________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 2.7 MMC Source Code and Network Access. The parties agree that, during the ---------------------------------- development contemplated hereunder, MMC will provide Cisco with the MMC source code in order to support Cisco in the design of the Cisco Chip Set. Cisco acknowledges that the Source Code and any information disclosed to Cisco on the MMC network is highly Confidential Information. Therefore, in addition to the obligations of nondisclosure set forth in Section 9 below, Cisco agrees to keep the computers on which the Source Code is stored locked in Cisco's server room; such computers shall be password protected with limited access to Cisco designers, and managers working with the designers, and the system administrators) and other authorized personnel (a) who have a need to use such Source Code or have access to the MMC network to perform hereunder, and (b) who have signed agreements (in the form attached hereto as Exhibit D) obligating --------- them to maintain the confidence of the Source Code disclosed to them. 3. OWNERSHIP AND GRANT OF RIGHTS AND LICENSES 3.1 MMC Chip Set Ownership. The MMC Chip Set, and all Proprietary Rights ---------------------- therein and thereto, is owned by MMC. 3.2 MMC Source Code License. Subject to the terms and conditions of this ----------------------- Agreement, MMC hereby grants Cisco a non-exclusive, worldwide, perpetual, irrevocable license, under MMC's Proprietary Rights, to the MMC Source Code to (a) use the MMC Source Code to create the Cisco Chip Set, (b) make, have made, sell and distribute the Cisco Chip Set and (c) modify, make derivative works of, sell and distribute such modifications and derivative works of the Cisco Chip Set. 3.3 Cisco Chip Set Ownership. Subject to MMC's ownership of the MMC Chip ------------------------ Design, the Cisco Chip Set, and all Proprietary Rights therein and thereto, which Cisco develops pursuant to this license shall be owned by Cisco. 3.4 MMC Switch Design and Software License. Subject to the terms and -------------------------------------- conditions of this Agreement, MMC hereby grants Cisco a non-exclusive, worldwide, perpetual, irrevocable license, under MMC's Proprietary Rights, to the Switch Design and Software to use, make, have made, modify, make derivative works of, sell, distribute and otherwise exploit. This does not imply the license to use MMC's proprietary Shared Memory Architecture in any other application. 3.5 MMC Site License. Subject to the terms and conditions of this ---------------- Agreement, MMC hereby grants Cisco a non-exclusive, worldwide, perpetual, irrevocable, royalty-free license, not for resale and for internal use only, under MMC's Proprietary Rights, to the Application Development Software System to enable Cisco to develop application software in parallel to hardware development. 3.6 Further Assurances. At any time or from time to time on and after the ------------------ date of this Agreement, at the request of either party, the other party shall (a) deliver such records, data or other documents consistent with the provisions of this Agreement, (b) execute, and deliver or cause to be delivered, all such assignments, consents, documents or further instruments of transfer or license and (c) take or cause to be taken all such other actions, as the requesting party may reasonably deem necessary or desirable in order for the requesting party to obtain the full benefits of this Agreement and the transactions contemplated hereby, including ensuring all employees participating in the developments hereunder have executed agreements assigning all inventions such employee may develop or conceive to such employee's employer. 3.7 (*) 3.8 No Other Rights. Except as expressly provided in this Agreement, --------------- neither party shall have any license, expressed or implied, to use any technology or Proprietary Rights owned solely by the other party. _____________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 4. MANUFACTURING 4.1 Agreement to Manufacture. Upon receipt of orders therefor, MMC agrees ------------------------ to have the MMC Chip Sets manufactured and to sell such MMC Chip Sets to Cisco at prices determined as set forth in Section 5 below, and Cisco agrees to purchase such MMC Chip Sets from MMC on the terms and conditions set forth herein. 4.2 MMC's Obligations. MMC agrees to hold finished goods inventory of the ----------------- MMC chipset (at Cisco's expense; value to be mutually agreed upon within 30 days following the signing of this Agreement) in quantities sufficient to cover their quoted manufacturing leadtime plus one month. The quantity is determined by the open purchase orders and the 9 (nine) month rolling forecast (section 5.2). 4.3 Quality. MMC agrees that the MMC Chip Sets manufactured and delivered ------- hereunder will meet the quality requirements set forth in Exhibit G. --------- 4.4 Regulatory Approvals. Cisco will be responsible for the MMC Chip Set's -------------------- compliance with all applicable UL, CSA, FCC and other approvals, standards and regulations, provided that the MMC Chip Sets are manufactured in accordance with the Specifications. Cisco may designate any approved third party hereunder as the manufacturing location for the purposes of such approvals. MMC will cooperate, and require such approved third parties to cooperate, with public and private regulatory agencies and organizations to allow periodic inspections at mutually agreeable times to maintain such approvals. 4.5 Cisco's Right to Manufacture. MMC agrees that it shall grant Cisco the ---------------------------- right to manufacture, and hereby does grant Cisco the worldwide, nonexclusive, nontransferable, perpetual, irrevocable right and license, without the right to sub-license, under MMC's Proprietary Rights, to manufacture or have manufactured, use sell or otherwise distribute the MMC Chip Set upon the occurrence of the following events or circumstances: (a) MMC assigns, transfers or delegates its rights and obligations under this Agreement to another party without Cisco's prior written consent, including without limitation any transfer by sale, merger or other business combination of ownership of or control over more than fifty percent (50%) of the voting securities or control of MMC; Cisco will not unreasonably withhold its consent provided that the assignee can carry out the obligations under this Agreement. (b) MMC fails consistently to supply Cisco with MMC Chip Sets meeting the applicable quality standards in the quantities required in accordance with the capacity requirements set forth in section 4.2. For purposes of this paragraph (b), MMC shall be deemed to have failed consistently in performing its obligations to supply MMC Chip Sets if over a twelve month period, three occurrences in which (i) MMC fails to ship at least ninety percent (90%) of the scheduled quantities of the MMC Chip Set for any two (2) month period on or before the ship dates scheduled in accordance with this Agreement, or (ii) more than .4 percent (or 4000 DPM) as a Cisco Chip Set (see Exhibit G) delivered are defective in any material respect with regard to materials and workmanship (excluding design defects, software bugs and other defects which are not related to manufacturing operations). (c) Cisco reasonably deems itself insecure with respect to MMC's capacity to continue to supply MMC Chip Sets in accordance with this Agreement because MMC is experiencing financial distress as evidenced by the occurrence of all of the following: (i) MMC has experienced losses for the two preceding fiscal quarters, (ii) MMC has working capital on hand that is inadequate to fund MMC's operations for the following three months at the same level as the prior three months and (iii) MMC fails to obtain sufficient working capital for such following three months within 30 days after receiving written notice from Cisco that Cisco intends to exercise its right to manufacture MMC Chip Sets. Cisco and MMC agree that, if MMC recovers from its financial distress and can demonstrate that it has working capital on hand sufficient to fund operations at the level sufficient to find operations at Cisco's then current demand for at least six months, Cisco and MMC will negotiate in good faith for an arrangement under which MMC will again manufacture MMC Chip Sets for Cisco and which takes into account the investment Cisco makes to begin manufacturing MMC Chip Sets itself. 4 (d) MMC refuses to make the MMC Chip Sets available to Cisco at or below the maximum applicable price levels agreed to in writing by the parties for the MMC Chip Sets; or (e) Cisco terminates this Agreement by reason of any other material breach by MMC of its obligations hereunder which remain uncured thirty (30) days after MMC's receipt of written acceptance thereof by Cisco. 4.6 Royalties and License Fees. --------------------------- (a) In the event Cisco exercises its right to manufacture the Chip Sets, Cisco agrees to pay MMC royalties on all Cisco products using the MMC Chip Sets manufactured and distributed by Cisco hereunder at royalties to be mutually agreed upon (e.g., based on a win/win principle) at a later date. Such royalties will be computed on a per unit basis and paid quarterly within forty-five (45) days following the end of each Cisco quarter. (b) MMC shall be obligated to pay all license fees and royalties, if any, with respect to any third party technologies which are required for the exercise of Cisco's manufacturing rights. 4.7 Audit Rights. In the event Cisco exercises its right to manufacture ------------ the MMC Chip Set as provided hereunder, Cisco agrees to keep and maintain, for a period of two (2) years after the end of the year to which they pertain, complete and accurate records of the MMC Chip Sets manufactured and distributed by Cisco in order to calculate and confirm Cisco's royalty obligations under Section 4.6 above. Upon reasonable prior notice, MMC will have the right, exercisable not more than once every twelve (12) months, to appoint an independent accounting firm, at MMC's expense, to examine such books, records and accounts during Cisco's normal business hours to verify the royalties due by Cisco to MMC under Section 4.7 above, subject to such independent accounting firm's execution of Cisco's standard confidentiality agreement; provided that execution of such agreement will not preclude such firm from reporting its results to MMC. In the event such audit discloses an underpayment or overpayment of royalties due hereunder, the appropriate party will promptly remit the amounts due to the other party. In the event the audit reveals underpayments greater than five percent (5%), Cisco will pay all reasonable fees submitted by the independent accounting firm. 4.8 Manufacturing Information Escrow. -------------------------------- (a) MMC agrees, at Cisco's expense, to place in escrow all information that is reasonably required in order for Cisco to manufacture the MMC Chip Set meeting the Specifications and shall include at least the information listed in Exhibit H ("Manufacturing Information"). MMC shall place the Manufacturing - --------- Information in escrow, with an escrow agent selected by Cisco, as soon as is reasonably practicable following the Effective Date of this Agreement. The "Escrow Agreement" will provide that the Manufacturing Information will only be released to Cisco, subject to the terms and conditions hereof, only after notice to MMC and only under circumstances in which Cisco would otherwise be entitled to exercise the manufacturing rights. MMC agrees to promptly deposit, but not more often than four (4) times per year, into escrow any and all updates, enhancements and modifications to the Manufacturing Information. (b) In the event Cisco exercises its manufacturing rights hereunder, MMC shall provide Cisco such technical support and assistance as Cisco may reasonably request in connection with the manufacture and testing of the MMC Chip Set. (c) Cisco agrees that it will maintain the Manufacturing Information delivered to it under this Agreement in strict confidence and will require its contractors to do the same. Any source code which is delivered as part of the Manufacturing Information will be subject to Cisco's obligations set forth in Section 9.3 below. 5 5. TERMS OF PURCHASE 5.1 Terms and Conditions. Cisco agrees to purchase and MMC agrees to sell -------------------- to Cisco units of the MMC Chip Set. All orders for MMC Chip Sets by Cisco will be initiated by Cisco's issuance of written purchase orders sent to MMC (via mail, telecopier, or telefax). Such orders shall state unit quantities, requested delivery dates, and shipping instructions. Such purchase orders will be deemed accepted upon receipt by MMC, unless Cisco is notified otherwise within seven business days. No terms on purchase orders, invoices or like documents by MMC or Cisco will serve to alter or add to the terms of this Agreement. 5.2 Leadtime. MMC agrees to work with Cisco to develop a rapid fulfillment -------- capacity in order to meet demand with shortest lead-times. 5.3 Unit Price. ---------- (a) The prices to Cisco for each MMC Chip Set as well as individual chips are contained in EXHIBIT J, Pricing. --------- (b) Notwithstanding anything to the contrary in paragraph (a) above, MMC agrees that it shall pass through to Cisco one hundred percent (100%) of any third party foundry price reductions for manufacture of the MMC Chip Sets. (c) Notwithstanding anything to the contrary herein, MMC agrees that the Unit Price paid by Cisco hereunder shall not be greater than the unit price MMC charges any other customer for the MMC Chip Set for all Agreements signed on or after this Agreement. 5.4 Initial Purchase Order. Within five (5) days after the Effective Date ---------------------- of this Agreement, Cisco agrees to place a purchase order for (*) MMC Chip Sets. In consideration for the Advance Payment paid by Cisco to MMC under Section 2.6 above, MMC agrees that the Unit Price to Cisco for this initial order shall be reduced by (*) (i.e. (*) per MMC Chip Set). The Deliverables delivered under Section 2 above (including without limitation the prototypes of the MMC Chip Set) will not be counted as part of the initial purchase order placed by Cisco. 5.5 Payment Terms. MMC shall submit an invoice to Cisco upon each shipment ------------- of MMC Chip Sets ordered by Cisco. The full invoiced amount shall be paid by Cisco within thirty (30) days of the date of invoice. Cisco shall be entitled to a one percent (1%) discount if payment is made within ten (10) days of the date of invoice. 5.6 Taxes. All stated prices are exclusive of any taxes, fees and duties ----- including any value added or withholding taxes. Any taxes related to MMC Chip Sets purchased or licensed pursuant to this Agreement shall be paid by Cisco or Cisco shall present an exemption certificate acceptable to the taxing authorities. Applicable taxes may be billed as a separate item on the invoice. 6 ________________________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5.7 Increasing, Rescheduling and Canceling Orders. Cisco may cancel to --------------------------------------------- reschedule shipments in accordance with the following table by providing MMC with a written order for such cancellation or reschedule. The time periods specified in the following table are the number of days after receipt by MMC of the written order for cancellation or reschedule that the MMC Chip Set was originally scheduled to be shipped. Cancellations will be subject to a cancellation charge based on a percentage of the charges for the complete cancelled shipment. The MMC Chip Set may be rescheduled only one time per line item. Product which has been rescheduled may not be subsequently cancelled without cancellation charges. Cancellation charges shall be computed based on the originally scheduled delivery date.
Time Cancellation Charges Reschedule Option ------ -------------------- ----------------- > 120 days None At Cisco's Option 91 - 120 days 25% At Cisco's option but new shipment date must be within 90 days of the original shipment date. 61 - 90 days 80% At Cisco's option but new shipment date must be within 60 days of the original shipment date. 0 - 60 days 100% No reschedules permitted
Upon request by Cisco, MMC agrees to increase scheduled deliveries as follows:
Number of days prior to the Maximum percentage of MMC Chip original scheduled delivery Sets by which the schedule can be date that written notice of increased an increase is received by MMC - --------------------------- ----------------------------------- 0 - 30 days To be determined at point of request by Cisco and MMC 31 - 60 days 50% 61 - 120 days 100% >120 days no limit
MMC agrees to use commercially reasonable efforts to meet Cisco's requested schedule and order changes, and Cisco agrees to use commercially reasonable efforts to minimize the number and frequency of such requested changes. 5.8 Shipping. Shipment will be F.O.B. MMC's distribution facility -------- ("F.O.B. Point"), and all freight, insurance and other shipping expenses shall be borne by Cisco. All MMC Chip Sets delivered pursuant to the terms of this Agreement shall be suitably packed for shipment in MMC's standard shipping cartons, marked for shipment at Cisco's address set forth above, or as otherwise designated by Cisco, and delivered to Cisco or its designated carrier agent at the F.O.B. Point, at which time risk of loss shall pass to Cisco. 7 5.9 Acceptance. Cisco shall inspect all MMC Chip Set lots promptly upon ---------- receipt thereof and may reject any MMC Chip Set lot which is visibly damaged or of which .4 percent (or 4000 DPM) of the lot fails to meet the warranty set forth in Section 7.1(d) below. To reject a MMC Chip Set lot, Cisco shall (a) within sixty (60) days of receipt of such MMC Chip Set lot notify MMC of its rejection and (b) within ten (10) days of such notice MMC shall instruct Cisco either to dispose of such MMC Chip Set lot (in any manner deemed appropriate by Cisco) or to return an agreed upon number of MMC Chip Sets from such lot to MMC, freight prepaid and properly insured. In the event that MMC instructs Cisco to dispose of such MMC Chip Set lot or determines that the returned MMC Chip Sets were properly rejected by Cisco, Cisco shall not be required to remit payment therefor until a replacement MMC Chip Set lot is shipped to Cisco, upon which full payment shall be made in accordance with Section 5.5 above. 6. SUPPORT MMC agrees to provide Cisco, for a period of one (1) year after the Effective Date of this Agreement, with support reasonably requested by Cisco with regard to use, modification, enhancement and support of the MMC Source Code. MMC's support services will consist of assisting Cisco, by telephone or electronic mail (with information related to equipment system use, configuration and troubleshooting), and providing updates, minor enhancements, problem prioritization, bug fixes and work-around solutions to reported problems. Cisco will provide support to its end users, including 1st and 2nd level support, for Cisco's products which include the MMC Chip Set. MMC will provide 3rd level support for the MMC Chip Set directly to Cisco as defined in Exhibit I. --------- 7. REPRESENTATIONS AND WARRANTIES 7.1 MMC Representations and Warranties. ---------------------------------- (a) MMC represents and warrants that (i) all materials and services provided hereunder including, without limitation, the MMC Chip Set, are either owned or properly licensed by MMC or are in the public domain and that the use thereof by Cisco or its customers, representatives, distributors or dealers will not infringe any Proprietary Rights of any third party, (ii) each of MMC's employees, consultants, contractors, partners or agents who has been or will be involved in the development activities set forth in the Statement of Work, has signed an agreement that conveys all Proprietary Rights in the MMC Chip Set to MMC and requires such person to maintain in confidence all trade secrets embodied in the MMC Chip Set, and (iii) MMC has the full power to enter into this Agreement, to carry out its obligations under this Agreement and to grant the rights granted to Cisco in this Agreement including, without limitation, the transfers and assignments made to Cisco. (b) MMC represents and warrants that MMC, during the term of this Agreement, will not improperly use or disclose any proprietary information or trade secrets of any other person or entity with which MMC has an agreement or duty to keep in confidence information acquired by MMC in confidence, if any. (c) MMC represents and warrants that MMC has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement, or that would adversely affect MMC's performance hereunder, and MMC agrees that MMC shall not enter into any such conflicting agreement during the term of this Agreement. (d) MMC further represents and warrants that (i) the MMC Chip Set developed, manufactured and delivered hereunder will conform to the Specifications and will be free from defects in design, material and workmanship for a period of twelve (12) months from the date of acceptance by Cisco, (ii) the MMC Chip Sets developed, manufactured and delivered hereunder will meet the quality requirements set forth in Exhibit G and (iii) that MMC shall perform its --------- obligations hereunder in a professional and workmanlike manner. 8 7.2 Cisco Representations and Warranties. ------------------------------------- (a) Cisco represents and warrants that Cisco has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement or that would adversely affect Cisco's performance hereunder, and Cisco agrees that Cisco shall not enter into any such conflicting agreement during the term of this Agreement. (b) Cisco further represents and warrants that (i) each of Cisco's employees, consultants, contractors, partners or agents who has been or will be involved in the development activities set forth in the Statement of Work, has signed an agreement that requires such person to maintain in confidence all Confidential Information (defined below) of MMC, and (ii) Cisco has the full power to enter into this Agreement, to carry out its obligations under this Agreement and to grant the rights granted to MMC in this Agreement. EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING THOSE OF MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE, OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE. 8. INDEMNIFICATION MMC will defend, indemnify and hold Cisco harmless from and against any claim, suit or proceeding brought against Cisco alleging that the MMC Chip Set or any Deliverables developed or supplied hereunder infringes any third party patent, copyright or any other Proprietary Right if notified promptly in writing of the claim, and if MMC is given full authority, information and assistance from Cisco for the defense. MMC agrees to pay all damages, costs, expenses (including without limitation reasonable fees of attorneys and professionals) which may be incurred or assessed against Cisco under any such claim. If such claim has occurred, or in MMC's opinion is likely to occur, Cisco agrees to permit MMC at its option and expense, either to procure for Cisco the right to continue using the MMC Chip Set or Deliverable, as applicable, to replace or modify the same so that it becomes non-infringing, or in the event neither the foregoing alternatives is reasonably available to MMC, refund to Cisco all amounts paid by Cisco to MMC hereunder and terminate this Agreement. THE FOREGOING STATES THE ENTIRE OBLIGATION OF MMC WITH RESPECT TO INFRINGEMENT OF PROPRIETARY RIGHTS. 9. CONFIDENTIALITY 9.1 Confidentiality. "Confidential Information" consists of (a) any --------------- information designated as confidential, (b) the Statement of Work, (c) the Specifications, (d) the Deliverables, (e) the MMC Source Code (defined in Section 2.7 above), (f) the Manufacturing Information (defined in EXHIBIT H), ---------- (g) any information relating to MMC's or Cisco's purchase orders and delivery schedules (including quantities), product plans, product designs, product costs, product prices, product names, finances, marketing plans, business opportunities, personnel, research, development or know-how except such information which the parties agree in writing is not confidential. Cisco agrees that MMC may disclose information on Cisco's purchase orders, and delivery schedules to financial investors, banks, and other related concerns. Confidential Information in oral form shall be considered proprietary only to the extent it is reduced to writing and transmitted to the receiving party, identified as proprietary, within thirty (30) days after the oral disclosure. Notwithstanding the foregoing, the disclosing party shall not be required to reduce to writing any Confidential Information presented in oral form which is otherwise referenced in materials provided by one party to the other party marked as containing proprietary information. Each party shall use Confidential Information owned by the other solely for implementing its respective obligations and express rights under this Agreement. 9 9.2 Limitations on Access. Any Confidential Information owned by a party --------------------- shall be protected by the other party from disclosure to others with at least the same degree of care as that which is accorded to its own proprietary information, but in no event with less than reasonable care. Each party hereby consents to the disclosure of its Confidential Information to the employees of the other as is necessary in order to allow the other party to perform this Agreement and obtain the benefits hereof, provided that each such employee is bound by a written confidentiality agreement protecting such Confidential information. 9.3 MMC Source Code. Cisco will protect the MMC Source Code in accordance --------------- with Section 2.7 herein. 9.4 Exceptions. The foregoing restrictions will not apply to information ---------- that (a) is known to the receiving party at the time of disclosure to the receiving party (provided that this exclusion will not apply to Confidential Information which will become the property of Cisco pursuant to this Agreement), (b) has become publicly known through no wrongful act of the receiving party, (c) has been rightfully received from a third party authorized to make such disclosure without restriction, (d) has been approved for release by written authorization of the disclosing party, or (e) is required by law to be disclosed, after securing available confidential treatment and notifying the disclosing party prior to such disclosure to allow the disclosing party sufficient time to secure confidential treatment. 9.5 Remedies. Any breach of the restrictions contained in this Section 9 -------- is a breach of this Agreement which may cause irreparable harm to the non- breaching party entitling the non-breaching party to injunctive relief in addition to all legal remedies. 10. TERM AND TERMINATION 10.1 Term. This Agreement shall commence on the Effective Date and shall ---- continue in force for a period of three (3) years ("Initial Term") unless terminated earlier under the provisions of this Section 10. This Agreement will automatically be renewed for additional one (1) year terms (each a "Renewal Term"), unless at least sixty (60) days prior to the expiration of the Initial Term or any Renewal Term, Cisco notifies MMC of Cisco's intent to not renew this Agreement. 10.2 Termination for Cause. ---------------------- (a) Either party may terminate this Agreement upon notice to the other if the other becomes the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if that petition or proceeding is not dismissed with prejudice within sixty (60) days after filing. (b) Either party (the "non-breaching party") will have the right to terminate this Agreement upon written notice to the other party (the "breaching party") if the breaching party breaches any material term or condition of this Agreement and fails to cure such breach within thirty (30) days after having been given written notice of such breach; provided, that if during such thirty- day period the breaching party has provided the non-breaching party with a plan reasonably acceptable to the non-breaching party to correct such breach, the non-breaching party will have the right to terminate this Agreement if the breaching party fails to cure such breach within sixty (60) days after having been given written notice of such breach. 10.3 Return of Materials. Subject to Cisco's right-to manufacture hereunder ------------------- and Cisco's right to use the Manufacturing Information as provided herein, within thirty (30) days after the termination of this Agreement, each party shall deliver to the other party, at the other party's expense and direction, all designs, drawings, formulas or other data, software, demonstrators, literature, Confidential Information and information of every kind provided by one party to the other for purposes of the development contemplated herein. Neither party shall make or retain any copies of any confidential items or information that may have been entrusted to it. 10.4 Survival of Provisions. The rights and obligations of the parties ---------------------- pursuant to Sections 3, 4.5, 4.6, 4.7, 4.8, 6, 7.1, 8, 9, 10.3 and 11 will survive any expiration or termination of this Agreement. 10 11. GENERAL PROVISIONS 11.1 Independent Contractors. The relationship of the parties hereto is ----------------------- that of independent contractors, and neither party is an employee, agent, partner or joint venturer of the other. 11.2 Governing Law. This Agreement will be governed by, and interpreted ------------- under, the laws of the State of California, without reference to conflict of laws principles. 11.3 Confidentiality of Agreement. Each party agrees that the terms and ------------------ --------- conditions of this Agreement shall be treated as Confidential Information and that the terms and conditions of this Agreement or to activities pertaining thereto cannot be disclosed in any form without the prior written consent of the other party; provided, however, that each party may disclose the terms and conditions of this Agreement: (a) as required by any court or other governmental body after seeking any available confidential treatment; (b) as otherwise required by law after seeking any available confidential treatment, including a requirement to file this Agreement with the Securities and Exchange Commission in connection with a decision by MMC to file a registration statement under the Securities Act of 1933, as amended, (c) to legal counsel of the parties; (d) in confidence to accountants, banks, and financing sources and their advisors; (e) in confidence in connection with the enforcement of this Agreement or rights under this Agreement; or (f) in confidence, in connection with a merger or acquisition or proposed merger or acquisition, or the like. 11.4 Public Disclosure. Neither party will disclose any terms or the ----------------- existence of this Agreement, except as required pursuant to this Agreement, or pursuant to a mutually agreeable press release or as otherwise required by law. Both parties agree to submit to the other party for approval any advertising, press releases, sales promotions or other publicity relating to this Agreement which references the other party prior to releasing such publicity. 11.5 Force Majeure. Neither party will be liable for any loss, damage or ------------- penalty resulting from delays or failures in performance resulting from acts of God or other causes beyond its control. If there is a delay in the performance of this Agreement due to any of the events specified in this Section 11.5, the party who has been so affected immediately shall give written notice to the other party and shall do everything reasonably possible to resume performance. Upon receipt of such written notice, this Agreement shall immediately be suspended and all scheduled deadlines and time limitations specified in the Agreement will be extended by an amount of time equal to such delay; provided, however, in the event such delay extends for more than thirty (30) days, the party whose ability to perform has not been so affected may, by written notice, terminate this Agreement. Such termination will be in addition to any legal or equitable remedies to which such party may be entitled. 11 11.6 Assignment. A mutually agreed consideration for Cisco entering into ---------- this Agreement is the reputation, business standing, and goodwill already honored and enjoyed by MMC under its present ownership, and accordingly, neither party may assign or delegate this Agreement or any of its rights or duties under this Agreement, whether by operation of law or otherwise, without the prior written consent of Cisco, except to a person or entity into which it has merged or which has otherwise succeeded to all or substantially all of its business and assets to which this Agreement pertains, by merger, reorganization or otherwise, and which has assumed in writing or by operation of law its obligations under this Agreement. Additionally, any permitted assignment will be subject to MMC's permitted assignee or transferee agreeing in writing to comply with all the terms and restrictions contained in this Agreement. Any attempted assignment in violation of the provisions of this Section 11.6 will be void. Subject to the foregoing, the rights and liabilities of the parties hereto will bind and inure to the benefit of their successors, executors or administrators. 11.7 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY HAVE ANY ----------------------- LIABILITY FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT LIMITATION ON, DAMAGES FOR LOST PROFITS, LOSS OF DATA OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, ARISING IN ANY WAY OUT OF THIS AGREEMENT UNDER ANY CAUSE OF ACTION, WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 11.8 Modification. No modification to this Agreement, nor any waiver of any ------------- rights, will be effective unless agreed in writing by the party to be charged and the waiver of any breach or default will not constitute a waiver of any other right hereunder or any subsequent breach or default. 11.9 Partial Invalidity. If any provision of this Agreement is held to be ------------------ invalid by a court of competent jurisdiction, then the remaining provisions shall nevertheless remain in full force and effect. The parties agree to renegotiate in good faith a substitute, valid and enforceable provision which most nearly effects the parties' intent in entering into this Agreement. 11.10 Notices. All notices required or permitted under this Agreement will ------- be in writing and will be deemed given when: (a) delivered personally; (b) sent by confirmed telex or facsimile; (c) three (3) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt. All communications will be sent to the addresses set forth below or to such other address as may be designated by a party by giving written notice to the other party pursuant to this Section 11.10. Cisco MMC - ----- --- Name: Mario Mazzola Name: P.K. Dubey ----------------- ----------------- Title: VP & GM Title: President & CEO ---------------- ---------------- Cisco Systems, Inc. Multimedia Communications, Inc. 170 West Tasman Drive 2855 Kifer Road San Jose, CA 95134 Santa Clara, CA 95051 11.11 Descriptive Headings. The headings of the several sections of this -------------------- Agreement are inserted for convenience of reference only and are not intended to be apart of or to affect the meaning or interpretation of this Agreement. 11.12 Entire Agreement. This Agreement, including all Exhibits, ---------------- constitutes the entire and exclusive Agreement between the parties hereto with respect to its subject matter and supersedes and cancels all previous registrations, agreement, commitments and writings in respect thereof. 12 11.13 Counterparts. This Agreement may be executed in counterpart, each of ------------- which will be deemed an original but both of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. CISCO SYSTEMS MULTIMEDIA COMMUNICATIONS, INC. By: /s/ Mario Mazzola By: /s/ Amos Wilnai ------------------------- ------------------------- Name: Mario Mazzola Name: Amos Wilnai ----------------------- ----------------------- (Print) (Print) Title: V.P. & General Manager Title: Chairman ---------------------- ---------------------- Date: 12/19/94 Date: 12/19/94 ------------------------ ------------------------ 13 EXHIBIT A STATEMENT OF WORK -----------------
1. Contract signed December 19, 1994 2. Hand over MMC Source Code to Cisco November 14, 1994 3. ADSS (Software development system) delivery December 19, 1994 The ADSS should be fully functional, and should accurately represent the switch design. A model for MMC's SAR chip should be included along with the switch model. 4. All chips released to layout (1st signoff) December 30, 1994 All chip designs are released to the chip foundry for layout. 5. All chips post layout timing complete (2nd signoff) January 13, 1995 All chip designs are approved for fabrication by the chip foundry. This is a formal signoff between MMC and their chip foundry. 6. First samples delivered February 28, 1995 Samples of all four chips are received by Cisco.
14 EXHIBIT B SPECIFICATIONS -------------- ATMS 2000 Chip Set Specifications, dated 12/O5/94. MMC Chip set to have IEEE 1149.lA - 1993 version of the boundary scan incorporated. Boundary scan implementation to function with no defects with industry standard Hewlett-Packard ICT software (or a mutually agreed upon compliance verification). EXHIBIT C MMC CHIP DESIGN, SWITCH DESIGN AND SOFTWARE AND ----------------------------------------------- THE APPLICATION DEVELOPMENT SOFTWARE SYSTEM ------------------------------------------- 1. Description of the MMC Chip Set: ------------------------------- The MMC Chip Set is a set of four chips, which can be used with standard SRAM and logic components to build a 5 Gb/s ATM switch. The four chips are: - - The Port Interface Controller - - The Memory Buffer - - The Switch Controller Grey - - The Switch Controller White An ATM switch implemented using the MMC Chip Set would include several instantiations of the Port Interface Controller and the Memory Buffer, and one instantiation each of the Switch Controller Grey and the Switch Controller White. The MMC Chip Set is described in the MMC document in EXHIBIT B. ---------- 2. Description of the Switch Design and Software: --------------------------------------------- The switch electrical design is a board-level design of an ATM switch utilizing the MMC Chip Set, together with other standard electronic components. The switch electrical design includes board-level schematics, a bill of materials, a set of board level electrical design rules defining trace delays and skews, and any other information which is appropriate and useful in designing a product based on the MMC Chip Set. The switch software is sample software code for interacting with the MMC Chip Set. This code will include routines for initialization of the MMC Chip Set, control of the MMC Chip Set under standard operational conditions, and recovery from any exception conditions to which the MMC Chip Set is subject. The switch software shall also include any workarounds required for any problems found in any version of the MMC Chip Set. 3. Description of the Application Development Software System: ----------------------------------------------------------- The Application Development Software System is a software tool which allows development of software to interact with the MMC Chip Set with no dependency on the availability of the actual [MMC] Chip Set or source code of the [MMC] Chip Set. The Application Development Software System has a graphical user interface and runs under the X-window system. The Application Development Software System runs on Sparc-based workstations. Documentation for users of the tool is included. EXHIBIT D CISCO MATERIALS TO BE PROVIDED BY CISCO --------------------------------------- Cisco will provide the switch fabric board for testing of the MMC chip set by 2/28/95. The schematics and board layouts of the switch will be included. Cisco will provide the software tools for testing the MMC Chip Set on the above mentioned board. EXHIBIT E INDIVIDUAL NONDISCLOSURE AGREEMENT ---------------------------------- CISCO SYSTEMS, INC. NON-DISCLOSURE AGREEMENT This Non-Disclosure Agreement ("Agreement") is entered into as of _____, 199__ by the individual named below ("Recipient") who is an employee, agent or contractor of Cisco Systems, Inc. ("Cisco"). In connection with that certain Proprietary Information Non-Disclosure Agreement entered into between Cisco and Multimedia Communications, Inc. ("MMC"), the parties have agreed that certain employees of Cisco will have access to MMC's computer network and certain source code of MMC which are proprietary to MMC ("MMC Proprietary Information"). In consideration for such access by Recipient, Recipient agrees as follows: 1. Recipient understands and agrees that the MMC Proprietary Information to which Recipient will have access is the confidential and proprietary information of MMC. Recipient agrees to hold the MMC Proprietary Information in strict confidence, not to disclose the MMC Proprietary Information to any persons (except Cisco employees, agents or contractors who have signed an agreement in a form similar to this Agreement), and not to use the MMC Proprietary Information for any purpose except to evaluate the business opportunity which is the subject of the Proprietary Information Non-Disclosure Agreement and to perform Cisco's obligations under a resulting agreement, if any, into which Cisco and MMC may enter. 2. Recipient agrees to comply with all of the security procedures enforced by MMC to protect the MMC Proprietary Information as in effect from time-to-time. Notwithstanding the foregoing, any of the MMC Proprietary Information which enters the public domain through no fault of Recipient (or Cisco or any of its other employees, agents or contractors) will not be deemed to be MMC Proprietary Information under this Agreement. This Agreement will be governed under the laws of the State of California. 3. Recipient agrees that any violation or threatened violation of this Agreement may cause irreparable harm to MMC, entitling MMC the right to obtain injunctive relief to enforce this Agreement in addition to all legal remedies. ACCEPTED AND AGREED BY: ___________________________________ Signature ___________________________________ Name ___________________________________ Date EXHIBIT F (*) _____________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EXHIBIT G QUALITY CONFORMANCE REQUIREMENTS -------------------------------- MMC agrees to guarantee its quality to conform to applicable industry standards. Where MMC is providing products procured from sources specified by Cisco, MMC guarantees that the material procured will conform to Cisco's approved vendor listing. No changes will be made without prior approval from Cisco, even if the change is to another vendor listed on Cisco's approved vendor listing. MMC agrees to supply materials acceptable to Cisco's Specifications. Cisco may, during the performance of this Agreement, request changes to the Specifications. Such changes will be requested in writing, and shall be implemented upon mutual agreement of the parties. However, the parties recognize that occasional minor modifications may be required to enhance the manufacturability and agree that such changes may be made provided that prior written notification is given to the other party. If any change causes an increase or decrease in price of, and/or the time required for the performance of any part of the Statement of Work under this Agreement, pricing will be reviewed and modified to reflect an equitable adjustment. Note: The chips and Chip Sets delivered to Cisco will adhere to the following DPM requirements shown below: 1. Quality to be measured as a % yield per Cisco Chip Set implementation: Cisco Chip Set implementation = 1 Grey, 1 White, 6 Mbuf, S Pif. 2. Total Cisco Chip Set % yield not to be below 99.6% or the following Defect Per Million (DPM) per individual chip: - Grey and White 4000 - Mbuf = 670 - Pif = 500 EXHIBIT H MANUFACTURING INFORMATION ------------------------- List of all information Cisco would need to manufacture the MMC Chip Set: 1. MMC Chip Set net-list, electronic format to be agreed upon by the parties 2. test vectors 3. list of ASIC vendors 4. letters of authorization to the suppliers of MMC Chip Set EXHIBIT I PROBLEM PRIORITIZATON AND ESCALATION GUIDELINE ---------------------------------------------- MMC CHIP SET PROBLEM PRIORITIES DEFINITIONS: PRIORITY 1: Critical impact to Cisco products and Cisco end users if MMC Chip Set problem not fixed quickly. No workaround is available. Cisco is willing to commit substantial resources around the clock to resolve the situation. PRIORITY 2: Severe degradation impacting significant aspects of Cisco products and Cisco end users. No workaround is available. Cisco is willing to commit full-time resources during business hours to resolve situation. PRIORITY 3: Degradation in which functionality of Cisco products are noticeably impaired but most business operations of Cisco and Cisco's end users continue. PRIORITY 4: End user requires information or assistance on Cisco product capabilities, installation, or configuration. NOTE: Priority 1 problem escalation times are measured in calendar hours 24 hours per day, 7 days per week. Priority 2, 3 and 4 escalation times during business hours, 6 A.M. to 6 P.M. Pacific Time, Monday through Friday, excluding holidays. CUSTOMER ESCALATION GUIDELINE:
- ---------------------------------------------------------------------------------------------------- ELAPSED TIME PRIORITY 1 PRIORITY 2 PRIORITY 3 PRIORITY 4 - ---------------------------------------------------------------------------------------------------- End User 1-Hour Engineering Manager - ---------------------------------------------------------------------------------------------------- Technical End User 4-Hour Support Engineering Director Manager - ---------------------------------------------------------------------------------------------------- Vice President Technical Support 24-Hour Cust. Advocacy Director - ---------------------------------------------------------------------------------------------------- 48-Hour President (CEO) Vice President Cust. Advocacy - ---------------------------------------------------------------------------------------------------- 72-Hour End User Engineering Manager - ---------------------------------------------------------------------------------------------------- 96-Hour President (CEO) Technical Support End User Director Engineering Manager - ----------------------------------------------------------------------------------------------------
REQUESTING ESCALATION: If Cisco feels that adequate forward progress or the quality of service is not satisfactory, Cisco may escalate by asking for the President and CEO at: 1-408-653-1810 EXHIBIT J PRICING ------- A. The price to Cisco for each MMC Chip Set (the "Unit Price") ordered during the first year of this Agreement shall not exceed the following amounts: (i) First (*) MMC Chip Sets at (*) per set ((*) per Mbps port) (ii) (*) MMC Chip Sets at (*) per set ((*) per Mbps port) B. The price to Cisco for each individual chip is:
First (*) (*) - (*) ----------------------------- Port Interface Controller (*) (*) Memory Access Buffer (*) (*) Switch Controller (Grey) (*) (*) Switch Controller (White) (*) (*)
If Cisco orders, or forecasts orders, for MMC Chip Sets in volumes significantly greater than (*) units in any Contract Year of this Agreement, MMC agrees to negotiate in good faith with Cisco to reduce the Unit Price accordingly. _____________________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. FIRST AMENDMENT TO DEVELOPMENT LICENSE AND PURCHASE AGREEMENT BETWEEN MMC NETWORKS, INC. AND CISCO SYSTEMS, INC. This Amendment (the "Amendment") is entered into effective as of January 30, 1996, between Cisco Systems, Inc., a California, corporation (the "Cisco") and MMC Networks, Inc., a California corporation ("MMC"), and amends that certain Development, License and Purchase Agreement (the "Agreement"), dated as of December 19, 1994, between MMC and Cisco. RECITALS WHEREAS Cisco has expertise in the field of network systems design, and is a leader in the provision of network systems; and, WHEREAS MMC has expertise in the field of ATM switch technology; and, WHEREAS Cisco and MMC desire to supply their respective expertise and certain proprietary information so as to design certain companion chips to MMC's basic ATM switch fabric, WHEREAS the parties desire to amend the Agreement to include the development and supply of such companion chips, NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the amount and sufficiency of which is acknowledged by both parties, the parties hereby agree to amend the Agreement as follows: 1. Development. MMC agrees to undertake and complete development of chip specifications ("Specifications") for the products described in Exhibit A ("Products") in accordance with and on the schedule specified in Exhibit B ("Schedule"). However, Cisco understands that MMC's performance is dependent in part on Cisco providing MMC with the equipment, proprietary information, and technical design assistance described in Exhibit C ("Cisco Expertise"). Accordingly, any dates or time periods relevant to performance by MMC hereunder shall be appropriately and equitably extended to account for any delays in providing Cisco Expertise that are due to Cisco. MMC acknowledges that Cisco relies on the timely completion of the Specifications according to the Schedule; and that delays in such timely completion will cause Cisco to suffer substantial harm due to the unavailability of the Products. 2. Project Management. a. John Kennedy from MMC and Prem Jain from Cisco will be the initial "Project Coordinators" under this Amendment. The Project Coordinators will be responsible for day-to-day communications between the parties regarding the subject matter of this Amendment. b. Either party may change its Project Coordinator at any time and from time to time by giving the other party written notice. c. Each Project Coordinator will be responsible for (i) monitoring the schedules and progress of work pursuant to this Amendment; (ii) receiving and submitting requests for information and/or assistance; (iii) determining whether a request he or she receives for information and/or assistance from the other Project Coordinator is necessary for the other party to complete the Specifications; (iv) receiving and submitting Specifications; (v) cooperating with the other Project Coordinator to implement acceptance testing; and (vi) supervising and recording the exchange of confidential information pursuant to this Amendment. d. The Project Coordinators will meet periodically to discuss the progress of the development effort and, if applicable, to exchange information. e. The Project Coordinators will reasonably and in good faith consider and discuss with any proposed change to the Products, Schedule, or Cisco Expertise, provided, however, that all such changes must be approved by the parties before implementation. f. Neither party's Project Coordinator is authorized to amend, alter or extend this Amendment in any manner. 3. Acceptance. When MMC believes it has appropriately completed the Specifications (for one or more Products), MMC will deliver them to Cisco's Project Coordinator. Cisco will accept or reject the Specifications within five (5) business days after delivery; failure to give notice of acceptance or rejection within that period will constitute acceptance. If Cisco rejects the Specifications, MMC will promptly correct the failures specified in the rejection notice. When it believes that it has made the necessary corrections, MMC will again deliver the Specifications to Cisco's Project Coordinator and the acceptance-rejection-correction provisions above shall be reapplied until the Specifications are accepted; provided, however, that upon the third or any subsequent rejection, Cisco may terminate this Amendment by ten (10) business days notice unless the Specifications are accepted during the notice period. Page 2 4. Ownership. a. As between the parties, (i) MMC shall have all right, title and interest (including all patent rights, copyrights, trade secret rights, mask work rights and other rights throughout the world) in any inventions, works-of- authorship, mask works, ideas or information made or conceived or reduced to practice by MMC, and (ii) Cisco shall have all right, title and interest (including all patent rights, copyrights, trade secret rights, mask work rights and other rights throughout the world) in any inventions, works-of-authorship, mask works, ideas or information made or conceived or reduced to practice by Cisco. MMC hereby grants Cisco a worldwide, perpetual, royalty-free, non- transferable, non-sublicensable, non-exclusive license under the preceding rights and developments to use, reproduce, distribute, make, have made, sell, offer for sale, import, or export the Products, provided that Cisco's manufacturing rights shall only be effected through MMC unless Cisco exercises its rights under Section 4.5 of the Agreement. b. The parties hereby make any assignments necessary to accomplish the foregoing ownership provisions. 5. Confidentiality. Each party agrees that all information provided pursuant to this Agreement, including without limitation designs, layouts, mask works, pinout descriptions, register assignments, timing charts, code, inventions, algorithms, know-how and ideas and all other business, technical and financial information, is the confidential property of the disclosing party ("Proprietary Information" of the disclosing party). Except as expressly and unambiguously allowed herein, the receiving party will hold in confidence and not use or disclose any Proprietary Information of the disclosing party and shall similarly bind its employees in writing. The receiving party shall not be obligated under this Section 5 with respect to information the receiving party can document: (1) is or has become readily publicly available without restriction through no fault of the receiving party or its employees or agents; or (2) is received without restriction from a third party lawfully in possession of such information and lawfully empowered to disclose such information; or (3) was rightfully in the possession of the receiving party without restriction prior to its disclosure by the other party; or (4) was independently developed by employees or consultants of the receiving party without access to such Proprietary Information. Page 3 6. Use of Specifications. a. For 5 months after notice of acceptance of the final Specification pursuant to Section 3 of this Amendment, MMC shall refrain from releasing, distributing, disclosing, licensing, or otherwise using the Specifications in any manner except for the benefit of, and with the approval of, Cisco; provided, however, that MMC may prepare a summary of the functionality of the Specifications or the Products ("Data Sheet") for marketing purposes, but may only distribute such Data Sheets after Cisco has approved them (which approval shall not be unreasonably withheld). b. (*) c. In addition to the other use restrictions, MMC shall not release, distribute, disclose, license, or otherwise use any portion of the Specifications, Products, or products based on or incorporating the Specifications, that contain, arise out of, or depend on Proprietary Information of Cisco that has been clearly identified by Cisco in writing on or before the date of final acceptance of the Specifications pursuant to Section 3 of this Amendment, in any manner except for the benefit of, and with the approval of, Cisco. 7. Warranty and Disclaimer. a. Specifications and Company Expertise. MMC warrants (i) that the work under this Amendment will be performed in a professional and workmanlike manner; (ii) that the work performed under this Amendment by MMC will be MMC's original work and it owns, will own, or will secure all rights, title, and interest in such work; and, (iii) that it has and will obtain agreements with its employees and contractors sufficient to allow it to provide Cisco with the licenses provided for herein. EXCEPT FOR THE WARRANTIES MADE HEREIN, NEITHER PARTY MAKES ANY WARRANTIES TO THE OTHER PARTY WITH RESPECT TO THE SPECIFICATIONS OR THE COMPANY EXPERTISE, AND EACH PARTY HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. b. Products. The parties hereby agree that the warranties set forth in Section 7.1 (and the disclaimer set forth in Section 7.2) are hereby extended to include the Products. _____________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 4 8. Indemnification. a. Subject to Section 8 b. below, MMC shall hold Cisco and its officers, directors, agents and employees harmless from liability resulting from infringement by the Specifications and the Products of any patent, copyright, or misappropriation of any trade secret or violation of other third party proprietary rights, provided MMC is promptly notified of any and all threats, claims and proceedings related thereto and given reasonable assistance at MMC's cost and the opportunity to assume sole control over the defense and all negotiations for a settlement or compromise. b. Cisco shall hold MMC and its officers, directors, agents and employees harmless from liability resulting from infringement by the Company Expertise of any copyright, or misappropriation of any trade secret or violation of other third party proprietary rights, provided Cisco is promptly notified of any and all threats, claims and proceedings related thereto and given reasonable assistance at Cisco's cost and the opportunity to assume sole control over the defense and all negotiations for a settlement or compromise. 9. Manufacturing Terms. a. Supply of Product. Subject to the terms of this Section 9, the Products shall be manufactured and purchased in accordance with Sections 4 through 6 of the Agreement. The parties shall mutually agree upon acceptance criteria with respect to the Products that is substantially similar to the criteria set forth in Section 5.9 of the Agreement. b. Most Favored Customer Status. MMC shall treat Cisco as MMC's "most favored customer" in the following respects: (i) the prices with respect to the Product shall at all times be the lowest price charged to any third party; and (ii) MMC shall ensure that at all times Cisco has first priority with respect to the allocation of Products and/or manufacturing capacity of MMC. MMC will (i) maintain accurate books and records relating to its sales of the Products, and (ii) permit Cisco through independent certified accountants to audit such books and records from time to time upon reasonable notice to MMC. c. WAN Switch Partners. Cisco agrees to notify MMC no later than January 31, 1996 of its plans to utilize MMC's switch fabric and chip sets for the purposes of building an enterprise WAN switch. (*) Page 5 _______________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. d. Recovery of NRE's. Cisco agrees to reimburse MMC for the fully documented and reasonable NRE's, including but not limited to labor, NRE payments to the ASIC vendor, constructing a specific test environment, etc., for the chips specifically identified on Exhibit A hereto. 10. Termination of Amendment. Cisco may terminate this Amendment at any time without cause upon 120 days notice provided that Cisco shall upon termination pay MMC a termination payment covering MMC's direct costs incurred in performance of the additional obligations incurred under this Amendment to the date of such notice. In the event of termination of this Amendment or the Agreement, Sections 4 through 9 of this Amendment shall survive termination. In the specific event Cisco terminates without cause this Amendment or the Agreement prior to July 31, 1996, then section 11. Volume Commitments will ------------------------------ survive. 11. Volume Commitments. Provided that MMC fulfills its obligations under the Agreement including (without limitation the following: Product development, manufacture, bug fixes, cost reduction, and the like) Cisco hereby agrees to procure a minimum quantity of 5000 chipsets over the 24 month period commencing August 1, 1996 through July 1998. 12. Rights in the Event the Company Seeks or Receives an Offer to be Acquired. In the event that the Company decides to seek an offer from a third party to acquire all or substantially all the business of the Company, or enters into serious negotiations with another parry for that party to acquire the Company, the Company will inform Cisco in writing that it is seeking such an offer or has entered into such serious negotiations and, if Cisco so desires, will, for a period of 20 days following the Company's notice to Cisco, negotiate with Cisco in good faith an arrangement pursuant to which Cisco would acquire the Company. The Company will refrain from executing any definitive agreement with a party other than Cisco during such 20 day negotiating period. If the Company and Cisco have not executed a definitive agreement under which Cisco agrees to acquire the Company within such 20 day period, the Company shall be free, for a period of 180 days, to negotiate and execute an agreement with another party for that other party to acquire the Company. If Cisco has made the Company a written offer to acquire the Company during the 20 day period, the Company shall not agree to be acquired by such other party at a price which is less than the midpoint between the last price offered by Cisco to the Company and the last price offered by the Company to Cisco. If Cisco has not made a written offer to acquire the Company for a stated price during such negotiations, the Company shall be free to agree to be acquired by such other party during such 180 day period at any price. If Cisco makes a written offer to acquire the Company during the negotiating period, the Company shall be obligated to provide Cisco with the Company's written asking price before the Company makes any agreement to be acquired by another party. Cisco and the Company agree that any offered price provided by either of them to the other shall be held Page 6 confidential and shall not be disclosed to any person other than Cisco, the Company and their respective advisors. For purposes of the notice contemplated by the first two sentences of this paragraph, the Company's Board of Directors shall determine when the Company is in serious negotiations, thereby triggering the Company's obligation to provide such notice to Cisco. The Company shall have no obligation to inform Cisco of the price or terms of any offer received by the Company from any other party. The provisions of this section shall expire on the date a registration statement filed by the Company under the Securities Act of 1933, as amended, first becomes effective. 13. Publicity and Press Releases. Except to the extent necessary under applicable laws the parties agree that no press releases or other publicity relating to the existence or substance of the matters contained herein will be made without joint approval. 14. Precedence. With respect to the Products, Specifications and Company Expertise, in the event of any conflict between the terms of this Amendment and the Agreement, the terms of this Amendment shall take precedence; in all other respects, the Agreement shall remain in full force and effect as supplemented by this Amendment. This Amendment does not affect the parties rights or obligations with respect to the Chip Sets. IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have affixed their signatures as of the date first set forth above. Cisco Systems, Inc. (Cisco) MMC Networks, Inc. (MMC) By: /s/ Mark Farino By: /s/ Amos Wilnai --------------------- ---------------------- Name: Mark Farino Name: Amos Wilnai ------------------- -------------------- Title: Director WBV Title: Chairman ------------------ ------------------- Page 7 EXHIBIT A PRODUCTS 1. Per-VC queuing and fair scheduling algorithms 2. Explicit rate ABR functionality Page 8 EXHIBIT B DEVELOPMENT SCHEDULE Page 9 EXHIBIT C CISCO EXPERTISE - - ATM systems architecture, design, implementation - - Simulation environment - - Test bed for testing and debugging - - Building systems model for software development Page 10 EXHIBIT D (*) _____________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 11 AMENDMENT NUMBER 2 TO DEVELOPMENT LICENSE AND PURCHASE AGREEMENT BETWEEN CISCO SYSTEMS, INC. AND MMC NETWORKS, INC. This Amendment No. 2 ("Amendment #2") is made in California by and between Cisco Systems, Inc., a California corporation having its principal place of business at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"), and MMC Networks, Inc., a California corporation having its principal place of business at 1134 E. Arques Avenue, Sunnyvale, CA 94086-4602 ("MMC"). WHEREAS, Cisco and MMC entered into the Development, License and Purchase Agreement dated December 19, 1994, as amended on January 30, 1996 ("Amendment #1"); and WHEREAS, the parties desire to amend the Agreement and Amendment #1 (collectively, the "Agreement") to include the development and supply of the Modular ATM Switch Engine and the Ethernet Port InterFace as specified below, including the following Exhibits which are included in and made a part of this Agreement: Exhibit 'A' - Specifications Exhibit 'B' - Development Schedule and Definitions Exhibit 'C' - Pricing NOW THEREFORE, in consideration of the covenants and conditions contained herein, the parties agree as follows: 1. Definitions "MASC Chip Set" means the Modular ATM Switch Controller chip set which meets the Specifications. "Ethernet PIF", means the Ethernet Port InterFace chip which meets the Specifications. "Specifications" means the functional, technical and other specifications for the MASC Chip Set and the Ethernet PIF set forth in Exhibit A to Amendment #2, which may be modified from time to time by written mutual agreement of the parties. 2. Development. MMC agrees to apply commercially best efforts to complete development of the MASC Chip Set and the Ethernet PIF according to the Specifications and in accordance with and on the schedule specified in Exhibit B ("Schedule"). 3. Pricing and Definitions See Exhibit C 4. Volume Commitments. None 5. Precedence. Terms capitalized shall have the meaning assigned to them in the Agreement unless specifically defined herein. If conflicts exist between the terms specifically addressed in this Amendment #2 and the Agreement, the terms of this Amendment shall take precedence. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment #2 to be executed by their duly authorized representatives. Cisco Systems Inc. (Cisco) MMC Networks, Inc. (MMC) By: /s/ Prem Chand Jain By: /s/ Amos Wilnai ----------------------- --------------------- Name: Prem Jain Name: Amos Wilnai --------------------- ------------------- Title: VP of Engineering Title: Chairman -------------------- ------------------ Date: July 6, 1997 Date: July 7, 1997 --------------------- ------------------- Page 2 EXHIBIT A MASC CHIP SET AND ETHERNET PORT INTERFACE SPECIFICATIONS 1. Modular ATM Switch Controller as defined by the MMC Engineering Specification, Version 2.2, dated June 11, 1997. 2. Ethernet Port InterFace as defined by the MMC Engineering Specification, Version 1.2, dated June 20, 1997. Page 3 EXHIBIT B DEVELOPMENT SCHEDULE AND DEFINITIONS
Device Tapeout Prototypes Production - -------------------------------------------------- A2301 EPIF 8/6 9/1 2/28/98 A2302 GPIF 10/31 11/30 3/31/98 A2401 MBUF2 8/6 9/1 2/28/98 A2402 PIF2 8/5 9/1 2/28/98 A2403 MSC1 8/7 9/4 2/28/98 A2404 MSC2 8/1 8/29 2/28/98 A2405 XQC2 8/11 9/8 2/28/98 A2406 CMI 8/14 9/11 2/28/98
DEFINITIONS: - ------------ TAPEOUT: - ------- Tapeout is when the netlist is released to mask generation. It is the point in the design cycle when post-layout functional and timing simulations are available and predict a fully functional device. PROTOTYPE: - --------- These parts are the from the first silicon for these devices. Product availability is limited. Prototypes must be ordered in advance of tapeout as the prototypes are built in the first run of silicon. Prototype orders are non- refundable and non-cancelable. Prototype leadtime is 4 weeks after tapeout. Prototypes are not intended for production and may skip some of the production process steps to expedite product delivery. RISK PRODUCTION: - --------------- Risk production parts are ordered before Cisco and MMC have completely verified the full functionality of the silicon. Risk production orders may be placed at any time including prior to tapeout. As the Risk Production material is ordered prior to full verification there is limited liability that a Risk Production part is proven to not be fully functional. If a Risk Production part is determined to be non-functional as related to the device specification, Cisco will be invoiced at only 70% of the price. If it is determined that the devices are non functional within a period no greater than 6 weeks after the placement of the order then the cancellation fee will be no greater than 50% of the original quoted price. Leadtime for Risk Production is the same as for Production. PRODUCTION: - ---------- These parts are purchased after MMC and Cisco have agreed in writing that the devices meet all specifications and are fully functional. Production devices are subject to the normal terms and condition of sale. Page 4 EXHIBIT C PRICING PRICING For comparison purposes, pricing for the 5G System including PerVC Queuing is (*) + (*) per system; or (*) Per OC-3 Port. Budgetary component pricing is as follows: 1) COMPONENT PRICING Pricing for Cougar, EPIF and PIF will be step pricing allowing Cisco to achieve lower pricing as the product volumes increase. This component pricing is valid for 1997 and 1998 calendar years. A) COUGAR FABRIC PRICING FOR PRODUCTION, RISK-PRODUCTION AND PROTOTYPES:
DEVICE # A2403 A2404 A2406 A2205 A2401 A2405 TOTAL 20G - ----------------------------------------------------------------------------------------- NAME MSC1 MSC2 XQC2 XS MBUF2 CMI FABRIC - ----------------------------------------------------------------------------------------- QTY / 20GIG 8 8 8 8 12 4 48 PROTOTYPES (*) (*) (*) (*) (*) (*) (*) RISK PRODUCTION (*) (*) (*) (*) (*) (*) (*) FIRST 5K SYSTEMS (*) (*) (*) (*) (*) (*) (*) 5K - 10K SYSTEMS (*) (*) (*) (*) (*) (*) (*) - ----------------------------------------------------------------------------------------- > 10K SYSTEMS (*) (*) (*) (*) (*) (*) (*) - -----------------------------------------------------------------------------------------
B) PIF PRICING FOR PRODUCTION, RISK-PRODUCTION AND PROTOTYPES:
DEVICE # A2402 TOTAL 20 G - ----------------------------------------------------------- NAME PIF2 32 OC-12 PORTS - ----------------------------------------------------------- QTY / 32 OC-12 PORTS (20 GIG) 12 12 PROTOTYPES (*) (*) RISK PRODUCTION (*) (*) 0-50K UNITS (FIRST 50K) (*) (*) 50K-100K UNITS (NEXT 50K) (*) (*) 100K-125K UNITS (NEXT 25K) (*) (*) - ----------------------------------------------------------- 125K+ UNITS (REST) (*) (*) - -----------------------------------------------------------
____________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 5 C) EPIF PRICING FOR PRODUCTION, RISK-PRODUCTION AND PROTOTYPES:
DEVICE # A2301 TOTAL 20 G - ------------------------------------------------------------- NAME EPIF 128 FAST ENET PORTS - ------------------------------------------------------------- QTY / 128 FE PORTS (20 GIG) 12 12 PROTOTYPES (*) (*) RISK PRODUCTION (*) (*) 0-24K UNITS (FIRST 24K) (*) (*) 24K-120K UNITS (NEXT 96K) (*) (*) 120K-240K UNITS (NEXT 120K) (*) (*) - ------------------------------------------------------------- 240K+ UNITS (REST) (*) (*) - -------------------------------------------------------------
____________________ (*) Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 6 EX-10.11 16 SUPPLIER ESCROW AGREEMENT EXHIBIT 10.11 SUPPLIER ESCROW AGREEMENT This Agreement, made and entered into this 21 day of April, 1997, by and between MMC Networks, Inc., a corporation organized and existing under the laws of the State of California with its principal office at 1134 E. Arques Avenue, Sunnyvale, CA 94086 ("MMC"), Hitachi Computer Products (America), Inc., a corporation organized and existing under the laws of the State of Delaware with an office at 3101 Tasman Drive, Santa Clara, CA 95054 ("HICAM") and SourceFile, a with an address at 1350 W. Grand Avenue, Oakland CA (the -------------- "Escrow Agent"). WHEREAS, HICAM and MMC have entered into an agreement pursuant to which HICAM agreed to purchase (under the terms and conditions of a Purchase Order, a sample of which is attached hereto as Exhibit A) on a continuing basis from MMC the PS1000 chip set ("Chip Set") for use in HICAM products; and WHEREAS, pursuant to the Agreement, MMC has certain continuing supply, warranty, support and maintenance obligations; and WHEREAS, MMC and HICAM have agreed to place copies of the documentation required for the manufacture and testing of the Chip Set, a copy of a Purchase Order and letters of authorization to suppliers of the Chip Set in escrow to be released to HICAM upon any discontinuation of certain obligations of supply, warranty, support and maintenance of the Chip Set undertaken by MMC; NOW THEREFORE, in consideration of the mutual promises and undertakings hereafter set forth, the parties hereto do hereby covenant and agree as follows: ARTICLE 1. ESCROW DOCUMENTS. - --------------------------- 1.1 The Letters of Authorization authorizing the existing vendors and suppliers of the Chip Set to accept purchase orders from HICAM and to ship production units of the Chip Set directly to HICAM, and any documents, drawings, design specifications, bills of materials and other information necessary to manufacture the Chip Set without undue experimentation on the part of vendors and suppliers of the Chip Set, HICAM or its agents and suppliers, shall be placed in escrow, including any exhibits, addenda, amendments and modifications thereto, whether presently existing or created hereafter. The documents existing as of the date of execution of this Agreement are listed in Exhibit B hereto. 1.2 A fully executed original License Agreement (the "License Agreement") by and between MMC and HICAM, a copy of which is attached as Exhibit "C" shall be placed in escrow and will be delivered to HICAM concurrent with the delivery of the Escrow Documents pursuant to Article 5 below. ARTICLE 2. PURPOSE OF AGREEMENT; DEPOSIT OF DOCUMENTATION. - --------------------------------------------------------- 2.1 Deposit. The deposit of the Documentation and the license thereof pursuant ------- to Article 3.1 is intended to provide assurance to HICAM OF access and right of use of such Documentation in the event that MMC discontinues its supply of the Chip Sets to HICAM. In connection therewith, the Escrow Agent agrees to accept from MMC and MMC agrees to deposit with Escrow Agent, within ten (10) calendar days of the date of this Agreement, a copy of the Documentation. MMC will furnish to Escrow Agent a list describing all items deposited. MMC shall also furnish to HICAM a copy of such list so that HICAM can insure that all required items are included. The Documentation to be initially deposited with Escrow Agent is described in Exhibit B hereto, and such descriptions will be supplemented and updated by MMC with each subsequent deposit. For each deposit, Escrow Agent will issue receipts to MMC, and will send to HICAM copies of such receipts. 2.2 Update and Maintenance. During the term of this Agreement MMC shall keep the ---------------------- Documentation in escrow fully current by depositing the documentation and related materials for each and every correction, modification or new release of the Documentation. 2.3 Verification and Testing. HICAM may appoint an independent consultant to ------------------------ inspect, test and review the Documentation (under obligations of confidentiality) at the time of the initial deposit and at the time of each subsequent deposit in escrow in order to verify that it corresponds to the Exhibit hereto, and the Escrow Agent shall permit such inspections and testing of the same promptly upon request. ARTICLE 3. LICENSE. - ------------------ 3.1 In the event that the Documentation shall be delivered out of escrow to HICAM pursuant to the terms of this Agreement, HICAM shall be licensed by MMC, and MMC does so hereby license HICAM, subject to the terms and conditions of the License Agreement attached hereto as Exhibit C, to use, modify, maintain and update the Documentation in all such respects as may be necessary for HICAM to manufacture, use, copy, distribute and sell the Chip Set as part of HICAM's packet switch system products. HICAM may sublicense its rights in the Chip Set to purchasers of HICAM's products so that they may exploit the same. ARTICLE 4. TITLE TO DOCUMENTATION. - --------------------------------- 4.1 Title to the Documentation shall remain in MMC, but title of the copy thereof to be deposited in escrow hereunder shall pass to and vest in the Escrow Agent and, in the event the Documentation shall he delivered to HICAM pursuant hereto, pass to and vest in HICAM. 2 Notwithstanding its ownership of a copy the Documentation in such event, HICAM shall remain subject to the terms of the license granted pursuant to Article 3.1 hereof with respect to the use thereof. ARTICLE 5. RELEASE OF DOCUMENTATION TO HICAM. - -------------------------------------------- 5.1 Release. The Documentation to be deposited in escrow pursuant to this ------- Agreement shall be released to HICAM only in accordance with the terms of this Agreement. 5.2 Notice of Default; Cure Period. If MMC discontinues its obligation to supply ------------------------------ HICAM with the Chip Sets or is in breach of any of its obligations under the terms and conditions set forth in a Purchase Order, HICAM shall so notify MMC in writing, specifying in reasonable detail. A copy of such notice will be served simultaneously upon the Escrow Agent. For a period of ten days after service of such notice, MMC shall have the right to resume its supply of the Chip Sets or cure the identified breaches, whichever the case may be. In the event that, at the conclusion of such cure period, MMC does not resume supply of the Chip Sets to HICAM, or HICAM shall conclude in good faith that the identified breaches have not been cured, HICAM may so notify both MMC and the Escrow Agent, and such notice shall include a demand that the Escrow Agent release the Documentation to HICAM pursuant to the terms hereof. 5.3 Dispute by MMC. In the case where MMC disagrees that it has discontinued its -------------- obligation to supply HICAM with the Chip Sets or that its obligations have been breached, MMC shall, within five (5) days after receipt of HICAM's notice and demand for release, notify both the Escrow Agent and HICAM that it objects to release of the Documentation. Failure of MMC to furnish timely notice objecting to release of Documentation shall conclusively establish its consent to the immediate release of the Documentation to HICAM under the terms of this Agreement, and the Escrow Agent shall release such Documentation to HICAM. 5.4 Injunctive Relief. MMC and HICAM acknowledge and agree that HICAM will ----------------- suffer irreparable harm to its business and operations in the event that release of the Documentation to HICAM is wrongfully delayed by MMC, and that HICAM may petition for injunctive relief to prevent MMC from seeking to delay such a release. 5.5 Payment to MMC. HICAM shall pay to MMC, in the event that the Documents are -------------- released to HICAM and HICAM manufactures and sells the Chip Sets, the amount of MMC's price to HICAM for the purchase of the Chip Set above the cost of manufacture of the Chip Set by HICAM, as set forth in detail in the License Agreement attached hereto as Exhibit C. 3 ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF MMC. - ------------------------------------------------ 6.1 Ownership. MMC warrants and represents to HICAM that it is the owner of and --------- holder of all rights in the Documentation and that MMC has the right to grant to HICAM the license rights pursuant to Article 3.1 hereof and to deposit the Documentation with the Escrow Agent pursuant to the terms hereof. 6.2 Current Version. MMC warrants and represents to HICAM that the Documentation --------------- to be deposited with the Escrow Agent is the most current version of such Documentation and conforms to the descriptions set forth in Exhibit B hereto. ARTICLE 7. BREACH BY MMC. - ------------------------ 7.1 MMC shall be deemed to be in breach of its obligations and under this Agreement should any of the following events occur: (1) MMC discontinues its obligation to supply HICAM with the Chip Sets; (2) MMC advertises for the sale of all or substantially all of its assets or negotiates or signs an agreement providing for the sale of all or substantially all of its assets, and such sale threatens, in HICAM's discretion, to disrupt MMC's obligation to supply HICAM with the Chip Set; (3) MMC admits in writing its inability to pay its debts generally as they become due; (4) MMC makes a general assignment for the benefit of creditors; (5) MMC voluntarily institutes proceedings to be adjudicated as bankrupt; (6) MMC consents to the filing of a petition of bankruptcy against it; (7) a petition of bankruptcy is filed against MMC and remains unstayed or is not dismissed within ten (10) days after such filing; (8) MMC is adjudicated by a court of competent jurisdiction as being bankrupt or insolvent; (9) MMC seeks reorganization under any bankruptcy act or law of debtor's moratorium or consents to the filing of a petition seeking such a reorganization; or (10) MMC has a decree entered against it by a court of competent jurisdiction appointing a receiver, liquidator, trustee or assignee in bankruptcy or insolvency covering all or substantially all MMC's property or providing for the liquidation of MMC's property or business affairs. Upon occurrence of any of the above events, HICAM may thereupon so notify Escrow Agent in writing and provide evidence of the same. In such event, Escrow Agent shall promptly release and deliver the Documentation to HICAM pursuant to the terms hereof. 4 ARTICLE 8. LIMITATION ON OBLIGATION OF ESCROW AGENT. - -------------------------------------------------- 8.1 Escrow Agent shall not be required to inquire into the truth of any statements or representations contained in any notices, certificates or other documents required or otherwise provided hereunder, and it shall be entitled to assume that the signatures on such documents are genuine, that the person signing on behalf of any party thereto are duly authorized to execute the same, and that all actions necessary to render any such documents binding on the party purporting to be executing the same have been duly undertaken. Without limiting the foregoing, Escrow Agent may in its discretion require from MMC or HICAM additional documents that it deems to be necessary or desirable to aid it in the course of performing its obligations hereunder. ARTICLE 9. RELEASE AND INDEMNIFICATION OF ESCROW AGENT. - ------------------------------------------------------ 9.1 MMC and HICAM, severally, hereby do release Escrow Agent from any and all liability for losses and damages that may be incurred on account of any action taken by Escrow Agent in good faith pursuant to this Agreement (excluding acts of negligence by Escrow Agent), and (the parties do hereby severally indemnify Escrow Agent and undertake to hold harmless Escrow Agent from and against any and all claims, demands or actions arising out of or resulting from such performance by Escrow Agent under this Agreement. ARTICLE 10. ESCROW AGENT FEES. - ----------------------------- 10.01 HICAM hereby acknowledges and agrees that it shall pay the escrow fees related to this Agreement as set forth in Exhibit D attached hereto and made a part hereof. Escrow Agent shall invoice HICAM directly for all such fees. Escrow Agent shall notify HICAM at least ninety (90) days prior to any renewal of this Agreement of any increase in Escrow Agent's fees, which increase will not be in an amount greater than 10% of the fees in effect prior to any such renewal. ARTICLE 11. CONFIDENTIALITY AND USE OF THE DOCUMENTATION. - -------------------------------------------------------- 11.1 Confidentiality. The Documentation released to HICAM pursuant to this --------------- Agreement shall be used by HICAM solely for the purposes permitted by this Agreement. HICAM shall treat and preserve the Documentation as a trade secret of MMC in accordance with the same practices employed by HICAM to safeguard its own trade secrets against unauthorized use and disclosure. MMC hereby acknowledges that HICAM may disclose the Documentation to its authorized agents, affiliates (including Hitachi, Ltd. and its affiliates) and suppliers of the Chip Set as needed by HICAM in order to manufacture, distribute and sell the Chip Sets. Nothing in this Agreement is intended to limit the disclosure of technical or other information as needed for HICAM's customers to effectively deploy properly licensed Chip Sets. 5 11.2 Survival of Obligations. The obligations of this Article 11 shall survive ----------------------- the termination of this Agreement for any reason and shall continue for as long as the Documentation continues to embody trade secrets of MMC, but in any event no longer than five(5) years from the date of its disclosure to HICAM. ARTICLE 12. TERM OF AGREEMENT. - ----------------------------- 12.1 The term of this Agreement shall commence on the effective date hereof and shall continue until the Documentation shall be transferred to HICAM pursuant to the terms hereof, or, if such transfer shall not have so occurred, the Agreement shall terminate and the Documentation shall be returned to MMC upon termination of MMC's supply and support obligations to HICAM. ARTICLE 13. MISCELLANEOUS. - ------------------------- 13.1 Independent Contractors. The parties hereto are and shall be independent ----------------------- contractors under this Agreement, and nothing herein shall be construed to create a partnership, joint venture or agency relationship between the parties hereto. No party shall have the authority to enter into agreements of any kind on behalf of the other parties in any manner. 13.2 Authority. The parties hereto represent and warrant that they have full --------- power and authority to undertake the obligations set forth in this Agreement and that they have not entered into any other agreements nor will they enter into any other agreements that would render them incapable of satisfactorily performing their respective obligations hereunder. 13.3 No Agency; No Assignment; No Amendment. HICAM and MMC each represents that -------------------------------------- it is acting on its own behalf and is not acting as an agent for or on behalf of any third party and agrees that it may not assign its rights or obligations under this Agreement, or amend this Agreement, without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld or delayed. 13.4 Waiver. No party shall, by mere lapse of time, be deemed to have waived any ------ breach by the other party or parties of any provisions of this Agreement. The waiver of any party of a particular breach of this Agreement by any other party shall not be construed as or constitute a continuing waiver of such breach or of other breaches of the same or other provisions of this Agreement unless in writing by the waiving party. 13.5 Notices. All notices and other communications required or permitted to be ------- given under this Agreement shall be in writing and shall be considered effective when sent by facsimile, courier, or when deposited in the U.S. Mail, postage prepaid, and addressed to the respective party at the address noted above, unless by such notice a different address shall have been designated. 6 13.6 Governing Law. The construction and interpretation of this Agreement shall ------------- be governed by the law of the State of California, with the exception of its provisions regarding conflicts of law. 13.7 Force Majeure. No party shall be in default if failure to perform any ------------- obligation hereunder is caused solely by supervening conditions beyond such party's control, including acts of God, civil commotion or governmental demands or requirements. 13.8 Partial Invalidity. if any part, term or provision of this Agreement shall ------------------ be held illegal, unenforceable or in conflict with any law, the validity of the remaining portions or provisions hereof shall not be affected thereby. 13.9 Complete Agreement. The parties hereto acknowledge that each has read this ------------------ Agreement, understands it and agrees to be bound by its terms. The parties further agree that this Agreement, incorporating all Exhibits hereto, is the complete and exclusive statement of their agreement and supersedes all prior proposals, understandings, representations, conditions, warranties, covenants and all other communications between the parties relating hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives as set forth below: MMC Networks Hitachi Computer Products (America), Inc. By: /s/ Amos Wilnai by: /s/ Takeaki Matsuoka ----------------------- -------------------------- Title: Chairman Title: Senior Vice President ----------------------- ----------------------- & General Manager ----------------------- Date: 4/11/97 Date: April 16, 1997 ----------------------- ----------------------- Escrow Agent By: /s/ [SIGNATURE] ----------------------- Title: President ----------------------- Date: 4-21-97 ----------------------- 7 EXHIBIT A HITACHI COMPUTER PRODUCTS (AMERICA), INC. TERMS AND CONDITIONS 1) FORMATION OF CONTRACT The Purchase Order ("Order") is Buyer's offer to purchase the goods and/or services (herein after referred to as "goods") described from the Seller and does not constitute an acceptance by Buyer, of any offer to sell, quotation of proposal by the Seller. This Order shall become a binding contract under the conditions set forth herein only when the Seller acknowledges in writing the acceptance of the Order. Buyer's placement of this Order is expressly conditioned upon acceptance by Seller of all of the terms contained herein and on the face of this Order and any supplements, specifications of documents incorporated herein by reference. Any additional or different terms or conditions which may appear in any communication from Seller are hereby expressly objected to and shall not be affective or binding unless specifically agreed to in writing by Buyer's Purchasing Department. Seller expressly acknowledges that Buyer is purchasing the goods covered by this Order for internal use. 2) PRICE AND PAYMENT All prices shall be firm and fixed unless otherwise agreed in writing. However, if Seller reduces its published or standard prices for goods or services covered by the contract before Seller completes his performance thereunder, such reduced prices shall apply to any goods or services undelivered at the time. Payment terms shall be net 30 days unless otherwise specified. Seller agrees not to deliver goods on sight draft basis. Except as otherwise provided herein, Seller shall pay all taxes that may arise of its sale of the goods and services to the Buyer. Buyer agrees to provide Seller with a Tax Exemption Certificate if required. 3) WORK BY SELLER ON BUYER PREMISES In the event Seller, its officers, employees and agents or any of them enter premises owned, leased, occupied or under the control or Buyer in the performance of or in connection with this order, Seller agrees to indemnify and hold harmless Buyer, its officers, agents and employees from any loss, costs, damages, or bodily injury (including death) or whatsoever kind or nature arising out of or incidental to the performance of delivery of installation of this order occasioned in whole or in part by the actions or omissions of Seller, its employees, officers and agents or any of them. Seller shall maintain public liability, property damage and automobile liability insurance in reasonable amounts covering the obligations set forth and upon request will provide Buyer with a Certificate of Insurance indicating the amount of such insurance. 4) PACKING Seller shall include shipping marks, as specified by Buyer on all packing. Unless otherwise specified, Seller shall pack the goods in such a manner as to be safe from damage or deterioration while in transit or storage under foreseeable circumstances. No charges of any kind, including charges for boxing or cartage, will be allowed unless specifically agreed to by Buyer in writing. 5) DELIVERY Unless otherwise stated on this Order, all goods are to be shipped freight prepaid, F.O.B. Seller's factory. Buyer will advise the Seller of the destination, and has the option to specify routing and method of shipment. Time is of the essence, and this Order may be terminated if delivery is not made or services not performed by the date specified on the Order. No change in the scheduled date or performance will be permitted without Buyer's written consent. No acceptance of goods or services after the scheduled delivery date shall be deemed a waiver of future compliance with the terms hereof. If the materials cannot be delivered within the time specified in the Order. Seller must notify Buyer immediately in writing of the earliest possible delivery date. 6) INSPECTION Seller shall thoroughly inspect all and every part of the goods and shall conduct running and performance tests before shipment and send Buyer a record of such tests. Buyer and/or its designee shall have the right and opportunity to witness such inspection and/or test. Seller shall furnish without additional charge, all reasonable facilities and assistance for the safety and convenience of Buyer and/or as designee in the performance of such inspection and/or test. Witnessing or failure to witness such inspection and/or tests by Buyer and/or its designee shall in no way impact Buyer's or its designee's rights in the case of nonconforming or defective goods. All goods furnished under this Order by Seller to Buyer or its designee may, at its option, (1) reject the goods and return it to Seller at Seller's risk and expense or (2) arrange for repair or make the goods otherwise acceptable at Seller's expense in accordance with Seller's timely instructions, or in accordance with Buyer's or the designee's best judgement (at Seller's risk and expense). If Seller does not provide such instructions or make such repairs within a reasonable time, or (3) accept the goods at a reasonably reduced price. Freight costs for rejected goods shall include all freight charges from the point of which the goods are rejected. If rejection occurs outside of the U.S., Buyer will bear any taxes and/or duties incurred in the transportation of the goods to the Seller. Seller shall provide Buyer with appropriate material certifications, including but to limited to material, physical and/or chemical analysis certifications. 7) WARRANTIES A. Seller warrants to the Buyer and its designee that the goods supplied and work of services performed under this Order conform to the specifications herein. B. Seller further warrants to the Buyer and its designee that all goods under this Order will be free from defects in material and workmanship and will conform to applicable specifications, drawings, samples and descriptions. Buyer's or the designee's written approval of the designs furnished by Seller shall not relieve Seller of its obligations under this warranty. C. Unless otherwise specified, Seller's warranty shall extend for a period of twelve (12) months after the goods are accepted by Buyer's designee. Buyer and its designee shall have the benefit of any other warranties which may be applicable. D. In the event Buyer or its designee discovers a breach of any kind of the warranties specified herein with respect to any goods or part thereof within the warranty period, Buyer or its designee may at its option, (1) return such goods to Seller's at Sellers' risk and expense; or (2) arrange for repair or make the goods otherwise conform to the warranties at Seller's risk and expense in accordance with the Seller's timely instructions, or in accordance with Buyer's or its designee's best judgement (at Seller's risk and expense) if Seller does not provide such instructions or make such repairs within a reasonable time. E. In addition to the other remedies provided herein, Seller shall be liable for all damages both to Buyer and/or its designee, incurred as a result of any defect or breach of warranty in any item covered by this Order. F. the warranties of the Seller shall survive the termination of this contract. 8) ASSIGNMENT Seller shall not assign this contract, or the right to payment due hereunder, without Buyer's prior written consent. 9) LIENS, CLAIMS AND ENCUMBRANCES Seller warrants and represents that all the goods will, when delivered hereunder, be free and clear of all liens, claims or encumbrances of every kind. 10) DEFAULT AND TERMINATION Buyer may cancel the whole or any part of this Order or exercise any other remedy provided buyers of goods by law or in equity including any remedy under the Uniform Commercial Code, in any of the following circumstance: 1. If Seller fails to make delivery of the goods or to perform the services within the time specified herein or any extension thereof; 2. If, in Buyer's good faith judgement, the Seller fails to perform any of the other provisions of this Order or fails to make progress as to endanger performance of this Order in accordance with its terms and does not cure such failure within a period of ten days, or such longer period as Buyer may authorize in writing, after receipt of notice from Buyer specifying such failure: 3. Seller is in breach of any of the terms or conditions of the Order; 4. Seller becomes insolvent, makes a general assignment for the benefit of creditors, or is subject of proceeding under any law relating to bankruptcy, insolvency or relief of debtors, however designated. The failure of the Buyer to insist upon strict performance of any of the terms of this Order of to exercise any rights hereunder shall not be construed as a waiver of the rights of the Buyer or designee. 11) INFRINGEMENTS Seller warrants the Buyer's and/or its designee's purchase, installation, and/or use of the goods covered hereby will not result in any claim of infringement, or actual infringement, of any patent, trademark, copyright, or other intellectual property right. Seller agrees to defend any action brought against the Buyer and/or its designee arising out of such infringement and Seller shall indemnify and hold buyer and/or its designee harmless from and against all claims, losses, expenses, damages, causes of action and liabilities of every kind and nature, including without limitation, reasonable attorney's fees (without waiver of Seller's obligation to indemnify Buyers and/or its designee hereunder), arising from or out of any breach of the foregoing warranty. The rights granted hereunder shall survive termination of this contract. 12) FORCE MAJEURE Neither party shall be responsible for any delay or failure in performance of any part of this Order to the extent that such delay or failure is caused by events beyond its control and without its negligence ("force majeure conditions"). If any force majeure condition occurs, the party delayed or unable to perform shall give immediate notice to the other party, and the party affected by the others delay or inability to perform may elect to: (1) suspend this Order for the duration of the force majeure condition, buy elsewhere, goods to be bought under this Order, and deduct from any commitment the quantity bought for which commitments have been made elsewhere, and resume performance of this Order once the force majeure condition ceases with an option in the affected party to extend the period of this Order up to the length of time the forced majeure condition endured; or (2) terminated this Order or the part of it relating to goods not already shipped if the force majeure condition continues for more than thirty (30) days. 13) CHANGES Buyer shall have the right to make changes in this Order. If such changes affect shipment of delivery or the amount to be paid by Buyer, Seller shall immediately notify Buyer in writing. Upon such notification, the parties shall enter into negotiation for and adjustment. 14) EXPORT RESTRICTIONS Seller agrees to comply, and do all things necessary for Buyer to comply with all applicable federal, state and local laws and regulations, including regulations of the United States Departments of Commerce and State relating to the export of technical data and commodities insofar as they relate to the transactions contemplated herein. Seller agrees to advise Buyer of any and all export restrictions and/or requirements concerning the goods covered by this Order and to obtain the required government documents and approvals prior to export from the United States of any such technical data or commodity. 15) COMPLIANCE The Seller shall warrant that the goods called for by this order have been or will be produced in compliance with Fair Labor Standards Act of 1939 (29 U.S. Code 210-219) and any amendments thereto, and insofar as applicable to this Order, the Walsh-Healy Public Contracts Acts (41 U.S. Code 35-45) and any amendments thereto, as well as with the provision of any other Federal Law enacted including P.L. 87-851 WORK HOURS ACT OF 1962-Overtime Compensation, and with any and all rules and regulations issued under each and every such act. The Seller agrees that this warranty may be considered as the certificate contemplated by the amendment dated October 26, 1949, to the Fair Labor Standard Act of 1938. Seller of goods and or services herein listed on this purchase order, asserts and warrants to the Buyer that the goods and/or services complies with all applicable standards of the Williams-Steiger Occupational Safety and Health Act of 1970. Seller shall comply with all applicable Federal, State or local laws, rulings, regulations, and orders pertaining thereof in effect on the date of this Order. 16) APPLICABLE LAW The validity, interpretation, and performance of this order shall be governed by the laws of the State of California. EXHIBIT B(1) LETTER OF AUTHORIZATION TO MOTOROLA SEMICONDUCTOR _____________, 1997 Motorola Semiconductor 1300 N. Alma School Road Chandler, AZ 85224 RE: Authorization to Supply To whom it may concern: You are a party to that certain Development and Purchase Agreement with MMC Networks, Inc. ("MMC") pursuant to which you agree to provide certain [foundry] supply services to MMC with respect to the supply of the MMC product known as the PS1000 chip set (the "Chip Set"). Effective upon delivery of this letter to you and notwithstanding anything to the contrary in any document given to you or executed by MMC, MMC and its successors and assigns, hereby authorize and grant to you an irrevocable and non-exclusive right and license to sell quantities of the Chip Set to Hitachi Computer Products (America), Inc. as Hitachi Computer Products (America), Inc. may from time to time order. Very truly yours, MMC Networks, Inc. By:_________________________ Its:________________________ EXHIBIT B (2) LETTER OF AUTHORIZATION TO NEC CORP. ______________, 1997 NEC Corp. 2880 Scott Blvd. P.O. Box 58062 Santa Clara, CA 95052-8062 RE: Authorization to Supply To whom it may concern: You are a party to that certain Development and Purchase Agreement with MMC Networks, Inc. ("MMC") pursuant to which you agree to provide certain [foundry] supply services to MMC with respect to the supply of the MMC product known as the PS1000 chip set (the "Chip Set"). Effective upon delivery of this letter to you and notwithstanding anything to the contrary in any document given to you or executed by MMC, MMC and its successors and assigns, hereby authorize and grant to you an irrevocable and non-exclusive right and license to sell quantities of the Chip Set to Hitachi Computer Products (America), Inc. as Hitachi Computer Products (America), Inc. may from time to time order. Very truly yours, MMC Networks, Inc. By:_________________________ Its:________________________ EXHIBIT B(3) DESCRIPTION OF DEPOSITED MATERIAL --------------------------------- 1. For each of the following products: . PS1001 . Packet Switch Processor . PS1002 - Fast Ethernet Interface Unit . PS1003 - Ethernet Interface Unit a) Verilog source code b) EDIF files c) Test vectors 2. Letter of Authorization to the Chip Vendor(s) Exhibit C License Agreement ----------------- This LICENSE AGREEMENT (the "Agreement") is entered into and effective as of the date this fully executed original copy is delivered to Hitachi Computer Products (America), Inc., a Delaware corporation ("HICAM"), having offices at 3101 Tasman Drive, Santa Clara, CA 95054, this Agreement being by and between HICAM and MMC Networks, Inc., a California corporation ("MMC"), having offices at 1134 E. Arques Avenue, Sunnyvale, CA 94086, on the basis of the following facts: R E C I T A L S --------------- WHEREAS, MMC designs, manufactures, has manufactured, markets and sells a chip set currently known as the PS1000 chip set (the "Chip Set"). WHEREAS, MMC and HICAM from time to time conduct business pursuant to which MMC supplies quantities of the Chip Set to HICAM. WHEREAS, MMC desires to (i) ensure the availability to HICAM of certain proprietary materials relating to the Chip Set (collectively the "Source Material") in the event certain conditions set forth in Section 7 of the Escrow Agreement (a "Release Event") should occur, and (ii) grant to HICAM and HICAM desires to acquire from MMC a license to make, use and sell the Chip Set for the consideration and upon the terms and subject to the condition set forth in this Agreement. LICENSE AGREEMENT ----------------- IT IS HEREBY AGREED, on the basis of the foregoing facts and in consideration of the respective covenants set forth in this Agreement, as follows: 1. Grant of License. MMC hereby grants to HICAM a perpetual, non- ---------------- exclusive, worldwide right and license, without the right to sublicense, under all of its intellectual property rights to directly and indirectly make, use, test, sell, market and distribute the Chip Set, but only as part of an HICAM's packet switch system products and only pursuant to the terms stated in section 3.1 of the Escrow Agreement. 2. Consideration. In consideration of the License granted hereunder HICAM ------------- shall pay to MMC a royalty (the "Royalties") for each Chip Set manufactured and sold by HICAM as part of HICAM's packet switch system products, equal to the Production Margin. For the purposes of this Agreement, the "Production Margin" for each Chip Set shall he determined by subtracting the 10 cost that HICAM pays to the ASIC supplier for such Chip Set, from the average, pre-tax, FOB point of manufacture price at which HICAM purchased Chip Set from MMC during the three month period immediately preceding notice of a Release Event. 3. Payment Terms for Royalties. The Royalties attributable to the sale of --------------------------- a Chip Set, as part of HICAM's packet switch system products, shall be payable on the last day of the month following the month in which the Chip Set is actually received by HICAM. 4. Royalties Mistakenly Paid on Returned Products. If HICAM pays to MMC a Royalty on the sales of a product which includes the Chip Set that is subsequently returned to HICAM, the amount of the Royalty so paid shall be deemed a credit against future royalties payable by HICAM. If no future Royalties are payable, the remaining balance of such credits shall be refunded to HICAM within thirty (30) days after the expiration or termination of HICAM's obligation to pay Royalties or the expiration or termination of this Agreement. 5. Warranty and Indemnification. MMC warrants that HICAM's manufacture, use, sale, reproduction and distribution of the Chip Set shall be free of rightful claims of any third person of infringement of any intellectual property rights. MMC agrees to defend, at its expense, the part of any suit or proceeding brought against HICAM or HICAM's suppliers based in whole or in part upon any claims which, would constitute a violation of the foregoing intellectual property rights indemnification. HICAM agrees to notify MMC in writing of any such claim, give MMC sole control of the defense and settlement thereof; and provide all reasonable assistance, at MMC's expense, in connection therewith. If any Chip Set products are claimed to so infringe, MMC shall, at its option, (a) procure for HICAM the right to continue using the Chip Set; (b) modify or replace the Chip Set, without materially impairing the performance or functions of the product, so there is no infringement; or (c) compensate HICAM for the purchase price paid by HICAM for the Chip Set. MMC shall have no liability regarding any claim arising out of the use of the Chip Set in combination with other goods if the infringement would not occur but for such combination. 6. Term of License. This Agreement shall commence and be effective on the --------------- date on which a copy of the Agreement is delivered to MMC by the Escrow Agent and shall continue in full force and effect thereafter, subject to termination by (a) HICAM for any reason on thirty (30) days prior written notice to MMC, and (b) MMC for failure to pay Royalties when due, unless HICAM pays such Royalties within thirty (30) days of receipt of notice from MMC. In the event 11 of a Change in control of HICAM, provided that HICAM has not first obtained MMC's written consent as to a Change in Control, which consent shall not be unreasonably withheld or delayed, MMC may, upon thirty (30) days written notice to HICAM, terminate HICAM's right to purchase ASICs from the ASIC vendor. A Change in Control is defined as a sale of substantially all of HICAM's assets, a merger involving HICAM whereby HICAM is not the surviving corporate entity or any other changes of control of HICAM in which more than 50 percent of the voting power of HICAM no longer resides in HICAM's shareholders as constituted immediately prior to such transactions. 7.Confidential Information. HICAM agrees that MMC has a proprietary ------------------------ interest in the Source Materials. All disclosures to HICAM, its agents and employees shall be held in strict confidence by HICAM, its agents and employees. HICAM shall disclose the Source Materials only to those of its agents and employees to whom it is necessary in order properly to carry out their duties as limited by the terms and conditions hereof. HICAM shall not use the Source Materials except for the purposes of exercising its rights and carrying out its duties hereunder. The obligations foregoing obligations of confidentiality shall not apply to any particular portion of any Confidential Information that: (i) now or subsequently becomes generally known or available through no act or omission of the receiving party; (ii) is known to the receiving party at the time of receipt of same from the furnishing party; (iii) is provided by the furnishing party to a third party without restriction on disclosure; (iv) is subsequently rightfully provided to the receiving party by a third party without restriction on disclosure; or (v) is independently developed by the receiving party and as can be demonstrated from the receiving party's business records and documentation, provided the person or persons developing same have not had access to the Confidential Information of the furnishing party. 8.Audit Rights. HICAM agrees to make and keep full and accurate books and ------------ records in sufficient detail to enable Royalties payable hereunder to be determined. On thirty (30) days' prior written notice to HICAM and not more than two times within a calendar year, MMC's independent firm of certified public accountants shall have access to the books and records of HICAM pertaining to net proceeds received by HICAM for its sublicensing and assigning of its rights and licenses under this Agreement and shall have the right to make copies therefrom at MMC's expense. In the event that the audit shows that HICAM under compensated MMC by greater than 10% of the total amount due to MMC for the period audited, the costs of the audit shall be paid by HICAM. Such firm of independent certified public 12 accountants shall have such access at all reasonable times and from time to time during normal business hours. Prompt adjustment shall be made by the proper party to compensate for any errors or omissions disclosed by such audit. The firm of independent certified public accountants shall execute a confidentiality agreement with HICAM advance of receiving such access, whereby such firm shall agree to hold confidential all information learned in the course of any examination of HICAM's books and records hereunder, except that it may report to MMC the extent of any error or omission and the general basis therefor. All reports and payments not disputed as to correctness by MMC within two (2) year after receipt thereof shall thereafter conclusively be deemed correct for all purposes. 9.Miscellaneous. ------------- (a)This Agreement shall be governed by the internal laws of the State of California as if made and performed within the State. (b)Any dispute, controversy or claim arising out of or relating to this Agreement or breach thereof shall be exclusively and finally resolved by arbitration pursuant to the rules of the American Arbitration Association, which shall administer the arbitration and act as appointing authority. The decision of the arbitrators shall be final and binding upon the parties hereto, and shall be executory. Judgment based on the decision of the arbitrators may be entered by any court of competent jurisdiction. Notwithstanding this, judgment upon the award of the arbitration may be entered in any court where the arbitration takes place or any court having jurisdiction thereof, and application may be made to any court for a judicial acceptance of the award or order of enforcement. Notwithstanding anything contained in this section to the contrary, each party shall have the right to institute judicial proceedings against the other party or anyone acting by, through or under such other party in order to enforce the instituting party's rights hereunder through reformation of contract, specific performance, injunction or similar equitable relief. (c)A waiver of any breach of any provision of this Agreement shall not be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. (d)Nothing herein contained shall be deemed to create an agency, joint venture or partnership relationship between the parties hereto. Neither party shall have any power to bind the other party in any respect whatsoever. 13 (e)Any amendment or modification of any provision of this Agreement must be in writing, dated and signed by both parties hereto. (f)This Agreement may be executed in any number of counterparts and each such counterpart shall be deemed to be an original. (g)If any provision of this Agreement is declared invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court. The parties shall consult and use their best efforts to agree upon a valid and enforceable provision which shall be a reasonable substitute for such invalid or unenforceable provision in light of the intent of this Agreement. (h)Any headings contained herein are for directory purposes only, do not constitute a part of this Agreement, and shall not be employed in interpreting this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement personally or by agents or officers thereunto duly authorized. "HICAM" Hitachi Computer Products (America), Inc. TAKEAKI MATSUOKA -------------------------------- By: /s/ Takeaki Matsuoka ---------------------------- Date: April 16, 1997 -------------------------- "MMC" MMC Networks, Inc. /s/ Amos Wilnai -------------------------------- By: Amos Wilnai ---------------------------- Date: 4/11/97 -------------------------- 14 EXHIBIT D SOURCEFILE'S ESCROW SERVICES 1997 FEE SCHEDULE ESCROW SERVICES Includes climate controlled storage, certified letters of notification, and custom agreements. . Initial set-up $1,000.00* . Annual Maintenance per Deposit or Product $1,100.00 (Includes 2 deposit updates per year) . Annual Race per Beneficiary $ 300.00 SourceFile invoices Depositor . Annual Rate per Beneficiary $ 500.00 SourceFile Invoices Beneficiary directly
ADDITIONAL SERVICES . Technical Verification starts at $145.00/hour . SourceLink on-line account status please call for estimate . Source Material Updates $150.00 . Escrow Release Beneficiary Request $800.00 . Escrow Release Depositor Request $200.00 . Pick-Up and Delivery Service per year $200.00
*Due when agreement is customized or signed. EX-11.1 17 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE(1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, ----------------- 1996 1996 1997 ------------ -------- -------- (UNAUDITED) Net income...................................... $ 702 $ 326 $ 434 ======= ======== ======== Weighted average shares outstanding: Common stock.................................. 10,723 10,507 11,370 Common stock issuable upon exercise of options granted through July 31, 1996................ 2,236 2,226 1,797 Common stock issuable upon exercise of options granted subsequent to July 31, 1996(2)....... 2,600 2,600 2,600 Warrants...................................... 147 147 147 Convertible preferred stock................... 13,342 13,342 13,342 ------- -------- -------- Weighted average common shares and equivalents.. 29,048 28,822 29,256 ------- -------- -------- Net income per share............................ $ .02 $ .01 $ .01 ======= ======== ========
- -------- (1) This exhibit should be read in conjunction with Note 2 of Notes to Financial Statements. (2) Stock options granted (using the treasury stock method and an assumed initial public offering price of $10 per share) have been included in the calculation of the common equivalent shares as if they were outstanding for all periods presented. EX-23.1 18 CONSENT OF PRICE WATERHOUSE, LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated March 14, 1997, except for Note 9, which is as of August 15, 1997, relating to the financial statements of MMC Networks, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedules for the three years ended December 31, 1996 listed under item 16(b) of this Registration Statement when such schedules are read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included these schedules. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data". PRICE WATERHOUSE LLP San Jose, California August 19, 1997 EX-23.3 19 CONSENT OF DERGOSITS & NOAH, LLP EXHIBIT 23.3 CONSENT OF DERGOSITS & NOAH, LLP We consent to the reference to our firm under the captions "Risk Factors-- Protection of Intellectual Property," "Business--Intellectual Property" and "Experts" in the Registration Statement on Form S-1 and related Prospectus of MMC Networks, Inc. /s/ Todd A. Noah ------------------------------------- Todd A. Noah for Dergosits & Noah LLP San Francisco, California August 20, 1997 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 6-MOS DEC-31-1996 JUN-30-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 JUN-30-1997 4,809 2,953 1,509 2,609 2,158 3,508 133 165 511 231 8,976 9,413 2,207 3,212 591 977 10,676 11,732 1,863 2,562 636 447 0 0 10,247 10,247 256 438 (225) (295) 10,676 11,732 10,515 8,201 10,515 8,201 3,576 2,535 10,113 7,845 0 0 0 0 110 68 719 443 17 9 702 434 0 0 0 0 0 0 0 0 .02 .01 0 0
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